What changed in this filing

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Item 8. Financial Statements and Supplementary Data

2021-02-26 compared with 2020-02-27 · 236 added, 393 removed, 1244 unchanged (34% of the section changed)

8 unchanged sentences

Notes to Consolidated Financial Statements

Selected Quarterly Financial Data

Report of Independent Regist ered Public Accounting Firm

Report of Independent Registered Public Accounting Firm

To the Shareholders and Board of Directors of:

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2016-02, Leases (Topic 842), using the modified retrospective method.

As discussed in Note 2 to the consolidated financial statements, in 2019, the Company elected to change its method of accounting for its United States inventories from the last in, first out (LIFO) method to the first in, first out (FIFO) method and retrospectively adjusted the 2018 and 2017 financial statements for the change.

Basis for Opinion

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Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

Our audits included performing procedures to assess the risks of material misstatements of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements.

8 unchanged sentences

Environmental loss contingencies are evaluated based on the likelihood of the Company incurring a liability and whether a loss or range of losses is reasonably estimable.

The likelihood and amount of a loss or range of losses are

estimated based on currently available information and assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation.

The likelihood and amount of a loss or range of losses are estimated based on currently available information and assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation.

Past estimates for environmental liabilities are subject to adjustment as new facts emerge during the investigatory and remediation processes.

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Cost of Sales

Gross Profit (1)

Operating Expenses:

3 unchanged sentences

Deferred compensation expense (income)

Business restructuring (Note 23)

Business restructuring expenses (Note 22)

Operating Income

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Provision for Income Taxes (Note 9) \

Net Income (1)

Net Loss Attributable to Noncontrolling Interests (Note 1)

Net (Gain) Loss Attributable to Noncontrolling Interest (Note 1)

Net Income Attributable to Stepan Company

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Attributable to Stepan Company (Note 18):

The 2018 and 2017 amounts for the noted line items have been retrospectively 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 Consolidated Financial Statements are an integral part of these statements.

3 unchanged sentences

(In thousands)

Net Income (1)

Other Comprehensive Income (Loss):

Other Comprehensive Income:

Foreign currency translation adjustments (Note 19)

Defined benefit pension plans:

Net actuarial gain (loss) arising in period (net of taxes of $ 1,263 , $ 2,300 and $ 771 for 2019, 2018 and 2017, respectively)

Net actuarial gain (loss) arising in period (net of tax benefit of $ 265 , tax expense of $ 1,263 and tax benefit of $ 2,300 for 2020, 2019 and 2018, respectively)

Amortization of prior service cost included in pension expense

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Net cash flow hedge activity (Note 19)

Other Comprehensive Income (Loss)

Other Comprehensive Income

Comprehensive Income

Comprehensive (Income) Loss Attributable to Noncontrolling

Comprehensive Income Attributable to Noncontrolling

Comprehensive Income Attributable to Stepan Company

inventory valuation from LIFO to FIFO.

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

20 unchanged sentences

Other non-current assets

Total Assets (1)

Liabilities and Equity

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Total Stepan Company stockholders’ equity

Noncontrolling interests

Total equity (1)

Noncontrolling interest

Total Liabilities and Equity

The 2018 amounts for the noted line items have been retrospectively 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 2019 amounts for the noted line items include an adjustment related to the Company’s first quarter 2019 adoption of Accounting Standards Update (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 Consolidated Financial Statements are an integral part of these statements.

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Cash Flows From Operating Activities

Net income (1)

Adjustments to reconcile net income to net cash provided by

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Receivables, net

Inventories (1)

Other current assets

6 unchanged sentences

Expenditures for property, plant and equipment

Asset acquisition (Note 20)

Business acquisitions, net of cash acquired (Note 20)

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Cash payments of interest

inventory valuation from LIFO to FIFO.

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

11 unchanged sentences

Stock-based and deferred compensation

Net income (1)

Other comprehensive income

1 unchanged sentence

Common stock ($ 0.93 per share)

Payment of cash dividends to noncontrolling interest

Balance, December 31, 2018

The retained earnings and net income amounts for the noted line items have been retrospectively 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.

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.

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

11 unchanged sentences

Stock-based and deferred compensation

Net income (1)

Other comprehensive income

2 unchanged sentences

Balance, December 31, 2019

inventory valuation from LIFO to FIFO.

Reflects beginning retained earnings adjustment as a result of the Company’s first quarter 2019 adoption of ASU No.

2016-16, Income Taxes (Topic 740):

Intra-Entity Transfers of Assets Other Than Inventory.

2018-02, Income Statement – Reporting Comprehensive Income (Topic 220):

Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

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

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Balance, December 31, 2020

The retained earnings amount for the noted line item has been retrospectively changed from the amount 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.

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.

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

Not es to Consolidated Financial Statements

Notes to Consolidated Financial Statements

For the years ended December 31, 2020, 2019 and 2018

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At December 31, 2020, the Company’s cash and cash equivalents totaled $ 349.9 million including $ 123.7 million in money market funds, each of which was rated AAAm by Standard and Poor’s, Aaa-mf by Moody’s and AAAmmf by Fitch.

demand deposit accounts and certificates of deposit totaled $ 105.7 million and cash of the Company’s non-U.S.

demand deposit accounts totaled $ 76.1 million and cash of the Company’s non-U.S.

subsidiaries held outside the U.S.

totaled $ 150.1 million as of December 31, 2020.

Receivables and Credit Risk

Receivables and Credit Risk/Losses

Receivables are stated net of allowances for doubtful accounts and other allowances and primarily include trade receivables from customers, as well as nontrade receivables from suppliers, governmental tax agencies and others.

The Company is exposed to credit risk on accounts receivable balances.

This risk is mitigated by the Company’s large, diverse customer base, which is dispersed over various geographic regions and industrial sectors.

The Company is exposed to both credit risk and losses on accounts receivable balances.

The Company’s credit risk and loss exposure predominately relates to the sale of products to its customers.

When extending credit to customers the Company evaluates a customer’s credit worthiness based on a combination of qualitative and quantitative factors, inclusive of, but not limited to, a customer’s credit rating from external providers, financial condition and past payment experience.

The Company performs credit reviews on all customers at inception and on a scheduled basis thereafter dependent on customer risk and the level of credit extended.

Payment terms extended are short term in duration, typically ranging from 30 to 60 days.

The majority of the Company’s sales are made to large companies that are able to weather periodic changes in economic conditions.

This risk of losses is further mitigated by the Company’s diverse customer base, which is dispersed over various geographic regions and industrial sectors.

