UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------FORM 10-K/A
Amendment No. 1
(MARK(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31,
20012006OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROMTO
-------------- ---------------Commission File Number 1-4462
----------STEPAN COMPANY
(Exact(Exact name of registrant as specified in its charter)
Delaware 36-1823834 (State(State or other jurisdiction of
incorporation or organization)
(I.R.S.(I.R.S. Employer
Identification Number)
Edens and Winnetka Road, Northfield, Illinois 60093 (Address(Address of principal executive offices) (Zip(Zip Code) Registrant'sRegistrant’s telephone number including area code: 847-446-7500
Securities registered pursuant to Section 12 (b) of the Act:
Name of Each Exchange Title of Each Class on Which Registered ------------------- ----------------------- Common Stock, $1 par value New York Stock Exchange Chicago Stock Exchange 5 1/2% Convertible Preferred Stock, no par value New York Stock Exchange Chicago Stock Exchange
Title of Each Class
Name of Each Exchange
on Which Registered
Common Stock, $1 par value New York Stock Exchange
Chicago Stock Exchange
5 1/2% Convertible Preferred Stock, no par value New York Stock Exchange
Chicago Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act:
None
(TitleIndicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
Class)the Securities Act Yes ¨ No xIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of
registrant'sregistrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K.[ ].¨.Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13is a large accelerated filer, an accelerated filer, or15 (d)a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of theSecuritiesExchangeActAct. (Check one):Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
1934 duringthepreceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.Exchange Act)Yes
[X] No[ ]¨ No xAggregate market value at
February 28, 2002,June 30, 2006, of voting stock held by nonaffiliates of the registrant:$148,005,000*$204,204,002*Number of shares outstanding of each of the
issuer'sissuer’s classes of common stock as of February 28,2002: Class Outstanding at February 28, 2002 ----- -------------------------------- Common Stock, $1 par value 8,837,4482007:
Class
Outstanding at February 28, 2007
Common Stock, $1 par value
9,238,521 Documents Incorporated by Reference
Part of Form 10-K/A Document Incorporated ------------------- --------------------- Part III, Items 10-12 Proxy Statement dated March 28, 2002
Part of Form 10-K
Document Incorporated
Part III, Items 10-14
Proxy Statement dated March 22, 2007 * Based on reported ownership by all directors, officers and beneficial owners of more than 5% of
registrant'sregistrant’s voting stock. However, this determination does not constitute an admission of affiliate status for any of these holders.This amendmentEXPLANATORY NOTE
Stepan Company (the “Company”) is filing this Amendment No. 1 on Form 10-K/A to correct for a typographical error in the ‘Per Diluted Share’ amount in the 2006 first quarter column of the Selected Quarterly Financial Data table included in Item 8 of the Company’s Annual Report on Form 10-K
is being filed to give effect to the restatement of Stepan Company's financial statementsforthe years ended December 31, 2001, 2000 and 1999, as discussed in Note 2 to the Consolidated Financial Statements (Item 8 of this Form 10-K/A). PART I Item 1. Business Stepan Company and its subsidiaries (the "Company") produce specialty and intermediate chemicals, which are sold to other manufacturers and then made into a variety of end products. The Company has three reportable segments: surfactants, polymers and specialty products. Surfactants refer to chemical agents, which affect the interaction between two surfaces; they can provide actions such as detergency (i.e., the ability of water to remove soil from another surface), wetting and foaming, dispersing, emulsification (aiding two dissimilar liquids to mix), demulsification and viscosity modifications. Surfactants are the basic cleaning agent in detergents for washing clothes, dishes, carpets, fine fabrics, floors and walls. Surfactants are also used for the same purpose in shampoos and conditioners, toothpastes, cosmetics and other personal care products. Commercial and industrial applications include emulsifiers for agricultural products, emulsion polymers such as floor polishes and latex foams and coatings, wetting and foaming agents for wallboard manufacturing and surfactants for enhanced oil recovery. Polymers, which included phthalic anhydride, polyols and polyurethane foam systems, are used in plastics, building materials and refrigeration industries. Polymers are also used in coating, adhesive, sealant and elastomer applications. Specialty products sells chemicals used in food, flavoring and pharmaceutical applications. MARKETING AND COMPETITION Principal markets for surfactants are manufacturers of detergents, shampoos, lotions, toothpastes and cosmetics. In addition, surfactants are sold to the producers of emulsifiers and lubricating