Item 1. Financial Statements
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Net Sales
$
464,480
$
451,582
$
1,375,016
$
1,413,755
Cost of Sales
367,423
374,180
1,100,195
1,158,785
Gross Profit
97,057
77,402
274,821
254,970
Operating Expenses:
Selling
13,266
14,186
39,719
42,295
Administrative
21,354
19,708
60,957
60,558
Research, development and technical services
14,303
13,473
41,661
40,228
Deferred compensation expense
5,613
1,610
4,754
11,478
54,536
48,977
147,091
154,559
Business restructuring expenses (Note 16)
( 126
)
( 459
)
( 708
)
( 1,642
)
Operating Income
42,395
27,966
127,022
98,769
Other Income (Expense):
Interest, net
( 1,626
)
( 1,402
)
( 4,115
)
( 5,021
)
Other, net (Note 15)
2,629
885
3,804
4,265
1,003
( 517
)
( 311
)
( 756
)
Income Before Provision for Income Taxes
43,398
27,449
126,711
98,013
Provision for Income Taxes
10,056
1,569
29,987
16,945
Net Income
33,342
25,880
96,724
81,068
Net (Income) Loss Attributable to Noncontrolling Interests (Note 2)
( 174
)
9
( 304
)
23
Net Income Attributable to Stepan Company
$
33,168
$
25,889
$
96,420
$
81,091
Net Income Per Common Share Attributable to Stepan Company
(Note 10):
Basic
$
1.45
$
1.12
$
4.20
$
3.52
Diluted
$
1.43
$
1.11
$
4.15
$
3.48
Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 10):
Basic
22,907
23,025
22,951
23,070
Diluted
23,237
23,300
23,236
23,320
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
2
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Net income
$
33,342
$
25,880
$
96,724
$
81,068
Other comprehensive income:
Foreign currency translation adjustments (1) (Note 11)
8,631
( 19,287
)
( 29,025
)
( 11,290
)
Defined benefit pension adjustments, net of tax (Note 11)
839
473
2,455
1,558
Derivative instrument activity, net of tax (Note 11)
( 3
)
( 2
)
( 7
)
( 6
)
Total other comprehensive income
9,467
( 18,816
)
( 26,577
)
( 9,738
)
Comprehensive income
42,809
7,064
70,147
71,330
Comprehensive income attributable to noncontrolling interests (Note 2)
( 211
)
41
( 330
)
62
Comprehensive income attributable to Stepan Company
$
42,598
$
7,105
$
69,817
$
71,392
(1) Includes foreign currency translation adjustments related to noncontrolling interest.
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands)
September 30, 2020
December 31, 2019
Assets
Current Assets:
Cash and cash equivalents
$
310,392
$
315,383
Receivables, net
295,616
276,841
Inventories (Note 6)
202,315
203,647
Other current assets
24,713
22,918
Total current assets
833,036
818,789
Property, Plant and Equipment:
Cost
1,825,681
1,762,135
Less: Accumulated depreciation
( 1,173,995
)
( 1,122,818
)
Property, plant and equipment, net
651,686
639,317
Goodwill, net
27,152
26,086
Other intangible assets, net
22,959
15,352
Long-term investments (Note 3)
28,285
28,227
Operating lease assets
39,408
38,386
Other non-current assets
15,125
13,210
Total assets
$
1,617,651
$
1,579,367
Liabilities and Equity
Current Liabilities:
Current maturities of long-term debt (Note 14)
$
37,857
$
23,571
Accounts payable
207,553
194,276
Accrued liabilities
115,756
121,267
Total current liabilities
361,166
339,114
Deferred income taxes
23,994
23,391
Long-term debt, less current maturities (Note 14)
170,063
198,532
Non-current operating lease liabilities
29,490
29,654
Other non-current liabilities
93,702
96,180
Commitments and Contingencies (Note 8)
Equity:
Common stock, $ 1 par value; authorized 60,000,000 shares;
Issued 26,615,132 shares in 2020 and 26,493,335 shares in 2019
26,615
26,493
Additional paid-in capital
203,963
193,135
Accumulated other comprehensive loss (Note 11)
( 162,773
)
( 136,170
)
Retained earnings
1,000,337
922,464
Less: Common treasury stock, at cost, 4,153,694 shares in 2020
and 3,979,735 shares in 2019
( 129,949
)
( 114,139
)
Total Stepan Company stockholders’ equity
938,193
891,783
Noncontrolling interests (Note 2)
1,043
713
Total equity
939,236
892,496
Total liabilities and equity
$
1,617,651
$
1,579,367
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
4
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands)
Nine Months Ended September 30
2020
2019
Cash Flows From Operating Activities
Net income
$
96,724
$
81,068
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization
60,859
58,545
Deferred compensation
4,754
11,478
Realized and unrealized gains on long-term investments
( 2,169
)
( 2,806
)
Stock-based compensation
7,414
7,045
Deferred income taxes
257
( 2,291
)
Other non-cash items
860
2,192
Changes in assets and liabilities:
Receivables, net
( 28,405
)
( 8,959
)
Inventories
( 2,574
)
25,879
Other current assets
( 4,215
)
( 3,750
)
Accounts payable and accrued liabilities
12,041
( 35,330
)
Pension liabilities
( 418
)
( 979
)
Environmental and legal liabilities
( 3,388
)
800
Deferred revenues
( 62
)
( 243
)
Net Cash Provided By Operating Activities
141,678
132,649
Cash Flows From Investing Activities
Expenditures for property, plant and equipment
( 84,903
)
( 70,829
)
Asset acquistion (Note 17)
( 2,040
)
—
Business acquisition, net of cash acquired (Note 17)
( 13,519
)
—
Other, net
2,332
2,332
Net Cash Used In Investing Activities
( 98,130
)
( 68,497
)
Cash Flows From Financing Activities
Revolving debt and bank overdrafts, net
—
( 6,929
)
Other debt repayments
( 14,286
)
( 37,143
)
Dividends paid
( 18,547
)
( 16,911
)
Company stock repurchased
( 13,753
)
( 13,184
)
Stock option exercises
2,835
2,830
Other, net
( 889
)
( 3,101
)
Net Cash Used In Financing Activities
( 44,640
)
( 74,438
)
Effect of Exchange Rate Changes on Cash
( 3,899
)
( 3,913
)
Net Decrease in Cash and Cash Equivalents
( 4,991
)
( 14,199
)
Cash and Cash Equivalents at Beginning of Period
315,383
300,194
Cash and Cash Equivalents at End of Period
$
310,392
$
285,995
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds/payments
$
27,420
$
21,698
Cash payments of interest
$
6,916
$
9,311
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
5
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2020
Unaudited
1.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been prepared by Stepan Company (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of September 30, 2020, and its results of operations for the three and nine months ended September 30, 2020 and 2019, and cash flows for the nine months ended September 30, 2020 and 2019, have been included. These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company’s 2019 Annual Report on Form 10-K.