No single customer comprised more than 10 percent of the Company’s consolidated net sales in 2020, 2019 or 2018.

The Company maintains allowances for potential credit losses.

With the adoption of ASU No.

2016-13, Financial Instruments – Credit Losses, the Company assesses the likelihood of default based on various factors, including the length of time receivables are past due, historical experience, existing economic conditions and forward-looking economic forecasts.

The Company also evaluates expected losses based on portfolios of data inclusive of geographical areas, specific end market uses of its products, etc.

Although the Company’s historical credit loss experience has not been significant, its exposure to credit losses may increase if customers are adversely affected by economic pressures or uncertainty due to domestic or global economic recessions, disruptions due to COVID-19, or other adverse global/regional events and customer specific factors.

Specific customer allowances are recorded when a review of customer creditworthiness and current economic conditions indicate that collection is doubtful.

General allowances are also maintained based on historical averages and trade receivable levels and incorporate existing economic conditions and forecast assumptions, when warranted.

The Company reviews its reserves for credit losses on a quarterly basis.

The Company also maintains other customer allowances that occur in the normal course of business.

Such allowances are based on historical averages and trade receivable levels.

The adoption of ASU No.

2016-13 has not had a material impact on the Company’s allowances for potential credit losses.

The following is an analysis of the allowance for doubtful accounts and other accounts receivable allowances for the years ended December 31, 2020, 2019 and 2018:

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Inventories are valued at cost, which is not in excess of market value, and include material, labor and plant overhead costs.

Prior to 2019, the LIFO method was used to determine the cost of the Company’s U.S.

Effective January 1, 2019, the Company elected to change its method of accounting for U.S.

inventories from the LIFO basis to FIFO basis.

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 for U.S.

See Note 2 for additional details.

Currently, the first in, first out (FIFO) method is used to determine the cost of the Company’s inventory.

Property, Plant and Equipment

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The cost of property retired or sold, and the related accumulated depreciation, are removed from the accounts and any resulting gain or loss is reflected in income.

Long-lived assets are reviewed for impairment when conditions exist that indicate the carrying amount of the assets may not be fully recoverable.

Such conditions could include significant adverse changes in the business environment, significant declines in forecasted operations or an approved plan to discontinue an asset or an asset group before the end of its useful life.

Included in the computer equipment and software component of machinery and equipment are costs related to the acquisition and development of internal-use software.

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Costs incurred in the preliminary project phase are expensed.

The Company adopted 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 in the first quarter of 2020.

As a result, deferred implementation costs for hosted cloud computing service arrangements are now stated at historical cost and amortized on a straight-line basis over the term of the hosting arrangement.

Interest charges on borrowings applicable to major construction projects are capitalized.

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Compensation expense or income related to the Company’s deferred compensation plans is presented in the deferred compensation expense (income) line in the Consolidated Statements of Income.

For more details, see Note 12 to consolidated financial statements.

Environmental Expenditures

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When no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued.

Estimating the possible costs of remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation.

Some of the factors on which the Company bases its estimates include information provided by feasibility studies, potentially responsible party negotiations and the development of remedial action plans.

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Intangible assets other than goodwill are determined to have either finite or indefinite useful lives.

currently has no indefinite-life intangible assets other than goodwill.

The Company currently has no indefinite-life intangible assets other than goodwill.

The values for intangible assets with finite lives are amortized over the useful lives of the assets.

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patents – 10 - 15 years ;

non-compete agreements – five years ;

trademarks – 11 years ;

customer relationships – 10 - 25 years ;

supply contracts – four years and know-how – 8 - 14 years .

non-compete agreements – three - five years ;

trademarks – five- 11 years;

customer relationships – five - 20 years ;

know-how – 5 - 20 years and supply contracts - four years .

In addition, finite-life intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable.

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If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.

Uncertain tax positions are recorded in accordance with ASC 740 on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

Uncertain tax positions are recorded in accordance with ASC 740, Income Taxes , on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.

The Company recognizes interest and penalties related to unrecognized tax benefits within the income tax expense line in the accompanying Consolidated Statement of Operations.

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The Company has three foreign subsidiaries whose functional currencies are the U.S.

For these subsidiaries, nonmonetary assets and liabilities are translated at historical rates, monetary assets and liabilities are translated at exchange rates in effect at year end, revenues and expenses are translated at average exchange rates for the year and translation gains and losses are included in the other, net caption of the consolidated statements of income.

For these subsidiaries, nonmonetary assets and liabilities are translated at historical rates, monetary assets and liabilities

are translated at exchange rates in effect at year end, revenues and expenses are translated at average exchange rates for the year and translation gains and losses are included in the other, net caption of the consolidated statements of income.

Stock-Based Compensation

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The fair values of the stock options and stock awards are then recognized as compensation expense over the vesting periods of the instruments.

The Company’s SARs granted before 2015 settle in cash.

The Company’s SARs granted prior to 2015 are cash-settled, and SARs granted in 2015 and later are stock-settled.

The cash-settled SARs are accounted for as liabilities that must be re-measured at fair value at the end of each reporting period.

Compensation expense for each reporting period is calculated as the period-to-period change (or portion of the change, depending on the proportion of the vesting period that has been completed at the reporting date) in the fair value of the cash-settled SARs.

SARs granted subsequent to 2014 are settled in shares of Company common stock.

Compensation expense for the stock-settled SARs is calculated in the same way as compensation expense for stock options.

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Basic earnings per share amounts are computed as net income attributable to the Company divided by the weighted-average number of common shares outstanding.

Diluted earnings per share amounts are based on the weighted-average number of common

shares outstanding plus the weighted-average of net common shares (under the treasury stock method) that would be outstanding assuming the exercise of outstanding stock options and stock-settled SARs, the vesting of unvested stock awards that have no performance or market condition and the issuance of contingent performance stock awards.

Diluted earnings per share amounts are based on the weighted-average number of common shares outstanding plus the weighted-average of net common shares (under the treasury stock method) that would be outstanding assuming the exercise of outstanding stock options and stock-settled SARs, the vesting of unvested stock awards that have no performance or market condition and the issuance of contingent performance stock awards.

See Note 18 for detailed information about the Company’s earnings per share calculations.

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Recent Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (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 are 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.

The most significant impact of ASU No.

2016-2, Leases (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 retained earnings, the Company’s results of operations or cash flows, but it did have a material impact on specific balance sheet line items.

See Note 8, Leases for more details.

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 Act.