products. The Company also is a principal provider of polymers used in construction, refrigeration, automotive, boating and other consumer product industries. Specialty products are used primarily by food and pharmaceutical manufacturers. The Company does not sell directly to the retail market, but sells to a wide range of manufacturers in many industries and has many competitors. The principal methods of competition are product performance, price and adaptability to the specific needs of individual customers. These factors allow the Company to compete on a basis other than price alone, reducing the severity of competition as experienced in the sales of commodity chemicals having identical performance characteristics. The Company is a leading merchant producer of surfactants in the United States. In the case of surfactants, much of the Company's competition comes from several large national and regional producers and the internal divisions of larger companies. In the manufacture of polymers, the Company competes with the chemical divisions of several large companies, as well as with other small specialty chemical manufacturers. In recent years, the Company has also faced periodic competition from foreign imports of phthalic anhydride. In specialty products, the Company competes with several large firms plus numerous small companies.MAJOR CUSTOMER AND BACKLOG The Company does not have any one single customer whose business represents more than 10 percent of the Company's consolidated revenue. Most of the Company's business is essentially on the "spot delivery basis" and does not involve a significant backlog. The Company does have contract arrangements with certain customers, but purchases are generally contingent on purchaser requirements. ENERGY SOURCES Substantially all of the Company's manufacturing plants operate on electricity and interruptable gas purchased from local utilities. During peak heating demand periods, gas service to all plants may be temporarily interrupted for varying periods ranging from a few days to several months. The plants operate on fuel oil during these periods of interruption. The Company has not experienced any plant shutdowns or adverse effects upon its business in recent years that were caused by a lack of available energy sources. RAW MATERIALS The most important raw materials used by the Company are of a petroleum or vegetable nature. For 2002, the Company has commitments from suppliers to cover its forecasted requirements and is not substantially dependent upon any one supplier. RESEARCH AND DEVELOPMENT The Company maintains an active research and development program to assist in the discovery and commercialization of new knowledge with the intent that such effort will be useful in developing a new product or in bringing about a significant improvement to an existing product or process. Total expenses for research and development during 2001, 2000 and 1999 were $13.7 million, $13.4 million, and $13.1 million, respectively. The balance of expenses reflected on the Consolidated Statements of Income relates to technical services, which include routine product testing, quality control and sales support service. ENVIRONMENTAL COMPLIANCE Compliance with applicable federal, state and local regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, resulted in capital expenditures by the Company of approximately $1.1 million during 2001. Such capital expenditures in 2002 should approximate $1.5 to $2.0 million. These expenditures represented approximately three percent of the Company's capital expenditures in 2001 and are expected to be approximately five percent in 2002. These expenditures, when incurred, are depreciated and charged on a straight-line basis to pre-tax earnings over their estimated useful lives, which is typically 10 years. Compliance with such regulations is not expected to have a material adverse effect on the Company's earnings and competitive position in the foreseeable future.EMPLOYMENT At December 31, 2001 and 2000, the Company employed worldwide 1,491 and 1,387 persons, respectively. FOREIGN OPERATIONS See Note 14, Segment Reporting, of the Consolidated Financial Statements (Item 8 of this Form 10-K/A). SEGMENTS See Note 14, Segment Reporting, of the Consolidated Financial Statements (Item 8 of this Form 10-K/A). Item 2. Properties The Company's corporate headquarters and central research laboratories are located in Northfield, Illinois. The Northfield facilities contain approximately 70,000 square feet on an eight acre site. In addition, the Company leases 49,000 square feet of office space in a nearby office complex. Stepan Canada maintains a leased sales office in Mississauga, Canada. Stepan Mexico maintains a leased sales office in Mexico City, Mexico. Surfactants are produced at four plants in the United States and six wholly owned subsidiaries: one each in France, United Kingdom, Canada, Mexico, Colombia and Germany. The principal plant is located on a 626 acre site at Millsdale (Joliet), Illinois. A second plant is located on a 39 acre tract in Fieldsboro, New Jersey. West Coast operations