2.
RECONCILIATIONS OF EQUITY
Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the three and nine months ended September 30, 2020 and 2019:
(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 at June 30, 2020
898,261
26,552
198,947
( 129,212
)
( 172,203
)
973,345
832
Issuance of 40,435 shares of common stock under stock option plan
2,443
40
2,403
—
—
—
—
Stock-based and deferred compensation
1,899
23
2,613
( 737
)
—
—
—
Net income
33,342
—
—
—
—
33,168
174
Other comprehensive income
9,467
—
—
—
9,430
—
37
Cash dividends paid:
Common stock ($ 0.28 per share)
( 6,176
)
—
—
—
—
( 6,176
)
—
Balance at September 30, 2020
$
939,236
$
26,615
$
203,963
$
( 129,949
)
$
( 162,773
)
$
1,000,337
$
1,043
(In thousands, except share and per share amounts)
Total
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
Noncontrolling
Interest (1)
Balance at December 31, 2019
$
892,496
$
26,493
$
193,135
$
( 114,139
)
$
( 136,170
)
$
922,464
$
713
Issuance of 47,115 shares of common stock under stock option plan
2,835
47
2,788
—
—
—
—
Purchase of 160,780 shares of common stock on the open market
( 13,753
)
—
—
( 13,753
)
—
—
—
Stock-based and deferred compensation
6,058
75
8,040
( 2,057
)
—
—
—
Net income
96,724
—
—
—
—
96,420
304
Other comprehensive income
( 26,577
)
—
—
—
( 26,603
)
—
26
Cash dividends paid:
Common stock ($ 0.84 per share)
( 18,547
)
—
—
—
—
( 18,547
)
—
Balance at September 30, 2020
$
939,236
$
26,615
$
203,963
$
( 129,949
)
$
( 162,773
)
$
1,000,337
$
1,043
6
(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 at June 30, 2019
858,397
26,453
188,781
( 106,202
)
( 137,723
)
886,349
739
Issuance of 13,256 shares of common stock under stock option plan
667
13
654
—
—
—
—
Purchase of 73,821 shares of common stock on the open market
( 7,003
)
—
—
( 7,003
)
—
—
—
Stock-based and deferred compensation
1,408
15
1,969
( 576
)
—
—
—
Net income
25,880
—
—
—
—
25,889
( 9
)
Other comprehensive income
( 18,816
)
—
—
—
( 18,784
)
—
( 32
)
Cash dividends paid:
Common stock ($ 0.25 per share)
( 5,626
)
—
—
—
—
( 5,626
)
—
Balance at September 30, 2019
$
854,907
$
26,481
$
191,404
$
( 113,781
)
$
( 156,507
)
$
906,612
$
698
(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
$
808,185
$
26,309
$
182,881
$
( 97,389
)
$
( 141,483
)
$
837,107
$
760
Issuance of 56,385 shares of common stock under stock option plan
2,830
56
2,774
—
—
—
—
Purchase of 144,457 shares of common stock on the open market
( 13,184
)
—
—
( 13,184
)
—
—
—
Stock-based and deferred compensation
2,657
116
5,749
( 3,208
)
—
—
—
Net income
81,068
—
—
—
—
81,091
( 23
)
Other comprehensive income
( 9,738
)
—
—
—
( 9,699
)
—
( 39
)
Cash dividends paid:
Common stock ($ 0.75 per share)
( 16,911
)
—
—
—
—
( 16,911
)
—
Other (2)
—
—
—
—
( 5,325
)
5,325
—
Balance at September 30, 2019
$
854,907
$
26,481
$
191,404
$
( 113,781
)
$
( 156,507
)
$
906,612
$
698
(1)
Reflects the noncontrolling interest in the Company’s China joint venture.
(2)
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 .
3 .
FAIR VALUE MEASUREMENTS
The following were the financial instruments held by the Company at September 30, 2020, and December 31, 2019, and the methods and assumptions used to estimate the instruments’ fair values:
Cash and cash equivalents
Carrying value approximated fair value because of the short maturity of the instruments. Fair value of cash and cash equivalents is a Level 1 measurement.
7
Derivative assets and liabilities
Derivative assets and liabilities include the foreign currency exchange contracts discussed in Note 4. Fair value and carrying value were the same because the contracts were recorded at fair value. The fair values of the foreign currency contracts were calculated as the difference between the applicable forward foreign exchange rates at the reporting date and the contracted foreign exchange rates multiplied by the contracted notional amounts. See the table below that describes financial assets and liabilities measured on a recurring basis for the reported fair values of derivative assets and liabilities.