Consequently, the update reclassifies the stranded tax effects resulting from the Tax Act and should 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 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.

The Company adopted this guidance and recorded a $ 5,325,000 adjustment to the opening balance of retained earnings as of January 1, 2019 with the corresponding offset to AOCI.

See Note 20, Accumulated Other Comprehensive Income (Loss) for more details .

In June 2016, the FASB issued ASU No.

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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 will not have a material effect on the Company’s financial position, results of operations or cash flows.

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.

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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 is required 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.

The Company adopted the amendments in ASU No.

2017-4 for its annual, or any interim, goodwill impairment tests in the first quarter of 2020.

The adoption of the guidance in ASU No.

2017-4 in 2020 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.

2017-4 has not had an effect on the Company’s financial position, results of operations or cash flows.

In August 2018, the FASB issued ASU No.

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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 not expected to 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.

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 about defined benefit plans that are no longer considered cost beneficial and adds some disclosures 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.

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.

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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 contacts 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 has elected to apply the update prospectively to eligible implementation costs incurred starting January 1, 2020.

The adoption of the guidance in ASU No.

2018-15 will not have a material effect on the Company’s financial position, results of operations or cash flows.

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 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 early adoption is permitted.

The Company adopted ASU No.

2018-14 in 2020 and the adoption did not have an effect on the Company’s financial position, results of operations and cash flows, but impacted the disclosures made for the Company’s defined benefit retirement plans.

In December 2019, the FASB issued ASU No.

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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.

Change in Method of Accounting for Inventory Valuation

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.

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.

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.

The cumulative effect on retained earnings for these changes was $ 23,659,000 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)

Year Ended December 31, 2018

As originally reported under LIFO

Effect of change

As adjusted under FIFO

Cost of Sales

Operating Income

Income Before Provision for Income Taxes

Provision for Income Taxes

Net Income Attributable to Stepan Company

Net Income Per Diluted Common Share Attributable to Stepan Company

(In thousands, except per share amounts)

Year Ended December 31, 2017

As originally reported under LIFO

Effect of change

As adjusted under FIFO

Cost of Sales

Operating Income

Income Before Provision for Income Taxes

Provision for Income Taxes

Net Income Attributable to Stepan Company

Net Income Per Diluted Common Share Attributable to Stepan Company

Balance Sheet

(In thousands)

December 31, 2018

As originally reported under LIFO

Effect of change

As adjusted under FIFO

Other Non-Current Assets

Deferred Income Taxes

Retained Earnings

Total Liabilities and Equity

Statement of Cash Flows

(In thousands)

Year Ended December 31, 2018

As originally reported under LIFO

Effect of change

As adjusted under FIFO

Deferred Income Taxes

Change in Assets and Liabilities:

(In thousands)

Year Ended December 31, 2017

As originally reported under LIFO

Effect of change

As adjusted under FIFO

Deferred Income Taxes

Change in Assets and Liabilities:

The following tables present what 2019 financial statement line items would have been had the Company not changed its method of accounting for U.S.

inventories from the LIFO to FIFO basis:

Income Statement

(In thousands, except per share amounts)

Year Ended December 31, 2019

As reported under FIFO

Effect of change

As computed under LIFO

Cost of Sales

Operating Income

Income Before Provision for Income Taxes

Provision for Income Taxes

Net Income Attributable to Stepan Company

Net Income Per Diluted Common Share Attributable to Stepan Company

Balance Sheet

(In thousands)

December 31, 2019

As reported under FIFO

Effect of change

As computed under LIFO

Other Non-Current Assets

Deferred Income Taxes

Retained Earnings

Total Liabilities and Equity

Statement of Cash Flows

(In thousands)

Year Ended December 31, 2019

As reported under FIFO

Effect of change

As computed under LIFO

Deferred Income Taxes

Change in Assets and Liabilities:

The adoption of this update will not have a material effect on the Company’s financial position, results of operations and cash flows.

In March 2020, the FASB issued ASU No.

2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effect of Reference Rate Reform on Financial Reporting .

This update provides optional guidance for a limited period of time to ease the burden of implementing the usage of new reference rates.

The amendments apply to contract modifications that replace a reference rate affected by reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate.

If elected the optional expedients to contract modifications must be applied consistently for all eligible contracts or eligible transactions.

The amendments in this update may be implemented between March 12, 2020 and December 31, 2022.

The guidance should be applied prospectively.

The guidance is effective beginning on March 12, 2020 through December 31, 2022.

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

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

Fair Value Measurements

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Carrying value approximated fair value because of the short maturity of the instruments.

Fair value of cash and cash equivalents is a Level 1 measurement.

Derivative assets and liabilities

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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.

The Company’s fair value measurements for derivative assets and liabilities fall within Level 2 of the fair value hierarchy.

See the table that follows the financial instrument descriptions for the reported fair values of derivative assets and liabilities.

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Fair value and carrying value were the same because the mutual fund assets were recorded at fair value in accordance with the FASB’s fair value option guidance.

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.

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 and therefore its fair value measurements for mutual fund assets fall within Level 1 of the fair value hierarchy.

See the table that follows the financial instrument descriptions for the reported fair value of long-term investments.

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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 in level 2 of the fair value hierarchy.

The Company’s fair value measurements for debt fall within Level 2 of the fair value hierarchy.

At December 31, 2020 and 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 $ 617,000 , and $ 754,000 as of December 31, 2020 and 2019, respectively):

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Carrying value

The following tables present financial assets and liabilities measured on a recurring basis at fair value as of December 31, 2019 and 2018, and the level within the fair value hierarchy in which the fair value measurement falls:

The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of December 31, 2020 and 2019, and the level within the fair value hierarchy in which the fair value measurement falls:

(In thousands)

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Foreign currency contracts

Total liabilities at fair value

(In thousands)

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Foreign currency contracts

Total liabilities at fair value

Derivative Instruments

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See Note 20 for information regarding the goodwill acquired in a business combination.

Company tests its goodwill balances for impairment in the second quarter of each calendar year.

The Company tests its goodwill balances for impairment in the second quarter of each calendar year.

The 2020 and 2019 tests indicated no impairment.

The following table presents the components of other intangible assets, all of which have finite lives, as of December 31, 2020 and 2019.

The year-over-year changes in gross carrying values mainly resulted from an oilfield demulsifier product line acquisition and the effects of foreign currency translation.

The year-over-year changes in gross carrying values mainly resulted from acquisitions that took place in 2020 and the effects of foreign currency translation.