are conducted on an eight acre site in Anaheim, California. A fourth plant is located on a 175 acre site in Winder, Georgia. The plant, laboratory and office of Stepan Europe are located on a 20 acre site near Grenoble, France. Stepan Canada, Inc. is located on a 70 acre leased, with an option to purchase, site in Longford Mills, Ontario, Canada. Stepan Mexico is located on a 13 acre site in Matamoros, Mexico. Stepan Germany is located on a five acre site in Cologne, Germany. Stepan UK Limited is located on a five acre site in Stalybridge (Manchester), United Kingdom. Stepan Colombia is located on a five acre site in Manizales, Colombia. The phthalic anhydride, polyurethane systems and polyurethane polyols plants are also located at Millsdale. Specialty products are mainly produced at a plant located on a 19 acre site in Maywood, New Jersey. The Company owns all of the foregoing facilities except the leased office space and Canadian plant site mentioned above. The Company believes these properties are adequate for its operations. Item 3. Legal Proceedings The Company's site in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site, were listed on the National Priorities List in September 1993 pursuant to the provisions of the Comprehensive Environmental Response Compensation and LiabilityAct (CERCLA) because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into between the United States Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company completed a Remedial Investigation Feasibility Study (RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source Areas (Operable Unit 1) in September 2002. In addition, the Company has also submitted additional information regarding the remediation, most recently in October 2002. Discussions between USEPA and the Company are continuing. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to the currently owned and formerly owned Company property and the proposed remediation. The final ROD will be issued sometime after the public comment period. In 1985, the Company entered into a Cooperative Agreement with the United States of America represented by the Department of Energy (Agreement). Pursuant to this Agreement, the Department of Energy (DOE) took title to radiological contaminated materials and was to remediate, at its expense, all radiological waste on the Company's property in Maywood, New Jersey. The Maywood property (and portions of the surrounding area) were remediated by the DOE under the Formerly Utilized Sites Remedial Action Program, a federal program under which the U.S. Government undertook to remediate properties which were used to process radiological material for the U.S. Government. In 1997, responsibility for this clean-up was transferred to the United States Army Corps of Engineers (USACE). On January 29, 1999, the Company received a copy of a USACE Report to Congress dated January 1998 in which the USACE expressed their intention to evaluate, with the USEPA, whether the Company and/or other parties might be responsible for cost recovery or contribution claims related to the Maywood site. Subsequent to the issuance of that report, the USACE advised the Company that it had requested legal advice from the Department of Justice as to the impact of the Agreement. By letter dated July 28, 2000, the Department of Justice advised the Company that the USACE and USEPA had referred to the Justice Department claims against the Company for response costs incurred or to be incurred by the USACE, USEPA and the DOE in connection with the Maywood site and the Justice Department stated that the United States is entitled to recovery of its response costs from the Company under CERCLA. The letter referred to both radiological and non-radiological hazardous waste at the Maywood site and stated that the United States has incurred unreimbursed response costs to date of $138 million. Costs associated with radiological waste at the Maywood site, which the Company believes represent all but a small portion of the amount referred to in the Justice Department letter, could be expected to aggregate substantially in excess of that amount. In the letter, the Justice Department invited the Company to discuss settlement of the matter in order to avoid the need for litigation. The Company believes that its liability, if any, for such costs has been resolved by the aforesaid Agreement. Despite the fact that the Company continues to believe that it has no liability to the United States for such costs, discussions with the Justice Department are currently ongoing to attempt to resolve this matter. The Company believes it has adequate reserves for claims associated with the Maywood site. However, depending on the results of the ongoing discussions regarding the Maywood site, the final cost of the remediation could differ from the current estimates. The Company has been named as a potentially responsible party (PRP) in the case USEPA v. Jerome Lightman (92 CV 4710 D. N. J.) which involves the Ewan and D'ImperioSuperfund Sites located in New Jersey. Trial on the issue of the Company's liability at these sites