Long-term investments
Long-term investments include the mutual fund assets the Company held to fund a portion of its deferred compensation liabilities and all of its non-qualified supplemental executive defined contribution obligations (see the defined contribution plans section of Note 9). Fair value and carrying value were the same because the mutual fund assets were recorded at fair value. Fair values for the mutual funds were calculated using the published market price per unit at the reporting date multiplied by the number of units held at the reporting date. See the table that follows the financial instrument descriptions for the reported fair value of long-term investments.
Debt obligations
The fair value of debt with original maturities greater than one year comprised the combined present values of scheduled principal and interest payments for each of the various loans, individually discounted at rates equivalent to those which could be obtained by the Company for new debt issues with durations equal to the average life to maturity of each loan. The fair values of the remaining Company debt obligations approximated their carrying values due to the short-term nature of the debt. The Company’s fair value measurements for debt fall within level 2 of the fair value hierarchy.
At September 30, 2020, and December 31, 2019, the fair values and related carrying values of debt, including current maturities, were as follows (the fair value and carrying value amounts are presented without regard to unamortized debt issuance costs of $ 651,000 and $ 754,000 as of September 30, 2020 and December 31, 2019, respectively):
(In thousands)
September 30,
2020
December 31,
2019
Fair value
$
218,764
$
226,712
Carrying value
208,571
222,857
The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of September 30, 2020, and December 31, 2019, and the level within the fair value hierarchy in which the fair value measurements fall:
(In thousands)
September
2020
Level 1
Level 2
Level 3
Mutual fund assets
$
28,285
$
28,285
$
—
$
—
Derivative assets:
Foreign currency contracts
28
—
28
—
Total assets at fair value
$
28,313
$
28,285
$
28
$
—
Derivative liabilities:
Foreign currency contracts
$
924
$
—
$
924
$
—
(In thousands)
December
2019
Level 1
Level 2
Level 3
Mutual fund assets
$
28,227
$
28,227
$
—
$
—
Derivative assets:
Foreign currency contracts
981
—
981
—
Total assets at fair value
$
29,208
$
28,227
$
981
$
—
Derivative liabilities:
Foreign currency contracts
$
429
$
—
$
429
$
—
8
4 .
DERIVATIVE INSTRUMENTS
The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by the use of derivative instruments is foreign currency exchange risk. The Company holds forward foreign currency exchange contracts that are not designated as any type of accounting hedge as defined by GAAP. The Company uses these contracts to manage its exposure to exchange rate fluctuations on certain Company subsidiary cash, accounts receivable, accounts payable and other obligation balances that are denominated in currencies other than the entities’ functional currencies. The forward foreign exchange contracts are recognized on the balance sheet as either an asset or a liability measured at fair value. Gains and losses arising from recording the foreign exchange contracts at fair value are reported in earnings as offsets to the losses and gains reported in earnings arising from the re-measurement of the asset and liability balances into the applicable functional currencies. At September 30, 2020, and December 31, 2019, the Company had open forward foreign currency exchange contracts, all with durations of one to three months , to buy or sell foreign currencies with U.S. dollar equivalent amounts of $ 46,721,506 and $ 48,540,368 , respectively.
The fair values of the derivative instruments held by the Company on September 30, 2020, and December 31, 2019, are disclosed in Note 3. Derivative instrument gains and losses for the three- and nine-month periods ended September 30, 2020 and 2019, were immaterial. For amounts reclassified out of accumulated other comprehensive income (loss) (AOCI) into earnings for the three- and nine-month periods ended September 30, 2020 and 2019, see Note 11.
5 .
STOCK-BASED COMPENSATION
On September 30, 2020, the Company had stock options, stock awards and stock appreciation rights (SARs) outstanding under its 2011 Incentive Compensation Plan. SARs granted prior to 2015 are cash-settled, and SARs granted in 2015 and later are stock-settled. Stock options and SARs granted prior to 2017 generally cliff vested after two years . Starting in 2017, stock options and SARs have a three-year graded vesting feature, with one-third of the awards vesting each year. The Company has elected the straight-line method of expense attribution for the stock options and SARs with the graded vesting feature.
Compensation expense recorded for all stock options, stock awards and SARs was as follows:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
$
3,223
$
2,273
$
7,414
$
7,045
The increase in stock-based compensation expense for the third quarter of 2020 compared to the third quarter of 2019 was primarily attributable to cash-settled SARs. The increase in cash-settled SARs compensation expense reflects a larger increase in the market value of Company stock during the third quarter of 2020 versus the increase in the market value of Company stock during the third quarter of 2019.
Unrecognized compensation costs for stock options, stock awards and SARs were as follows:
(In thousands)
September 30, 2020
December 31, 2019
Stock options
$
2,441
$
1,850
Stock awards
5,518
3,618
SARs
5,314
4,058
The increases in unrecognized compensation costs for stock options, stock awards and SARs reflected the 2020 grants of:
Shares
Stock options
81,734
Stock awards (at target)
43,518
SARs
175,760
The unrecognized compensation costs at September 30, 2020, are expected to be recognized over a weighted-average period of 1.8 years for stock options and SARs and 1.9 years for stock awards.
9
6 .
INVENTORIES
The composition of inventories at September 30, 2020, and December 31, 2019, was as follows:
(In thousands)
September 30,
2020
December 31,
2019
Finished goods
$
143,964
$
139,785
Raw materials
58,351
63,862
Total inventories
$
202,315
$
203,647
7.
LEASES
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 43 percent and 34 percent, respectively, of the Company’s consolidated ROU asset balance. Except for real estate, typical lease terms range from one to ten years . Real estate lease terms typically range from one to fifty years . The Company’s two principal real estate leases relate to land leases in the Philippines and Singapore.