(In thousands)

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Non-compete agreements (2)

Trademarks (2)

Customer lists/relationships (2)

2 unchanged sentences

Know-how includes intellectual property rights covering proprietary information, written formulae, trade secrets or secret processes, inventions and developmental products (whether patentable or not), discoveries, improvements, compositions, manufacturing processes, manuals, specifications and technical data

In 2019, customer lists/relationships and k now- how include the acquisition of an oilfield demulsifier product line.

See Note 21 for more details.

The 2020 balances include intangible assets acquired as part of the Company’s Clariant (Mexico) and Logos Technologies acquisitions in 2020.

See Note 20 for additional details.

Aggregate amortization expense for the years ended December 31, 2020, 2019 and 2018, was $ 3,621,000 , $ 3,399,000 , and $ 3,470,000 , respectively.

11 unchanged sentences

Total inventories

Effective January 1, 2019, the Company elected to change its method of accounting for U.S.

inventories from the LIFO basis to the FIFO basis.

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 for U.S.

See Note 2 for additional details.

Debt comprised the following at December 31, 2020 and 2019:

7 unchanged sentences

$ 147 for 2020 and 2019, respectively)

5.88% (net of unamortized debt issuance cost of $ 0 and

$ 85 for 2019 and 2018, respectively)

Debt of foreign subsidiaries

Unsecured bank debt, foreign currency

Less current maturities

7 unchanged sentences

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 December 31, 2019, the Company had outstanding letters of credit of $ 4,929,000 and no borrowings under the revolving credit agreement.

As of December 31, 2020, the Company had outstanding letters of credit totaling $ 6,220,000 and no borrowings under the revolving credit agreement.

There was $ 343,780,000 available under the revolving credit agreement as of December 31, 2020.

4 unchanged sentences

The credit agreement requires the maintenance of certain financial ratios and compliance with certain other covenants that are similar to the Company’s existing debt agreements, including net worth, interest coverage and leverage financial covenants and limitations on restricted payments, indebtedness and liens.

On June 12, 2019, the Company prepaid the $ 17,100,000 outstanding principal balance of its 5.88 percent Series 2010-A Senior Notes due June 1, 2022 (Notes) and the related make-whole amount of $ 1,173,000 .

The make-whole amount primarily reflected the net present value of the remaining scheduled interest payments on the Notes, calculated in accordance with the applicable note purchase agreement.

The prepayment was made with cash on hand.

The Company also expensed remaining unamortized debt issuance costs of $ 74,000 .

The Company’s foreign subsidiaries had no unsecured debt at December 31, 2020.

8 unchanged sentences

Debt maturing in 2021 includes $ 37,857,000 of scheduled repayments under long-term debt agreements.

Although the Company’s foreign subsidiaries currently have no short-term working capital loans, these type of loans routinely exist .

Although the Company’s foreign subsidiaries currently have no short-term working capital loans,

these types of loans routinely exist .

These short-term loan agreements could be supplemented, if necessary, by the Company’s $ 350,000,000 revolving credit agreement entered into on January 30, 2018.

13 unchanged sentences

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.

The Company elected to apply the new lease standard at adoption as allowed under ASU No.

The Company elected to apply the new lease standard at adoption (January 1, 2019) as allowed under ASU No.

2018-11 and, as a result, the Company did not retrospectively adjust prior periods presented.

8 unchanged sentences

Railcars and real estate comprise approximately 26 percent and 56 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 .

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 of December 31, 2019, the Company had additional leases, primarily for equipment and railcars, that have not commenced of approximately $ 537,000 .

These leases will commence in the first half of 2020 with lease terms of five years .

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 at the inception of a lease is 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.

The Company’s three principal real estate leases relate to the office lease for the new corporate headquarters in Northbrook, Illinois and 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.

2 unchanged sentences

The total value of leases that reside in the five countries identified above represents approximately 98 percent of the Company’s consolidated ROU asset balance.

The lease cost is included in Cost of sale and Operating expenses sections of the Consolidated Statements of Income.

(In thousands)

December 31, 2020

December 31, 2019

Operating lease cost

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Weighted-average discount rate-operating leases

ASC 840 Disclosure

As required in transition, the table below summarizes the Company’s future minimum lease payments at December 31, 2018 under ASC 840.

(In thousands)

Subsequent to 2023

Total minimum future rental payments

Other, net in the Consolidated Statements of Income included the following for the years ended December 31, 2020, 2019 and 2018:

(In thousands)

Foreign exchange gains (losses)

Foreign exchange gains

Investment income

7 unchanged sentences

Income before Taxes

inventory valuation from LIFO to FIFO.

The variations between the effective and statutory U.S.

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Unrecognized tax benefits

Domestic production activities deduction

Nontaxable foreign interest income

6 unchanged sentences

Total income tax provision

inventory valuation from LIFO to FIFO.

Includes incremental state research credits for the tax years 2015 - 2019 that were identified as part of a research and development tax credit study.

For 2019, amount includes incremental state research credits for the tax years 2015 - 2019 that were identified as part of a research and development tax credit study.

Includes cost of global intangible low-taxed income (GILTI) in 2020, 2019 and 2018 plus other taxes paid or withheld on cash repatriated from foreign countries in 2020, 2019 and 2018.

1 unchanged sentence

For 2018, amount represents the federal tax rate change due to certain accounting methods that were adopted on the 2017 federal income tax return.

For 2017, amount represents an accounting method change for depreciation.

Certain 2018 and 2017 amounts have been reclassified to conform to the 2019 presentation.

Includes incremental federal research credits for 2015 - 2019 that were identified as part of a research and development tax credit study.

For 2019, amount i ncludes incremental federal research credits for 2015 - 2019 that were identified as part of a research and development tax credit study.

Also includes a federal tax rate change due to the classification of certain 2016 and 2017 depreciable fixed assets as deductible research costs .

4 unchanged sentences

Amortization of intangibles

Inventories (1)

Deferred Tax Assets:

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Net Deferred Tax (Liabilities) Assets

inventory valuation from LIFO to FIFO.

Earnings generated by a foreign subsidiary are presumed to ultimately be transferred to the parent company.

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or earnings that would qualify for the 100 percent dividends received deduction provided for in the Tax Act as long as such distributions would not result in any significant foreign taxes.

In 2019, the Company repatriated approximately $ 57,000,000 to the U.S.

parent, and recorded $ 500,000 of additional income tax expense in 2019 as a result of the repatriation.

In anticipation of the INVISTA acquisition, the Company’s Philippines entities declared a cash dividend of approximately $ 20,700,000 to the U.S.

parent in December 2020.