was completed in March 2000. The Company is awaiting a decision from the court. If the Company is found liable at either site, a second trial as to the Company's allocated share of clean-up costs at these sites will likely be held in 2003. The Company believes it has adequate defenses to the issue of liability. In the event of an unfavorable outcome related to the issue of liability, the Company believes it has adequate reserves. On a related matter, the Company has filed an appeal to the United States Third Circuit Court of Appeals objecting to the lodging of a partial consent decree in favor of the United States Government in this action. Under the partial consent decree, the government recovered past costs at the site from all PRPs including the Company. The Company paid its assessed share but by objecting to the partial consent decree, the Company is seeking to recover back the sums it paid. Regarding the D'Imperio Superfund Site, USEPA has indicated it will seek penalty claims against the Company based on the Company's alleged noncompliance with the modified Unilateral Administrative Order. The Company is currently negotiating with USEPA to settle its proposed penalty against the Company but does not believe that a settlement, if any, will have a material impact on the financial condition of the Company. In addition, the Company also received notice from the New Jersey Department of Environmental Protection (NJDEP) dated March 21, 2001, that NJDEP has indicated it will pursue cost recovery against the alleged responsible parties, including the Company. The NJDEP's claims include costs related to remediation of the D'Imperio Superfund Site in the amount of $434,406 and alleged natural resource damages in the amount of $529,584 (as of November 3, 2000). The NJDEP settled such claims against the alleged responsible parties, resulting in the Company paying its portion of $83,061 in July 2002. This payment is subject to reallocation after the allocation phase of the above-identified trial, if any. The payment did not have a material impact on the financial condition of the Company. The Company received a Section 104(e) Request for Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company Site located in Winslow Township, New Jersey. The Company responded to this request on May 18, 2000. In addition, the Company received a Notice of Potential Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it will participate in the performance of the RI/FS. However, based on the current information known regarding this site, the Company is unable to predict what its liability, if any, will be for this site. The Company received a General Notice of Potential Liability letter from the USEPA dated October 18, 2002, regarding the Liquid Dynamics Site located in Chicago, Illinois. The Company submitted a response to USEPA on November 5, 2002, stating that it is interested in negotiating a resolution of its potential responsibility at this site. Based on the fact that the Company believes it is a de minimis PRP at this site, the Company believes that a resolution of its liability at this site will not have a material impact on the financial condition of the Company. As reported previously in the Company's Quarterly Report Form 10-Q for the quarter ended September 30, 1994 and various subsequent reports, the Company received a Request for Information from the Commonwealth of Massachusetts Department of Environmental Protection relating to the Company's formerly-owned site at 51 Eames Street, Wilmington, Massachusetts. The Company received a copy of another Request for Information regarding this site dated October 18, 2002. The Company's response to this request is due on November 29, 2002. TheCompany is currently investigating this matter and therefore, cannot predict what its liability, if any, will be for this site. Item 4. Results of Votes of Security Holders No matters were submitted to stockholders during the fourth quarter ofthe fiscal year ended December 31,2001. Executive Officers2006, as filed with the U.S. Securities and Exchange Commission on March 8, 2007 (the “Original Filing”). The $0.37 Per Diluted Share amount on page 88 of theRegistrant Executive Officers are elected annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders to serve until the next annual meeting of the Board and until their respective successors are duly elected and qualified. Effective February 15, 1999, F. Quinn Stepan, Jr., was elected President and Chief Operating Officer. He was previously Vice President and General Manager - Surfactants as of January 1, 1997, Vice President - Global Laundry and Cleaning Products as of May 1996 and Director - Business Management as of May 1992. F. Quinn Stepan, Sr.,Original Filing hasserved the Company as Chairman and Chief Executive Officer since 1984. He served as President and Chief Operating Officer from 1973 until February 15, 1999. Effective February 16, 1999, John V. Venegoni was elected Vice President and General Manager - Surfactants. From May 1992 until May 1996, he served as a Senior Business Manager - Consumer Products. From