As most of the Company’s leases do not provide an implicit borrowing rate, the Company uses its incremental borrowing rate (IBR) based on the information available at the commencement date in determining the present value of lease payments. IBRs were specifically determined for the United States, the Philippines, Singapore, Brazil and China, typically for five-year increments. The U.S. IBR was used for all other countries as the leases in these countries are not material. The total value of leases of property in the five countries identified above represents approximately 97 percent of the Company’s consolidated ROU asset balance.
(In thousands)
Three months ended
September 30, 2020
Nine months ended
September 30, 2020
Lease Cost
Operating lease cost
$
3,101
$
8,583
Short-term lease cost
1,105
3,488
Variable lease cost
203
802
Total lease cost
$
4,409
$
12,873
Other Information
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flow from operating leases
$
3,124
$
8,658
Right-of-use assets obtained in exchange for new operating lease liabilities
3,666
5,160
(In thousands)
Undiscounted Cash Flows:
2020 (excluding the nine months ended September 30, 2020)
$
3,072
2021
10,666
2022
8,641
2023
6,091
2024
3,602
Subsequent to 2024
17,117
Total Undiscounted Cash Flows
$
49,189
Less: Imputed interest
( 9,761
)
Present value
$
39,428
Current operating lease liabilities (1)
9,938
Non-current operating lease liabilities
29,490
Total lease liabilities
$
39,428
(1)
This item is included in Accrued liabilities line on the Company’s Condensed Consolidated Balance Sheet.
10
Weighted-average remaining lease term-operating leases
8 Years
Weighted-average discount rate-operating leases
4.0 %
8 .
CONTINGENCIES
There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company’s business, the majority of which relate to environmental assessment, protection and remediation matters. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The Company’s operations are subject to extensive local, state and federal regulations, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund) as well as comparable regulations applicable to the Company’s foreign locations. Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party (PRP) at a number of sites where cleanup costs have been or may be incurred under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites and claims.
In determining the appropriate level of environmental reserves, the Company considers several factors such as information obtained from investigatory studies; changes in the scope of remediation; the interpretation, application and enforcement of laws and regulations; changes in the costs of remediation programs; the development of alternative cleanup technologies and methods; and the relative level of the Company’s involvement at various sites for which the Company is allegedly associated. The level of annual expenditures for remedial, monitoring and investigatory activities will change in the future as major components of planned remediation activities are completed and the scope, timing and costs of existing activities are changed. As of September 30, 2020, the Company estimated a range of possible environmental and legal losses of $ 22,448,000 to $ 41,146,000 . Within the range of possible environmental and legal losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range. These accruals totaled $ 22,448,000 at September 30, 2020 and $ 25,905,000 at December 31, 2019. Although the Company believes that its reserves are adequate for environmental contingencies, it is possible due to the uncertainties noted above, that additional reserves could be required in the future. Cash expenditures related to legal and environmental matters approximated $ 3,781,000 and $ 2,826,000 for the nine-month periods ended September 30, 2020 and 2019, respectively.
For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based upon the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no material liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position. However, in the event of one or more adverse determinations with respect to such sites in any annual or interim period, the effect on the Company’s cash flows and results of operations for those periods could be material.
Following are summaries of the Company’s major contingencies at September 30, 2020:
Maywood, New Jersey Site
The Company’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (collectively, the Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of alleged chemical contamination. Pursuant to (i) a September 21, 1987 Administrative Order on Consent entered into between the U.S. Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company at the Maywood site and (ii) the issuance of an order on November 12, 2004 by the USEPA to the Company for property currently owned by the Company at the Maywood site, the Company has completed various Remedial Investigation Feasibility Studies (RI/FS), and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated soil at the Maywood site, which requires the Company to perform remedial cleanup of the soil and buried waste. The USEPA has not yet issued a ROD for chemically-contaminated groundwater at the Maywood site. Based on the most current information available, the Company believes its recorded liability is reasonable having considered the range of estimated costs of remediation for the Maywood site. The estimate of the cost of remediation for the Maywood site could change as the Company continues to hold discussions with the USEPA, as the design of the remedial action is finalized, if a groundwater ROD is issued or if other PRPs are identified. The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability.
11
In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which re quires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil . Based on the Company’s review and analysis of this order, no changes to the Company’s recorded liability for claims associated with s oil remediation of chemical contamination at the Maywood site were required.
In addition, under the terms of a settlement agreement reached on November 12, 2004, the U.S. Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985. Under the Cooperative Agreement, the United States is responsible for the removal of radioactive waste at the Maywood site and it has incurred and will incur future remediation costs at the site. As such, the Company recorded no liability related to this settlement agreement.
D’Imperio Property Site
During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances generated by the Company at several sites in New Jersey, including the D’Imperio site. The Company was named as a PRP in an October 2, 1998, lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Site. In 2019, the PRPs were provided with updated remediation cost estimates by the PRP group technical consultant and project manager, which the Company considered in its determination of its range of estimated possible losses and liability balance. The changes in range of possible losses and liability balance were immaterial. Remediation work continues at the D’Imperio site. Based on current information, the Company believes that its recorded liability is reasonable having considered the range of estimated cost of remediation for the D’Imperio site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the current estimates.
Wilmington Site
The Company is currently contractually obligated to contribute to the environmental response costs associated with the Company’s formerly-owned site in Wilmington, Massachusetts (the Wilmington site). Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980. Under the Company’s October 1, 1993, agreement with the current owner of the Wilmington site, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. The Company has paid the current owner $ 2,965,000 for the Company’s portion of environmental response costs at the Wilmington site through September 30, 2020. The Company has recorded a liability for its portion of the estimated remediation costs for the site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the current estimates.