The Company recorded $ 2,384,000 of additional income tax expense in 2020 as a result of the expected repatriation.

The Company expects that the U.S.

parent will receive the cash in 2021.

The effect of the adjustment on the 2020 effective tax rate was an increase of approximately 1.4 percent.

During 2019, the Company reevaluated its indefinite reinvestment assertion with regards to certain accumulated foreign earnings.

The Company no longer considers the undistributed earnings of its Canadian subsidiary to be indefinitely reinvested in foreign operations to the extent of the subsidiary’s paid-up capital (PUC) as determined under Canadian tax law which is used to determine tax-free distributions for Canadian tax purposes.

The Company also no longer considers the undistributed earnings of its Dutch subsidiary, one of its Singapore subsidiaries, and one of its Chinese subsidiaries to be indefinitely reinvested in foreign operations.

The Company evaluated its indefinite reinvestment assertion with regards to certain accumulated foreign earnings as of December 31, 2020.

The Company does not consider the undistributed earnings of its Canadian subsidiary to be indefinitely reinvested in foreign operations to the extent of the subsidiary’s paid-up capital (PUC) as determined under Canadian tax law which is used to determine tax-free distributions for Canadian tax purposes.

The Company also does not consider the undistributed earnings of one of its Dutch subsidiaries, one of its Singapore subsidiaries, and one of its Chinese subsidiaries to be indefinitely reinvested in foreign operations.

A distribution from any of these subsidiaries should not result in any significant foreign taxes to the extent of the distribution limitations discussed above and therefore, the Company has not recognized a deferred tax liability for these undistributed earnings as of December 31, 2020.

8 unchanged sentences

The Company’s capital loss carryforwards do not expire .

At December 31, 2019, the Company had valuation allowances of $ 2,994,000 , which were attributable to deferred tax assets in Canada, China, India, the Philippines and Singapore.

As of December 31, 2020, and 2019, the Company had valuation allowances of $ 896,000 and $ 2,994,000 , respectively, which were attributable to deferred tax assets in Canada, China, India, and the Philippines.

The realization of deferred tax assets is dependent on the generation of sufficient taxable income in the appropriate tax jurisdictions.

4 unchanged sentences

The Company recognizes accrued interest and penalties related to unrecognized tax benefits as income tax expense.

In 2019, the Company recognized net interest and penalty expense of $ 19,000 compared to $ 26,000 of net interest and penalty income in 2018 and $ 3,000 of net interest and penalty expense in 2017.

In 2020, the Company recognized net interest and penalty expense of $ 31,000 compared to $ 19,000 of net interest and penalty expense in 2019 and $ 26,000 of net interest and penalty income in 2018.

At December 31, 2020 the liability for interest and penalties was $ 80,000 compared to $ 49,000 at December 31, 2019.

24 unchanged sentences

Stock options, stock awards and SARs are currently granted to Company executives and other key employees.

In addition, stock awards are currently granted to non-employee directors of the Company.

The 2011 Plan authorized the award of 2,600,000 shares of the Company’s common stock for stock options, SARs and stock awards.

1 unchanged sentence

Compensation expense recorded in the consolidated statements of income for all plans was $ 10,080,000 , $ 8,872,000 , and $ 6,837,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

The increase in stock-based compensation in 2019 versus 2018 was primarily due to the increase in compensation expenses related to SARs.

The $ 28.44 increase in the market value of Company common stock from $ 74.00 at December 31, 2018 to $ 102.44 at December 31, 2019 caused the fair value of SARs to

increase, resulting in an increase of the Company’s SARs liability.

Partially offsetting the increase caused by SARs was the decline in compensation expenses related to performance awards.

Management assessment that the profitability performance targets for certain grants would not be achieved led to the lowering of compensation expenses for performance awards.

The increase in stock-based compensation in 2020 versus 2019 was primarily due to the increase in compensation expenses related to performance awards.

Management’s assessment

that higher profitability performance targets for certain grants would be achieved led to the increase of compensation expenses for performance awards.

Partially offsetting the increase was the decrease in compensation expenses related to cash SARs.

The $ 16.88 per share increase in the market value of the Company common stock from $ 102.44 at December 31, 2019 to $ 119.32 at December 31, 2020 was smaller than the increase of $ 28.44 per share in the market value of the Company common stock from $ 74.00 at December 31, 2018 to $ 102.44 at December 31, 2019.

The total income tax benefit recognized in the income statement for share-based compensation arrangements was $ 2,390,000 , $ 1,501,000 , and $ 1,849,000 for the years ended December 31, 2020, 2019 and 2018, respectively.

2 unchanged sentences

The market price is defined and calculated as the average of the opening and closing prices for Company common stock on the grant date as reported in the New York Stock Exchange – Composite Transactions.

Stock option awards granted prior to 2017 cliff vest after two years .

Stock options granted in 2017, 2018 and 2019 have a three-year graded vesting feature, with one-third of the awards vesting each year.

Stock option awards granted prior to 2017 generally cliff vest after two years .

Starting in 2017, stock options 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 with graded vesting feature.

These options have 8- to 10-year contractual terms.

These options have a 10 -year contractual term.

The fair value of each option award was estimated on the date of grant using the Black-Scholes option valuation model incorporating the weighted-average assumptions noted in the following table.

31 unchanged sentences

These stock awards vest based on the service time established for the given grant.

In addition, the Company grants stock awards that have no performance conditions associated with their vesting to non-employee directors of the Company.

A summary of stock award activity for the year ended December 31, 2020, is presented below:

6 unchanged sentences

At December 31, 2020, the Company had both cash-settled and Company stock-settled SARs outstanding.

SARs granted prior to 2015 are cash-settled, and SARs granted after 2014 are stock-settled.

SARs granted prior to 2015 are cash-settled, and SARs granted in 2015 and later are stock-settled.

SARs granted prior to 2017 cliff vest after two years .

SARs granted in 2017, 2018 and 2019 have a three-year graded vesting feature, with one-third of the awards vesting each year.

Starting in 2017, 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 SARs with graded vesting feature.

31 unchanged sentences

therefore, fluctuations in the market price of the underlying Company stock do not affect earnings.

The additional compensation expense or income resulting from the changes in the market values and earnings of the selected investment options was $ 15,140,000 expense in 2019, $ 2,329,000 income in 2018 and $ 4,857,000 expense in 2017.

The main factor in the increase of the 2019 deferred compensation expense versus 2018 deferred compensation income was a $ 28.44 per share increase in the market price of the Company’s common stock in 2019 versus a $ 4.97 per share decline in the price of stock in 2018.