May 1996 until February 16, 1999, he served as Director - Global Personal Care. Effective January 1, 2001, Robert J. Wood was elected Vice President and General Manager - Polymers. From April 1988 until March 1996, he served as a Business Manager - Polyols. From March 1996 until January 1, 2001, he served as Director - Polyols. Mickey Mirghanbari retiredbeen replaced with $0.31 Per Diluted Share. This change is reflected onJune 30, 2001. Before the retirement, he served as Vice President - Manufacturing and Engineering. Earl H. Wagener retired on August 31, 2001. Before the retirement, he served as Vice President - Research and Development. Effective March 7, 2001, F. Samuel Eberts III was elected Vice President, General Counsel and Secretary. From 1992 until 1996, he served as an Assistant General Counsel for Baxter International Inc. From 1996 until 1998, he served as an Associate General Counsel for Allegiance Healthcare Corporation. From 1998 until 2001, he served as an Assistant General Counsel for Cardinal Health Inc.Effective July 1, 2001, Anthony J. Zoglio was elected Vice President - Manufacturing and Engineering. From 1991 until June 1, 1999, he served as Millsdale Plant Manager. From June 1, 1999 to July 1, 2001, he served as Vice President, Plant Operations. Effective February 11, 2002, James E. Hurlbutt was elected Vice President and Corporate Controller. From August 7, 1996 until February 11, 2002, he served as Controller - International and Tax Accounting. Walter J. Klein retired on April 30, 2002. Before the retirement, he served as Vice President - Finance. James A. Hartlage retired on July 31, 2002. Before the retirement, he served as Senior Vice President - Technology and Operations. All other executive officers have remained in their current capacity for over five years. The Executive Officers of the Company, their ages as of the filingpage 46 of this Form 10-K/A , and certainA. No other informationare as follows:
Year First Name Age Title Elected Officer ---- --- ----- ---------------F. Quinn Stepan 65 Chairman and Chief Executive Officer 1967 F. Quinn Stepan, Jr. 42 President and Chief Operating Officer 1997 John V. Venegoni 43 Vice President and General Manager - Surfactants 1999 F. Samuel Eberts III 43 Vice President, General Counsel and Secretary 2001 Robert J. Wood 45 Vice President and General Manager - Polymers 2001 Anthony J. Zoglio 57 Vice President - Manufacturing and Engineering 2001 James E. Hurlbutt 49 Vice President and Corporate Controller 2002PART II Item 5. Market for Registrant's Common Stock and Related Security Holder Matters (a) The Company's common stock is listed and traded on both the New York Stock Exchange and the Chicago Stock Exchange. See table below for quarterly market price information. Quarterly Stock Data Stock Price Range --------------------------------- 2001 2000 --------------- --------------- Quarter High Low High Low - ------- ------ ------ ------ ------ First $24.75 $22.35 $23.19 $19.88 Second $26.20 $23.10 $23.25 $20.94 Third $26.38 $17.98 $25.00 $19.63 Fourth $24.40 $17.80 $24.00 $18.50 Year $26.38 $17.80 $25.00 $18.50 ------ ------ ------ ------ The Company's 5 1/2 percent convertible preferred stock is listed and traded on the New York Stock Exchange and the Chicago Stock Exchange. See Note 8 of the Consolidated Financial Statements (Item 8 of this Form 10-K/A) for the description of the preferred stockholders' rights. From time to time the Company purchases shares of its common stockin theopen market and in block transactions from dealers for the purposeOriginal Filing is amended hereby. This Form 10/K-A continues to describe conditions as offunding option grants under its stock option plans and deferred compensation plans for directors and officers. (b) On February 28, 2002, there were 1,231 holders of common stock of the Company. (c) See table below for quarterly dividend information. Also, see Note 5 of the Consolidated Financial Statements (Item 8 of this Form 10-K/A), which sets forth the restrictive covenants covering dividends. Dividends Paid Per Common Share Quarter 2001 2000 - ------- ----------- ----------- First 17.50(cent) 16.25(cent) Second 17.50(cent) 16.25(cent) Third 17.50(cent) 16.25(cent) Fourth 18.25(cent) 17.50(cent) ----------- ----------- Year 70.75(cent) 66.25(cent) ----------- -----------Item 6. Selected Financial Data See the table below for selected financial information. The data have been restated, where appropriate, to reflect the correction of an accounting error discussed in Note 2 to the Consolidated Financial Statements (Item 8 of this Form 10-K/A). (In thousands, except per share and employee data)