The Company and other prior owners of the Wilmington site also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed.
Other U.S. Sites
Through the regular environmental monitoring of its plant production sites, the Company discovered levels of chemical contamination that were above thresholds allowed by law at its Millsdale, Illinois and Fieldsboro, New Jersey plants. The Company voluntarily reported its results to the applicable state environmental agencies. As a result, the Company is required to perform self-remediation of the affected areas. Based on current information, the Company believes that its recorded liability for the remediation of the affected areas is appropriate based on an estimate of expected costs. However, actual costs could differ materially from current estimates.
9 .
POSTRETIREMENT BENEFIT PLANS
Defined Benefit Pension Plans
The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations. The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued.
12
Components of Net Periodic Benefit Cost
UNITED STATES
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Interest cost
$
1,409
$
1,640
$
4,251
$
4,962
Expected return on plan assets
( 2,435
)
( 2,365
)
( 7,309
)
( 7,087
)
Amortization of net actuarial loss
1,092
563
3,196
1,867
Net periodic benefit cost (income)
$
66
$
( 162
)
$
138
$
( 258
)
UNITED KINGDOM
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Interest cost
$
111
$
134
$
327
$
416
Expected return on plan assets
( 137
)
( 190
)
( 404
)
( 589
)
Amortization of net actuarial loss
20
59
58
184
Net periodic benefit cost (income)
$
( 6
)
$
3
$
( 19
)
$
11
Employer Contributions
U.S. Plans
As a result of pension funding relief provisions included in the Highway and Transportation Funding Act of 2014, the Company is not required to make contributions to its funded U.S. qualified defined benefit plans. Approximately $ 299,000 is expected to be paid related to the unfunded non-qualified plans in 2020. Of such amount, $ 247,000 had been paid related to the non-qualified plans as of September 30, 2020.
U.K. Plan
The Company’s U.K. subsidiary expects to contribute approximately $ 495,000 to its defined benefit pension plan in 2020. Of such amount, $ 434,000 had been contributed to the plan as of September 30, 2020.
Defined Contribution Plans
The Company sponsors retirement savings defined contribution plans that cover eligible U.S. and U.K. employees. The Company’s U.S. retirement plans include two qualified plans, one of which is a 401(k) plan and one of which is an employee stock ownership plan, and one non-qualified supplemental executive plan. In the nine months ended September 30, 2020 and 2019, the Company made profit sharing contributions into the qualified retirement plans for U.S. employees and for certain non-U.S. employees. Profit sharing contributions were determined using a formula applied to Company earnings. In 2019 and 2020, profit sharing contributions for U.S. employees were made to the employee stock ownership plan. Profit sharing contributions are allocated to participant accounts based on participant base earnings.
Defined contribution plan expenses for the Company’s qualified contribution plans were as follows:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Retirement savings contributions
$
1,813
$
1,777
$
5,521
$
5,401
Profit sharing contributions plan
1,633
567
4,090
2,413
Total
$
3,446
$
2,344
$
9,611
$
7,814
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 September 30, 2020, the
13
balance of the trust assets was $ 1,604,000 , which equaled the ba lance of the supplemental plan liabilities (see the long-term investments section in Note 3 for further information regarding the Company’s mutual fund assets).
10 .
EARNINGS PER SHARE
Below are the computations of basic and diluted earnings per share for the three and nine months ended September 30, 2020 and 2019:
(In thousands, except per share amounts)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Computation of Basic Earnings per Share
Net income attributable to Stepan Company
$
33,168
$
25,889
$
96,420
$
81,091
Weighted-average number of common shares
outstanding
22,907
23,025
22,951
23,070
Basic earnings per share
$
1.45
$
1.12
$
4.20
$
3.52
Computation of Diluted Earnings per Share
Net income attributable to Stepan Company
$
33,168
$
25,889
$
96,420
$
81,091
Weighted-average number of shares outstanding
22,907
23,025
22,951
23,070
Add weighted-average net shares from assumed
exercise of options (under treasury stock method) (1)
119
102
107
95
Add weighted-average net shares related to unvested
stock awards (under treasury stock method)
1
1
1
2
Add weighted-average net shares from assumed
exercise of SARs (under treasury stock method) (1)
164
135
139
120
Add weighted-average contingently issuable net
shares related to performance stock awards
(under treasury stock method)
46
37
38
33
Weighted-average shares applicable to diluted
earnings
23,237
23,300
23,236
23,320
Diluted earnings per share
$
1.43
$
1.11
$
4.15
$
3.48
(1) Options/SARs to acquire 169,912 shares of Company common stock were excluded from the computations of diluted earnings per share for the nine months ended September 30, 2020. Options/SARs to acquire 142,833 shares of Company common stock were excluded from the computations of diluted earnings per share for the nine months ended September 30, 2019. Inclusion of the instruments would have had antidilutive effects on the computations of the earnings per share.
14
11.