The additional compensation expense or income resulting from the changes in the market values and earnings of the selected investment options was $ 9,988,000 expense in 2020, $ 15,140,000 expense in 2019 and $ 2,329,000 income in 2018.

The main factor in the decrease of the 2020 deferred compensation expense versus 2019 deferred compensation expense was a $ 16.88 per share increase in the market price of the Company’s common stock in 2020 versus a $ 28.44 per share increase in the price of stock in 2019.

The Company’s deferred compensation liability was $ 61,558,000 and $ 59,031,000 at December 31, 2020 and 2019, respectively.

14 unchanged sentences

Interest cost

Actuarial (gain) loss

Actuarial loss

Benefits paid

6 unchanged sentences

Fair value of plan assets at beginning of year

Actual return (loss) on plan assets

Actual return on plan assets

Employer contributions

41 unchanged sentences

cost and other comprehensive income

The estimated amounts that will be reclassified from accumulated other comprehensive income into net periodic benefit cost in 2020 are as follows:

(In thousands)

Net actuarial loss

Estimated Future Benefit Payments

13 unchanged sentences

Asset gains are subtracted or losses added in the following way:

80 percent of the prior

year’s gain or loss;

80 percent of the prior year’s gain or loss;

60 percent of the second preceding year’s gain or loss;

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At the direction of the Plan Committee, the plans sold 31,706 shares of the Company’s common stock to the Company’s ESOP trust on February 24, 2020.

In 2019, the plans sold 32,299 shares to the Company’s ESOP trust on February 21, 2019.

In 2018, the plans sold 43,930 shares to the Company’s ESOP trust on February 21, 2018, 23,471 shares to the Company on March 9, 2018 and 16,833 shares to the Company on August 8, 2018.

14 unchanged sentences

There are no specific prohibited investments, but the current managed fund will not allocate assets to derivatives or other financial hedging instruments.

Plan trustees meet regularly with the fund manager to assess the fund’s performance and to reassess investment strategy.

At December 31, 2019, the pension asset allocation was 31 percent equities, 58 percent fixed income, five percent insurance contracts, and six percent cash.

Plan trustees meet regularly with the fund manager to assess

the fund’s performance and to reassess investment strategy.

At December 31, 2020, the pension asset allocation was 13 percent equities, 74 percent fixed income, four percent insurance contracts, and nine percent cash.

Included in plan assets are insurance contracts purchased by the plan trustees to provide pension payments for specific retirees.

33 unchanged sentences

Level 2 – Fixed income investments without equivalent trading exchanges are valued primarily through a technique known as “future cash flow approach” which is based on what bondholders can reasonably expect to receive based upon an issuer’s current financial condition.

Pricing analysts prepare cash-flow forecasts and utilize one or two pricing models to arrive at an evaluated price.

Pricing analysts prepare cash-flow forecasts and utilize one or two pricing models to arrive at an

evaluated price.

Evaluated bid modeling includes factors such as the interest rate on the coupon, maturity, rating, cash flow projections and other factors.

57 unchanged sentences

Prior to 2018, the Company made profit sharing contributions into the qualified retirement plans for its U.S.

employees and in 2018 and 2019 made profit sharing contributions into the qualified retirement plans for U.S.

employees and starting in 2018 made profit sharing contributions into the qualified retirement plans for U.S.

employees and for certain non-U.S.

1 unchanged sentence

In 2017 and 2018, profit sharing contributions for 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.

In 2019, profit sharing contributions for 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.

In 2019 and 2020, profit sharing contributions for U.S.

employees were made to the employee stock ownership plan.

17 unchanged sentences

For the years ended December 31, 2020, 2019 and 2018, the Company recognized $ 1,679,000 , $ 935,000 and $ 374,000 , respectively, of statutory profit sharing expense and are included in the above table.

In total, approximately 77 percent of union and non-union employees are eligible for either Company’s sponsored or statutory profit sharing contributions.

In all Company locations, approximately 79 percent of union and non-union employees are eligible for either Company’s sponsored or statutory profit sharing contributions and 100 percent of U.S.

based union and non-union employees are eligible for the Company’s sponsored profit sharing contribution.

Accrued Liabilities

28 unchanged sentences

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

As of December 31, 2019, the Company estimated a range of possible environmental and legal losses of $ 25.9 million to $ 43.7 million.

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 ranges and, thus, has accrued at the lower end of the ranges.

These accruals totaled $ 25.9 million at December 31, 2019 and $ 23.4 million at December 31, 2018.

As of December 31, 2020, the Company estimated a range of possible environmental and legal losses of $ 22,884,000 to $ 41,104,000 .

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 $ 22,884,000 at December 31, 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 $ 3.8 million for the year ended December 31, 2019, compared to $ 1.6 million in 2018.

Cash expenditures related to legal and environmental matters approximated $ 4,483,000 for the year ended December 31, 2020, compared to $ 3,791,000 in 2019.

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.

1 unchanged sentence

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 and the possibility of other viable entities’ responsibilities for cleanup, 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.

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.

2 unchanged sentences

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) September 21, 1987 Administrative Order on Consent entered into between the 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 for Maywood site.

Pursuant to (i) a September 21, 1987 Administrative Order on Consent entered into between the 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 from the Company’s current recorded liability.

The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil.

Based on the Company’s review and analysis of this order, no changes to the Company’s current recorded liability for claims associated with soil 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 which the United States has taken title to and is responsible for the removal of radioactive waste at the Maywood site and has incurred past and will incur future remediation costs incurred by the United States.

Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985.

Under the Cooperative Agreement, the United States is responsible for the removal of radioactive waste at the Maywood site, including past and future remediation costs at the site.

As such, the Company recorded no liability related to this settlement agreement.

D’Imperio Property Site

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances generated by the Company’s at several sites in New Jersey, including the D’Imperio 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.

1 unchanged sentence

In 2020, the PRPs were provided with updated remediation cost estimates by the PRP group technical consultant and project manager which the Company considered in its determination of its range of estimated possible losses and liability balance.

The changes in range of possible losses and liability balance related to such updated remediation cost estimates were immaterial.

Remediation work is continuing at the D’Imperio site.

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 costs of the remediation at this site, the amount for which the Company is liable could differ materially from the current estimates.

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

1 unchanged sentence

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 the Company’s contributions.

The Company has paid the current owner $ 2.8 million for the Company’s portion of environmental response costs at the Wilmington site through December 31, 2019.