For the Year 2001/(d)/ 2000/(d)/ 1999/(d)/ 1998/(d)/ 1997 --------- --------- --------- --------- --------Net Sales $711,517 $698,937 $694,659 $635,756 $605,574 Operating Income 30,832 31,358 42,022 45,088 44,370 Percent of net sales 4.3% 4.5% 6.0% 7.1% 7.3% Pre-tax Income 25,798 24,475 35,768 39,090 34,874 Percent of net sales 3.6% 3.5% 5.1% 6.1% 5.8% Provision for Income Taxes 9,726 9,423 13,043 15,440 14,464 Net Income 16,072 15,052 22,725 23,650 20,410 Per share (Diluted) /(a)/ 1.65 1.53 2.21 2.21 1.86 Percent of net sales 2.3% 2.2% 3.3% 3.7% 3.4% Percent to stockholders' equity /(b)/ 10.8% 10.0% 15.8% 17.2% 15.5% Cash Dividends Paid 7,056 6,730 6,505 5,430 6,069 Per common share 0.7075 0.6625 0.6125 0.5625 0.5125 Depreciation and Amortization 39,972 39,277 39,452 37,347 35,281 Capital Expenditures 34,014 28,442 32,697 44,056 35,589 Weighted-average Common Shares Outstanding 8,837 8,948 9,232 9,499 9,831 As of Year End -------- -------- -------- -------- -------- Working Capital $ 72,628 $ 68,008 $ 66,331 $ 59,774 $ 63,789 Current Ratio 1.7 1.7 1.7 1.7 1.8 Property, Plant and Equipment, net 211,433 198,147 208,481 214,096 206,601 Total Assets 438,755 417,592 418,762 408,919 374,936 Long-term Debt, less current maturities 109,588 96,466 107,420 107,708 94,898 Stockholders' Equity 154,351 149,059 150,906 143,631 137,598 Per share /(c)/ 16.27 15.69 15.35 14.23 13.01 Number of Employees 1,491 1,387 1,365 1,372 1,292/(a)/ Based on weighted-average number of common shares outstanding during the year. /(b)/ Based on equity at beginning of year. /(c)/ Based on common shares and the assumed conversion of the convertible preferred shares outstanding at year end. /(d)/ Restated; see Note 2 to the Consolidated Financial Statements for explanation of restatement.Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations and Quantitative and Qualitative Disclosures about Market Risk As discussed in Note 2 to the Consolidated Financial Statements (Item 8 of this Form 10-K/A), the Company has restated its financial statements for the years ended December 31, 2001, 2000 and 1999. The accompanying Management's Discussion and Analysis gives effect to the restatement. Some information contained in the Management's Discussion and Analysis is forward looking and involves risks and uncertainties. The results achieved this year are not necessarily an indication of future prospects for the Company. Actual results in future years may differ materially. Potential risks and uncertainties include, among others, fluctuations in the volume and timing of product orders, changes in demand for the Company's products, changes in technology, continued competitive pressures in the marketplace, availability of raw materials, foreign currency fluctuations and general economic conditions. Critical Accounting Policies Estimates We prepare our financial statements in accordance with accounting principles generally accepted in the United States of America ("generally accepted accounting principles"). Preparing our financial statements in accordance with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities atthe date of thefinancial statementsOriginal Filing, andthe reported amounts of revenues and expenses during the reporting period. Critical areas where estimates are required are noted below: Environmental Liabilities: It is the Company's accounting policy to record environmental liabilities when environmental assessments and/or remedial efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. 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. Reserves for Doubtful Accounts: Accounts receivable are reported net of reserves for doubtful accounts. The Company determines the reserve requirement based upon the estimated collectibility of specific delinquent accounts, the Company's historical loss experience and the level of non-delinquent accounts receivable.Reserves for Obsolete and Slow Moving Inventories: The Company provides reserves for obsolete and slow moving inventory items. The reserve requirement is estimated based upon a review of specific inventory items that are identified as slow moving and consideration of potential salvage value and disposal costs. Because the foregoing liabilities and reserves are recorded based on estimates, actual amounts could differ from these estimates. Revenue Recognition Revenue is recognized upon shipment of goods to customers. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the statement of income. Deferred Compensation The Company maintains deferred compensation plans. These plans allow management to defer receipt of their bonuses and directors to defer receipt of director fees until retirement or departure from the Company. The plans allow the participant to choose to invest in either Stepan common stock or a limited variety of mutual funds. These assets are owned by the Company and subject to the claims of general creditors of the Company. These plans are accounted for under the requirements of the consensus reached by the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") in issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested". A description of the Company's deferred compensation accounting policy follows: The deferred compensation liability to the participants who elect deferral is recorded after the underlying compensation is earned, and recorded as expense. The purchase of Stepan common shares for the plans is recorded as a regular treasury stock purchase. The purchase of mutual funds is recorded as long term investments. Fluctuations in