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Below is the change in the Company’s AOCI balance by component (net of income taxes) for the three and nine months ended September 30, 2020 and 2019:
(In thousands)
Foreign
Currency
Translation
Adjustments
Defined
Benefit
Pension Plan
Adjustments
Cash Flow
Hedge
Adjustments
Total
Balance at June 30, 2019
$
( 100,477
)
$
( 37,323
)
$
77
$
( 137,723
)
Other comprehensive income before reclassifications
( 19,255
)
—
—
( 19,255
)
Amounts reclassified from AOCI
—
473
( 2
)
471
Net current-period other comprehensive income
( 19,255
)
473
( 2
)
( 18,784
)
Balance at September 30, 2019
$
( 119,732
)
$
( 36,850
)
$
75
$
( 156,507
)
Balance at June 30, 2020
$
( 141,682
)
$
( 30,589
)
$
68
$
( 172,203
)
Other comprehensive income before reclassifications
8,594
—
—
8,594
Amounts reclassified from AOCI
—
839
( 3
)
836
Net current-period other comprehensive income
8,594
839
( 3
)
9,430
Balance at September 30, 2020
$
( 133,088
)
$
( 29,750
)
$
65
$
( 162,773
)
Balance at December 31, 2018
$
( 108,481
)
$
( 33,083
)
$
81
$
( 141,483
)
Other comprehensive income before reclassifications
( 11,251
)
—
—
( 11,251
)
Amounts reclassified from AOCI
—
1,558
( 6
)
1,552
Remeasurement adjustment related to the Tax Act (1)
—
( 5,325
)
—
( 5,325
)
Net current-period other comprehensive income
( 11,251
)
( 3,767
)
( 6
)
( 15,024
)
Balance at September 30, 2019
$
( 119,732
)
$
( 36,850
)
$
75
$
( 156,507
)
Balance at December 31, 2019
$
( 104,037
)
$
( 32,205
)
$
72
$
( 136,170
)
Other comprehensive income before reclassifications
( 29,051
)
—
—
( 29,051
)
Amounts reclassified from AOCI
—
2,455
( 7
)
2,448
Net current-period other comprehensive income
( 29,051
)
2,455
( 7
)
( 26,603
)
Balance at September 30, 2020
$
( 133,088
)
$
( 29,750
)
$
65
$
( 162,773
)
(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.
15
Information regarding the reclassifications out of AOCI for the three- and nine-month periods ended September 30, 2020 and 2019, is displayed below:
(In thousands)
Amount Reclassified from AOCI (a)
AOCI Components
Three Months Ended
September 30
Nine Months Ended
September 30
Affected Line Item in
Consolidated Statements
of Income
2020
2019
2020
2019
Amortization of defined benefit pension actuarial losses
$
( 1,111
)
$
( 622
)
$
( 3,253
)
$
( 2,051
)
(b)
272
149
798
493
Tax benefit
$
( 839
)
$
( 473
)
$
( 2,455
)
$
( 1,558
)
Net of tax
Gains and losses on cash flow hedges:
Foreign exchange contracts
3
2
7
6
Cost of sales
3
2
7
6
Total before tax
—
—
—
—
Tax benefit
$
3
$
2
$
7
$
6
Net of tax
Total reclassifications for the period
$
( 836
)
$
( 471
)
$
( 2,448
)
$
( 1,552
)
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 9 for additional details).
12.
SEGMENT REPORTING
The Company has three reportable segments: Surfactants, Polymers and Specialty Products. Net sales by segment for the three and nine months ended September 30, 2020 and 2019, were as follows:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Segment Net Sales
Surfactants
$
333,839
$
299,719
$
993,245
$
962,749
Polymers
116,682
135,089
335,582
395,904
Specialty Products
13,959
16,774
46,189
55,102
Total
$
464,480
$
451,582
$
1,375,016
$
1,413,755
16
Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three and nine months ended September 30, 2020 and 2019, are summarized below:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Segment Operating Income
Surfactants
$
41,151
$
19,660
$
125,810
$
88,913
Polymers
22,387
23,283
45,430
58,148
Specialty Products
1,593
2,261
8,803
11,374
Segment operating income
65,131
45,204
180,043
158,435
Business restructuring
( 126
)
( 459
)
( 708
)
( 1,642
)
Unallocated corporate expenses (1)
( 22,610
)
( 16,779
)
( 52,313
)
( 58,024
)
Consolidated operating income
42,395
27,966
127,022
98,769
Interest expense, net
( 1,626
)
( 1,402
)
( 4,115
)
( 5,021
)
Other, net
2,629
885
3,804
4,265
Income before provision for income taxes
$
43,398
$
27,449
$
126,711
$
98,013
(1)
Unallocated corporate expenses primarily comprise corporate administrative expenses (e.g., corporate finance, legal, human resources, information systems, deferred compensation and environmental remediation) that are not included in segment operating income and not used to evaluate segment performance.
13.
REVENUE FROM CONTRACTS WITH CUSTOMERS
The Company deems a contract with a customer to exist when a purchase order is received from a customer for a specified quantity of product or products and the Company acknowledges receipt of such purchase order. In some instances the Company has entered into manufacturing supply agreements with customers but these agreements typically do not bind a customer to any purchase volume requirements and thus an obligation is not created until the customer submits a purchase order to the Company. The Company’s contracts typically have a single performance obligation that is satisfied at the time a product is shipped and control passes to the customer. For a small portion of the business, performance obligations are deemed satisfied when product is delivered to a customer location.
As of September 30, 2020, the Company had $ 438,000 of contract liabilities and no contract assets. A contract liability would typically arise when an advance or deposit is received from a customer before the Company recognizes revenue. In practice, this is rare as it would require a customer to make a payment prior to a performance obligation being satisfied. When such situations do arise, the Company would maintain a deferred revenue liability until the time a performance obligation has been satisfied. The Company recognized $ 350,000 of revenue in the nine months of 2020 from pre-existing contract liabilities at December 31, 2019.
The tables below provide a geographic disaggregation of net sales for the three and nine months ended September 30, 2020 and 2019. The Company’s business segmentation by geographic region most effectively captures the nature and economic characteristics of the Company’s revenue streams impacted by economic factors.
