Change In Method of Accounting for Inventory Valuation

3 Months Ended

Mar. 31, 2019

New Accounting Pronouncements And Changes In Accounting Principles [Abstract]

Change in Method of Accounting for Inventory Valuation

2. CHANGE IN METHOD OF ACCOUNTING FOR INVENTORY VALUTION

On January 1, 2019, the Company elected to change its method of accounting for U.S. inventories from the LIFO basis to the FIFO basis. Total U.S. inventories accounted for using the LIFO cost flow assumption, prior to the accounting method change, comprised 68 percent of the Company’s total inventories as of December 31, 2018.  Non-U.S. inventories have historically been maintained on the FIFO basis. The Company believes that this change to the FIFO method of inventory valuation is preferable as it provides a better matching of costs with the physical flow of goods, more accurately reflects the current market value of inventory presented on the Company’s consolidated balance sheets, standardizes the Company’s inventory valuation methodology and improves comparability with the Company’s industry peers.

In accordance with ASC 250, Accounting Changes and Error Corrections, this change in method of accounting for U.S. inventories has been retrospectively applied to all prior periods presented herein.  Prior period financial statements and financial comparables have been adjusted to reflect what results would have been had the Company always used the FIFO method of inventory valuation for U.S. inventories. The cumulative effect on retained earnings for these changes was $23.7 million at December 31, 2018.

The following tables present the prior year financial statement line items that have been affected by the retrospective change in accounting principle:

Income Statement

(In thousands, except per share amounts)	Three Months Ended March 31, 2018
	As originally reported under LIFO		Effect of change			As adjusted under FIFO
Cost of Sales	$	409,765	$	(1,628	)	$	408,137
Gross Profit		89,570		1,628			91,198
Operating Income		39,655		1,628			41,283
Income Before Provision for Income Taxes		37,664		1,628			39,292
Provision for Income Taxes		6,948		399			7,347
Net Income		30,716		1,229			31,945
Net Income Attributable to Stepan Company		30,723		1,229			31,952
Net Income Per Diluted Common Share Attributable to Stepan Company	$	1.31	$	0.06		$	1.37

Balance Sheet

(In thousands)	December 31, 2018
	As originally reported under LIFO		Effect of change			As adjusted under FIFO
Inventories	$	200,165	$	31,363		$	231,528
Other Non-Current Assets		10,964		(1,415	)		9,549
Total Assets		1,484,666		29,948			1,514,614
Deferred Income Taxes	$	18,672	$	6,289		$	24,961
Retained Earnings		813,448		23,659			837,107
Total Liabilities and Equity		1,484,666		29,948			1,514,614

Statement of Cash Flows

(In thousands)	Three Months Ended March 31, 2018
	As originally reported under LIFO			Effect of change			As adjusted under FIFO
Net Income	$	30,716		$	1,229		$	31,945
Deferred Income Taxes		357			399			756
Change in Assets and Liabilities:
Inventories		(8,993	)		(1,628	)		(10,621	)

The following tables present what current year financial statement line items would have been had the Company not changed its method of accounting for U.S. inventories from LIFO to FIFO basis:  

Income Statement

(In thousands, except per share amounts)	Three Months Ended March 31, 2019
	As reported under FIFO		Effect of change			As computed under LIFO
Cost of Sales	$	404,561	$	1,500		$	406,061
Gross Profit		84,609		(1,500	)		83,109
Operating Income		29,738		(1,500	)		28,238
Income Before Provision for Income Taxes		31,030		(1,500	)		29,530
Provision for Income Taxes		6,052		(368	)		5,684
Net Income		24,978		(1,132	)		23,846
Net Income Attributable to Stepan Company		24,984		(1,132	)		23,852
Net Income Per Diluted Common Share Attributable to Stepan Company	$	1.07	$	(0.05	)	$	1.02

Balance Sheet

(In thousands)	March 31, 2019
	As reported under FIFO		Effect of change			As computed under LIFO
Inventories	$	215,028	$	(32,863	)	$	182,165
Other Non-Current Assets		10,332		1,483			11,815
Total Assets		1,526,000		(31,380	)		1,494,620
Deferred Income Taxes	$	24,158	$	(6,589	)	$	17,569
Retained Earnings		861,773		(24,791	)		836,982
Total Liabilities and Equity		1,526,000		(31,380	)		1,494,620

Statement of Cash Flows

(In thousands)	Three Months Ended March 31, 2019
	As reported under FIFO			Effect of change			As computed under LIFO
Net Income	$	24,978		$	(1,132	)	$	23,846
Deferred Income Taxes		(1,857	)		(368	)		(2,225	)
Change in Assets and Liabilities:
Inventories		16,231			1,500			17,731