the value of these assets are recorded as adjustments for the deferred compensation liability and compensation costs included in administrative expense. The dividends, interest and capital gains from the mutual fund assets are recorded as investment income and included in "Other Income" as interest expense, net of investment income. Unrealized gains and losses resulting from market fluctuations of the mutual funds are recorded as other comprehensive income or expense in stockholders' equity.Results of Operations 2001 Compared with 2000 Net sales for 2001 increased two percent from $698.9 million in 2000 to $711.5 million in 2001. Net sales by segment were as follows: Percent (Dollars in thousands) 2001 2000 Change -------- -------- ------- Surfactants $558,927 $537,006 +4 Polymers 127,722 140,786 -9 Specialty Products 24,868 21,145 +18 -------- -------- Total $711,517 $698,937 +2 ======== ======== Surfactants are a principal ingredient in consumer and industrial cleaning products such as detergents, shampoos, lotions, toothpastes and cosmetics. Other applications include lubricating ingredients and emulsifiers for agricultural products, and plastics and composites. Surfactants net sales, representing 79 percent of the Company's revenue, increased $21.9 million, or four percent, due to a four percent rise in sales volume. Foreign operations accounted for the overall improvement, reporting a $32.5 million, or 27 percent, rise in net sales due to a 28 percent increase in sales volume. Approximately $14.7 million of the foreign improvement was attributable to the fourth quarter acquisition of Stepan UK Limited (formerly Manro Performance Chemicals) located in Stalybridge, UK. In addition, all other foreign subsidiaries reported increased net sales, primarily due to higher sales volumes. European operations, excluding the United Kingdom, posted a net increase of $8.6 million. Net sales for South American operations grew $4.5 million, while net sales for Mexico and Canada increased $2.6 million and $2.1 million, respectively. Domestic operations, which accounted for 73 percent of total surfactant revenues, reported a $10.6 million, or three percent, decline in net sales from $417.2 million in 2000 to $406.6 million in 2001. The decrease was due to a one percent drop in sales volume and a one percent decline in average selling prices. Lower demand for laundry and cleaning products and increased market competition led to the decline. The economic slowdown adversely impacted sales volume of higher margin industrial surfactants. The polymers product group includes phthalic anhydride (PA), polyurethane systems and polyurethane polyols. PA is used in polyester alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. Polyurethane systems provide thermal insulation and are sold to the construction, industrial and appliance markets. Polyurethane polyols are used in the manufacture of laminate board for the construction industry. Polyurethane polyols are also sold to the appliance, coatings, adhesives, sealants and elastomers markets. Polymer net sales, accounting for 18 percent of the Company's revenue, decreased $13.1 million, or nine percent, from $140.8 million in 2000 to $127.7 million in 2001. The decline was due to a 13 percent drop in sales volume, driven primarily by a slowdown in the U.S. economy. PA's net sales decreased 21 percent to $32.8 million for 2001 from $41.4 million in 2000. A 24 percent decline in sales volume accounted for the decrease. Polyurethane systems net sales fell 15percent to $19.4 million for 2001 from $22.7 million in 2000. A drop in sales volume accounted for the decline and more than offset an increase in average selling prices. Globally, polyurethane polyols net sales decreased $1.2 million, or one percent, between years from $76.7 million in 2000 to $75.5 million in 2001. Domestic net sales fell less than one percent due to a five percent decrease in sales volume, partially offset by an increase in average selling prices. European operations reported a decline in revenue due to an 11 percent drop in average selling prices, which offset a two percent gain in sales volume. Continued market pressures led to the average selling price drop. Specialty products include flavors, emulsifiers and solubilizers used in the food and pharmaceutical industries. Net sales for the year were $24.9 million, a rise of $3.7 million, or 18 percent, over 2000. Higher average selling prices coupled with a slightly higher sales volume led to the growth in revenue. Gross profit decreased to $107.2 million in 2001 from $112.0 million in 2000. Surfactants gross profit was down $4.8 million, or six percent, from $79.3 million in 2000 to $74.5 million in 2001. Domestic operations reported an $8.9 million decline in gross profit due primarily to a drop in average margins. Lower sales volume also contributed. The decrease in average margins was mainly due to weaker sales mix and higher energy costs. Higher margin industrial surfactants sales volume declined as the economy slowed down through the final quarter of 2001. Gross profit for foreign surfactants