For the Three Months Ended September 30, 2020
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
202,121
$
68,635
$
12,060
$
282,816
Europe
56,468
38,337
1,899
96,704
Latin America
60,393
723
—
61,116
Asia
14,857
8,987
—
23,844
Total
$
333,839
$
116,682
$
13,959
$
464,480
17
For the Three Months Ended September 30, 2019
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
178,799
$
84,397
$
14,035
$
277,231
Europe
57,190
39,852
2,739
99,781
Latin America
51,940
792
—
52,732
Asia
11,790
10,048
—
21,838
Total
$
299,719
$
135,089
$
16,774
$
451,582
For the Nine Months Ended September 30, 2020
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
617,638
$
199,256
$
38,883
$
855,777
Europe
171,940
107,589
7,306
286,835
Latin America
163,097
1,825
—
164,922
Asia
40,570
26,912
—
67,482
Total
$
993,245
$
335,582
$
46,189
$
1,375,016
For the Nine Months Ended September 30, 2019
(In thousands)
Surfactants
Polymers
Specialty Products
Total
Geographic Market
North America
$
584,816
$
242,154
$
46,127
$
873,097
Europe
183,028
126,042
8,975
318,045
Latin America
156,709
2,439
—
159,148
Asia
38,196
25,269
—
63,465
Total
$
962,749
$
395,904
$
55,102
$
1,413,755
14.
DEBT
At September 30, 2020, and December 31, 2019, debt was comprised of the following:
(In thousands)
Maturity
Dates
September 30,
2020
December 31,
2019
Unsecured private placement notes
3.95% (net of unamortized debt issuance cost of $ 284 and $ 316 for 2020 and 2019, respectively)
2021-2027
$
99,716
$
99,684
3.86% (net of unamortized debt issuance cost of $ 250 and $ 291 for 2020 and 2019, respectively)
2020-2025
71,179
85,423
4.86% (net of unamortized debt issuance cost of $ 117 and $ 147 for 2020 and 2019, respectively)
2020-2023
37,025
36,996
Total debt
$
207,920
$
222,103
Less current maturities
37,857
23,571
Long-term debt
$
170,063
$
198,532
The Company has a committed $ 350,000,000 multi-currency revolving credit agreement that expires on January 30, 2023 . The Company maintains standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement. As of September 30, 2020, the Company had outstanding letters of credit totaling $ 5,280,000 and no borrowings under the revolving credit agreement. There was $ 344,720,000 available under the revolving credit agreement as of September 30, 2020.
The Company’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
18
place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were $ 351,219,000 and $ 283,956,000 at September 30, 2020 and December 31, 2019, respectively .
15.
OTHER, NET
Other, net in the consolidated statements of income included the following:
(In thousands)
Three Months Ended
September 30
Nine Months Ended
September 30
2020
2019
2020
2019
Foreign exchange gain
$
476
$
374
$
1,467
$
333
Investment income
119
106
287
309
Realized and unrealized gain (loss) on investments
2,094
( 324
)
2,169
2,806
Net periodic pension benefit cost
( 60
)
159
( 119
)
247
Gain on sale of asset
—
570
—
570
Other, net
$
2,629
$
885
$
3,804
$
4,265
16.
BUSINESS RESTRUCTURING
In the first quarter of 2019, the Company approved a plan to restructure its Specialty Products office in the Netherlands and eliminate five positions from the site’s supply chain, quality control and research and development areas. This planned reduction in positions was made to better align the number of personnel with current business requirements and reduce costs at the site. As a result, severance and early lease termination expenses of $ 396,000 and $ 79,000 , respectively, were recognized during the first quarter of 2019.
During the third quarter of 2018, the Company approved a plan to shut down Surfactant operations at its German plant site. As of September 30, 2020, an aggregate of $ 2,392,000 shut down related expense has been recognized at the site. This aggregate expense is comprised of $ 1,404,000 of asset and spare part write downs recognized in 2018 and $ 988,000 of cumulative decommissioning costs. The Company recognized $ 169,000 in decommissioning expenses in the third quarter of 2019 and did no t incur any decommissioning expenses in the third quarter of 2020. For the first nine months of 2020 and 2019, the Company recognized $ 79,000 and $ 564,000 of decommissioning expenses, respectively.
In the fourth quarter of 2017, the Company approved a plan to restructure a portion of its Fieldsboro, New Jersey production facility. As a result, the Company recorded $ 915,000 of restructuring expense which reflected termination benefits for select plant employees. In the first quarter of 2019, the Company recognized a $ 251,000 favorable adjustment to the amount of termination benefits initially recorded.
In May 2016, the Company announced plans to shut down its Longford Mills, Ontario, Canada (Longford Mills) manufacturing facility, a part of the Surfactant reportable segment, by December 31, 2016. The shutdown plan was implemented to improve the Company’s asset utilization in North America and to reduce the Company’s fixed cost base. Manufacturing operations of the Longford Mills plant ceased by the end of 2016, and production of goods manufactured at the facility was transferred to other Company North American production sites. Decommissioning of the assets is expected to continue throughout 2020. As of September 30, 2020, $ 8,113,000 of aggregate restructuring expense has been recognized, reflecting $ 1,644,000 of termination benefits for approximately 30 employees and $ 6,469,000 for other expenses, principally site decommissioning costs. The Company recognized $ 126,000 and $ 290,000 of decommissioning expenses in the third quarter of 2020 and 2019, respectively. The Company recognized $ 629,000 and $ 811,000 of decommissioning expenses in the first nine months of 2020 and 2019, respectively.
17.
ACQUISITIONS
2020 Acquisitions
Clariant (Mexico) Acquisition
On September 17, 2020, the Company through its subsidiaries in Mexico, acquired Clariant’s (Mexico) S.A. de C.V. anionic business and select sulfonation equipment located in Santa Clara, Mexico. The acquisition did not include the purchase of a manufacturing site. The business acquired will be integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec). The purchase price of the acquisition was $ 14,000,000 , plus associated value-added taxes (VAT). As of September 30, 2020, $ 13,519,000 , inclusive of $ 308,000 net VAT, had been paid with cash on hand. The acquisition was accounted for as a business combination and the assets were measured and recorded at their preliminary estimated fair value.