The Company has paid the current owner $ 2,965,000 for the Company’s portion of environmental response costs at the Wilmington site through December 31, 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 that may be filed by the Town of Wilmington, Massachusetts, in connection with this site.

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.

2 unchanged sentences

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.

Remediation work is continuing at these sites.

Based on current information, the Company believes that its recorded liability for the remediation of the affected areas is appropriate based on the estimate of expected costs.

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.

3 unchanged sentences

Each segment provides distinct products and requires separate management due to unique markets, technologies and production processes.

Surfactants are used in a variety of consumer and industrial cleaning compounds as well as in agricultural products, lubricating ingredients, oil field chemicals and other specialized applications.

Surfactants are used in a variety of consumer and industrial cleaning and disinfection products as well as in agricultural products, lubricating ingredients, oil field chemicals and other specialized applications.

Polymers are used primarily in plastics, building materials, refrigeration systems and CASE applications.

13 unchanged sentences

Depreciation and amortization expenses

inventory valuation from LIFO to FIFO .

Below are reconciliations of segment data to the consolidated financial statements:

15 unchanged sentences

Consolidated depreciation and amortization

inventory valuation from LIFO to FIFO

(1) See Note 22 regarding business restructuring costs.

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.

The changes in unallocated corporate assets between 2019, 2018 and 2017 were primarily attributable to changes in the balance of U.S.

cash and cash equivalents, which are not allocated to segments.

Below is certain Company-wide geographic data for the years ended December 31, 2020, 2019 and 2018:

31 unchanged sentences

Diluted earnings per share

inventory valuation from LIFO to FIFO.

Options/SARs to purchase 107,125 , 50,770 and 18,630 shares of common stock were not included in the computations of diluted earnings per share for the years ended December 31, 2019, 2018 and 2017, respectively.

The options’/SARs’ exercise prices were greater than the average market price for the common stock and the effect of the options/SARs on earnings per share would have been antidilutive.

Options/SARs to purchase 127,434 , 107,125 and 50,770 shares of common stock were excluded from the computations of diluted earnings per share for the years ended December 31, 2020, 2019 and 2018, respectively.

The options’/SARs’ exercise prices were greater than the average market price for the common stock and inclusion of the instruments would have had antidilutive effect on the computations of the earnings per share.

Accumulated Other Comprehensive Income (Loss)

8 unchanged sentences

Amounts reclassified from AOCI

Remeasurement adjustment related to the Tax Act (1)

Net current period other comprehensive income

2 unchanged sentences

Amounts reclassified from AOCI

Remeasurement adjustment related to the Tax Act (1)

Net current period other comprehensive income

Balance at December 31, 2020

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.

Amounts reclassified out of AOCI for the three years ended December 31, 2020, 2019 and 2018, is displayed below:

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defined benefit plans).

2020 Acquisitions

Clariant (Mexico) Acquisition

On September 17, 2020, the Company through its subsidiaries in Mexico, acquired Clariant’s anionic business located in Santa Clara, Mexico.

The acquisition did not include the purchase of a manufacturing site.

The business acquired is being 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 December 31, 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 estimated fair value.

The acquired goodwill is not tax deductible.

All assets acquired are included in the Company’s Surfactants segment.

The following table summarizes the purchase price allocation for the acquisition:

(In thousands)

Identifiable intangible assets:

Customer lists

Trademarks and know-how

Non-compete agreement

Property, plant and equipment

Total assets acquired

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

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All of the acquired assets are included within the Company’s Surfactants segment.

The fair value analysis remains in process and is expected to be finalized during the first half of 2020.

The preliminary weighted average amortization periods for the identifiable intangibles assets are:

(i) customer list - 22 to 25 years , and;

(b) know-how - 13 to 14 years .

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.

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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.

(BASF) to acquire their production facility in Ecatepec, Mexico and a portion of their associated surfactants business.

(BASF) to acquire BASF’s production facility in Ecatepec, Mexico and a portion of the associated surfactants business.

The facility is located close to Mexico City and has over 50,000 metric tons of capacity, 124,000 square feet of warehouse space, a large laboratory and office space.

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The primary assets acquired were land, buildings, machinery and equipment and inventory.

In the third quarter of 2018 the Company reached alignment with BASF on the final value of inventory acquired.

The incremental inventory and related value-added taxes totaled $ 1,377,000 and increased the total assets acquired in the transaction from $ 21,475,000 to $ 22,852,000 as of December 31, 2019.

The final inventory settlement payment of $ 1,377,000 was made in the fourth quarter of 2018.

The acquisition was accounted for as a business combination, and, accordingly, the assets acquired were measured and recorded at their estimated fair values.

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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.

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.

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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, in 2018, the adoption of ASU 2014-09 did not have a material impact on the Company’s financial position or results of operations.

Payment terms on sales of product typically range from 30 to 60 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 accrues these rebates for each customer under the most likely amount method by estimating the expected volume of total purchases for each customer using actual volumes, customer projections and historical order patterns.

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 the historical use of discounts for all customers using the expected-value method.

These estimated early payment discounts are accounted for as a reduction to Net Sales similarly to volume rebates.

These forms of variable consideration are considered part of the transaction price.

The Company typically 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 December 31, 2019, the Company had $ 350,000 of contract liabilities and no contract assets.

A contract liability would typically arises when an advance or deposit is received from a customer before the Company recognizes revenue.

As of December 31, 2020, the Company had $ 773,000 of contract liabilities and no contract assets associated with normal product supply arrangements.

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 did not recognize any revenue in the current period from any pre-existing contract liability balance.

The Company recognized $ 350,000 of revenue in the current period from pre-existing contract liabilities at December 31, 2019.

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

This deferred revenue will be recognized over the period of the contract.

The tables below provide a geographic disaggregation of net sales for the years ended December 31, 2020, 2019 and 2018.

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As of December 31, 2020, an aggregate of $ 2,392,000 shut down related expense had 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 $ 909,000 of decommissioning costs recognized in the year ended December 31, 2019.

Decommissioning costs associated with the shutdown are expected to continue in 2020.

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 $ 79,000 and $ 909,000 in decommissioning expenses in 2020 and 2019, respectively.

2017 Restructuring

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This decision was made to improve future asset utilization and reduce the North American cost base going forward.

As a result, the Company recorded $ 915,000 of restructuring expenses which reflected termination benefits for select plant employees.

In addition, the Company reduced the useful lives of the manufacturing assets that were impacted by the restructuring and recorded $ 1,290,000 of accelerated depreciation.

This expense was recorded in the cost of sales line of the consolidated statements of income.

As a result, in 2017 the Company recorded $ 915,000 of restructuring expenses which reflected termination benefits for select plant employees and $ 1,290,000 of accelerated depreciation for the impacted manufacturing assets.

In the first quarter of 2019, the Company recognized a $ 251,000 favorable adjustment to the amount of termination benefits initially recorded.

Also, in June 2017, the Company eliminated 11 positions from manufacturing operations at its Singapore plant.

The Singapore plant is part of the Company’s Surfactant segment.

The reduction in positions was made to better align the number of personnel with current business requirements and to reduce costs at that site.

As a result of the reduction in workforce, termination expense of $ 132,000 was recognized in the second quarter of 2017 and there was no remaining liability for the termination pay as of December 31, 2017.

2016 Restructuring

In May 2016, the Company announced plans to shut down its Long Mills, Ontarion, Canada (Longford Mills) manufacturing facility, a part of the Surfactant reportable segment, by December 31, 2016.

In May 2016, the Company announced plans to shut down its Long 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.

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As of December 31, 2020, $ 8,617,000 of aggregate restructuring expense had been recognized, reflecting $ 1,644,000 of termination benefits for approximately 30 employees and $ 6,973,000 for other expenses, principally site decommissioning costs.

The Company recognized $ 1,133,000 , $ 1,410,000 and $ 1,185,000 in 2020, 2019 and 2018, respectively.

Insurance Recovery

Millsdale, IL site

On January 19, 2020, the Company experienced a power disruption that impacted its Millsdale, Illinois facility.

This power outage combined with below freezing temperatures, led to significant production and operational challenges that impacted both Surfactants and Polymers produced at the site.

The Millsdale facility operated on a partial basis and used existing inventories to serve its customers.

On February 17, 2020, power outage-related operational issues impacted the Millsdale site’s waste water treatment plant and forced the Company to stop production at the site.

As a result, the Company declared force majeure for the supply of phthalic anhydride (Polymers) and certain surfactant product lines.

All production lines were fully operational prior to the end of the 2020 first quarter.

During the second half of 2020, the Company finalized an insurance settlement related to this incident and recognized an $ 18,000,000 pre-tax insurance recovery.

This insurance recovery was recognized as a reduction of expenses within cost of sales in the consolidated financial statement of income for the year ended December 31, 2020.

Surfactant and Polymer segment reported $ 5.2 million and $ 12.8 million, respectively in insurance recovery.

Ecatepec, Mexico site

The Company received insurance recovery proceeds of $ 8,965,000 in December 2019 for damaged equipment, incremental supply chain expenses and business interruption losses pertaining to the first quarter 2019 sulfonation equipment failure at the Company’s plant in Ecatepec, Mexico.

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Both claims related to the Company’s Surfactant segment.

In the fourth quarter of 2017, the Company paid $ 2,709,000 for one of the claims and reversed the remainder of the reserve for the claim.

In the fourth quarter of 2017, the Company paid $ 2,709,000 for one of the claims and reversed

the remainder of the reserve for the claim.

The claim reversal was recorded within net sales.

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Subsequent Events

On January 19, 2020, the Company experienced a power disruption that impacted its Millsdale, Illinois facility.

This power outage combined with below freezing temperatures led to significant production and operational challenges.

During the period that followed the Millsdale facility operated on a partial basis and used existing inventories to serve its customers.

On February 17, 2020, operational issues impacted the Millsdale site’s waste water treatment plant (WWTP) and forced the Company to stop production at the site.

The Company has subsequently restarted polyol production using a temporary solution.

The Company announced on February 26, 2020, that the waste water treatment plant at the Millsdale facility was back in operation and that the facility was producing Surfactant products.

The Company is working to resume phthalic anhydride production.

As a result of the WWTP plant being down and low inventory levels the Company declared Force Majeure for the supply of phthalic anhydride and certain surfactant product lines.

The Company is using its global production network and working with customers to minimize the impact of this supply disruption.

At this time, the Company is not able to quantify the extent of the impact from this event on the Company’s statement of financial position, results of operations or cash flows.

The Company is working with its insurance provider to recover the losses related to this incident.

Selected Quarterly Financial Data

(In thousands, except per share data)

Operating Income

Interest, net

Income Before Income Taxes

Net Income Attributable to Stepan Company

Per Diluted Share

Gross Profit (1)

Operating Income (1)

Interest, net

Income Before Income Taxes (1)

Net Income (1)

Net Income Attributable to Stepan Company (1)

Per Diluted Share (1)

inventory valuation from LIFO to FIFO

On January 29, 2021 , the Company and its wholly-owned subsidiaries Stepan Holdings Netherlands B.V.

and Stepan UK Limited (collectively, “Stepan”) entered into a Stock and Asset Purchase Agreement with Arteva Specialties B.V., INV Performance Surfaces, LLC, INVISTA Textiles (U.K.) Limited, INV Management Services, LLC, and INVISTA Equities, LLC (collectively, “INVISTA”) to acquire INVISTA's aromatic polyester polyol business and associated assets.

Included in the transaction were two manufacturing sites, one in Wilmington, North Carolina (U.S.) and the other in Vlissingen, Netherlands, along with intellectual property, customer relationships, inventory and working capital.

This acquisition expands the Company’s manufacturing capabilities in both the United States and Europe and enhances its business continuity capabilities for the market.

The Company believes that INVISTA’s available spare capacity, combined with debottlenecking opportunities for both plants, will allow Stepan to support future market growth in a capital efficient way.

The purchase price was $ 165,000,000 , plus working capital, and was paid in cash.

The allocation of the purchase price to reflect the fair value of assets acquired and liabilities assumed has not been completed at the date of the filing of this report.

Such information will be included in a subsequent Quarterly Report on Form 10-Q.

The acquisition will be accounted for as a business combination, and the acquired operations will be included in the Company’s Polymer segment beginning in the first quarter of 2021.

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

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

Fermentation is a new platform technology for the Company and the Company is focusing efforts to further develop, integrate, produce and commercialize these unique surfactants moving forward.

Bio-surfactants, produced via fermentation, are attractive due to their biodegradability, low toxicity, and in some cases, unique antimicrobial properties.

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

The acquisition of this industrial scale fermentation plant represents the latest step in the Company’s bio-surfactant commercialization efforts.

The purchase price was $ 3,500,000 and was paid in cash.

This acquisition will be accounted for as an asset acquisition.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

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

What changed 10-K

Item 8. Financial Statements and Supplementary Data