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The acquired goodwill is not tax deductible. All assets acquired are included in the Comp any’s Surfactants segment. The following table summarizes the preliminary purchase price allocation for the acquisition:
(In thousands)
September 30, 2020
Assets:
Identifiable intangible assets:
Customer lists
$
4,814
Trademarks and know-how
2,802
Non-compete agreement
1,000
Goodwill
4,595
Property, plant and equipment
789
Total assets acquired
$
14,000
Pro forma financial information has not been included because revenue and earnings of the Company’s consolidated entity would not have been materially different than reported had the acquisition date been January 1, 2019.
Logos Technologies Acquisition
On March 13, 2020, the Company acquired certain assets of Logos Technologies LLC's NatSurFact® business, a rhamnolipid-based line of bio-surfactants derived from renewable sources. These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional. The acquisition was accounted for as an asset acquisition. The purchase price of the acquisition was $ 2,040,000 and was paid with cash on hand. All assets acquired are included in the Company’s Surfactants segment. The assets acquired were primarily intangibles, including trademarks and know-how ($ 1,392,000 ) and patents ($ 464,000 ). Additionally, $ 184,000 of laboratory equipment was acquired.
2019 Acquisition
On December 17, 2019, the Company acquired an oilfield demulsifier product line. The purchase price of the acquisition was $ 9,000,000 and was paid with cash on hand. This acquisition was accounted for as a business combination and the assets were measured and recorded at their estimated fair values. The primary assets acquired were intangibles, mostly comprised of goodwill ($ 3,161,000 ), product know-how ($ 3,300,000 ) and customer relationships ($ 1,900,000 ). A small amount of inventory was also acquired. All of the acquired assets are included within the Company’s Surfactants segment. The average amortization period for the identifiable intangibles assets is 20 years.
Pro forma financial information has not been included because revenues and earnings of the Company’s consolidated entity would not have been materially different than reported had the acquisition date been January 1, 2019. The acquired business did not impact the Company’s 2019 financial results.
18.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2016, the FASB issued ASU No. 2016-13 , Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which amends the guidance on the measurement of the impairment of financial instruments. The new pronouncement replaces the existing model of measuring credit losses with an expected credit loss model referred to as “the Current Expected Credit Loss (CECL) model.” The new model is based on expected losses that should be measured based not only on historical experience but on the combination of historical data, current conditions and reasonable forecasts. Under this methodology, an entity recognizes as an allowance its estimate of lifetime expected credit losses and is required to apply the new credit loss model to most financial instruments held at amortized cost including trade receivables. The amendments in the update are effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2019. The Company adopted ASU No. 2016-13 in the first quarter of 2020. The adoption of the guidance in ASU No. 2016-13 did not have a material effect on the Company’s financial position, results of operations or cash flows.
In January 2017, the FASB issued ASU No. 2017-4, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment , which eliminates Step 2 from the goodwill impairment test. When an indication of impairment was identified after performing the first step of the goodwill impairment test, Step 2 required that an entity determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) using the same procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Under the amendments in ASU No. 2017-4, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying value. An entity would recognize an impairment charge for the amount by which the carrying value exceeds the reporting unit’s fair value. In addition, an entity must consider income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. The Company adopted the amendments in ASU No. 2017-4 for its annual, or any interim, goodwill impairment tests in the first
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quarter of 2020. The adoption of the guidance in ASU No. 2017-4 has not had an effect on the Company’s fi nancial position, results of operations or cash flows.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement . This update modifies some disclosure requirements related to fair value measurements used for different levels of instruments in fair value hierarchy (Level 1, Level 2 and Level 3). The amendments in the update are effective for fiscal years, and interim periods within fiscal years, beginning after December 15, 2019. The Company adopted ASU No. 2018-13 in the first quarter of 2020 and the adoption of this update did not have an effect on the Company’s financial position, results of operations, cash flows or the disclosures made for fair value measurements used by the Company.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use software (Subtopic 350-40) Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract . This update aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This update requires the entity to determine which implementation costs to capitalize as an asset related to the service contact and which costs to expense over the term of the hosting contract. The amendments in this update are effective for fiscal years beginning after December 15, 2019. The Company adopted ASU N0 2018-15 prospectively in the first quarter of 2020. The adoption of ASU No.2018-15 did not have a material impact on the Company’s financial position, results of operations and cash flows.
In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20) . This update removes some disclosures that are no longer considered cost beneficial and adds some disclosures about defined benefit plans that have been identified as relevant. The amendments in this update are effective for fiscal years ending after December 15, 2020. The adoption of this update is not expected to have an effect on the Company’s financial position, results of operations and cash flows, but will impact the disclosures made for the Company’s defined benefit retirement plans.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This update provides guidance to reduce complexity in certain areas of accounting for income taxes. The amendments in this update are effective for fiscal years beginning after December 15, 2020. The adoption of this update is not expected to have a material effect on the Company’s financial position, results of operations and cash flows.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the effect of reference rate reform on financial reporting. This update provides optional guidance for a limited period of time to ease the burden of implementing the usage of new reference rates. The amendments apply to contract modifications that replace a reference rate affected by reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. If elected the optional expedients to contract modifications must be applied consistently for all eligible contracts or eligible transactions. The amendments in this update may be implemented between March 12, 2020 and December 31, 2022. The guidance should be applied prospectively. The Company has not yet implemented ASU No. 2020-04 and currently is in the process of assessing the potential impact of ASU No. 2020-04 on its financial position, results of operations and cash flows.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.