increased $4.1 million, or 29 percent, from year-to-year. A 28 percent improvement in sales volume caused the increase in gross profit. The newly acquired United Kingdom subsidiary contributed $1.9 million of the foreign increase. European operations, excluding United Kingdom, and South American operations contributed $1.0 million and $0.7 million, respectively, of the gross profit gain. Polymers gross profit declined $4.1 million, or 15 percent, from $27.9 million in 2000 to $23.8 million in 2001. Gross profit for PA declined 50 percent to $3.2 million in 2001 from $6.4 million in 2000. Lower sales volume and lower average margins accounted for the drop. Higher unit overhead costs resulting from decreased production volume coupled with some price reductions resulting from competitive situations led to the declined average margins. Global polyurethane polyols gross profit fell $0.3 million, or two percent, between years. Domestic operations reported an increase of $0.2 million, or one percent, in gross profit due to improved average margins that more than offset lower sales volume. Foreign operations gross profit fell $0.6 million on reduced average margins that more than offset higher sales volume. Polyurethane systems gross profit declined eight percent on lower sales volume. Improved average margins due to an average selling price increase and favorable sales mix partially offset the impact of lower sales volume. Specialty products reported an increase of $4.1 million in gross profit from year-to-year. The improvement was due to higher sales volume of higher margin products. Operating income was $30.8 million, a $0.5 million, or two percent, decrease in comparison with 2000. Operating expenses, consisting of marketing, administrative and research and development expenses, decreased five percent between years. Administrative expenses declined $4.2 million, or 13 percent, from those reported in the prior year. A $7.5 million decline in legal and environmental expense, partially offset by $4.7 million of 2001 expense for the implementation of an enterprise resource planning system, accounted for most of the decrease between years. The drop in legal and environmental expense was primarily due to $6.1 million of prior year expense related to the Company's Maywood, New Jersey, site that was non-recurring in 2001. In addition, current year expense was reduced by insurance recoveries received of $2.0 million, somewhat offsetby a $0.5 million year-to-year increase in general legal expenses. Marketing expenses declined one percent between years and research and development expenses remained almost unchanged. Interest expenses declined nine percent from year-to-year due to lower overall borrowing rates coupled with lower average debt levels, partially offset by decreased investment income. Philippine joint venture equity income rose $1.2 million between years. The improvement was largely due to reduced foreign exchange losses resulting from a devaluation of the Philippine peso in 2000. Pretax income increased $1.3 million, or five percent, to $25.8 million in 2001 from $24.5 million in 2000. The effective tax rate was 37.7 percent in 2001 compared to 38.5 percent in 2000. The lower effective tax rate was primarily attributable to Philippine tax benefits realized during 2001 (see Note 7 of the Notes to the Consolidated Financial Statements for a reconciliation of the statutory rate to the effective tax rate). Net income for the year was $16.1 million, or $1.65 per share diluted, compared with $15.1 million, or $1.53 per share diluted, a year ago. The acquisition of Stepan UK Limited added $0.4 million to net income, or $0.04 per share diluted. 2000 Compared with 1999 Net sales for 2000 increased one percent from $694.7 million in 1999 to $698.9 million in 2000 (1999 data has been reclassified to conform to 2000 presentation). The increase was due to a three percent rise in sales volume. Net sales by segment were as follows: Percent (Dollars in thousands) 2000 1999 Change -------- -------- ------- Surfactants $537,006 $547,359 -2 Polymers 140,786 126,774 +11 Specialty Products 21,145 20,526 +3 -------- -------- Total $698,937 $694,659 +1 ======== ======== Surfactants net sales, representing 77 percent of the Company's revenue, decreased $10.4 million, or two percent, from $547.4 million in 1999 to $537.0 million in 2000. Foreign operations' net sales decreased $13.2 million, or 10 percent, from $133.0 million in 1999 to $119.8 million in 2000, which accounted for the overall net sales decline. The decrease was mainly due to a decline in revenue reported by the Company's Mexican and European subsidiaries. Mexican operations reported lower revenue due to decreased sales volume. Despite a volume gain between years, European operations' net sales decreased. Weaker selling prices and lower European currency exchange rates versus the U.S. dollar contributed to the overall decline. Domestic sales increased $2.8 million, or one percent, from $414.4 million in 1999 to $417.2 million in 2000. A six percent rise in sales volume offset a five percent drop in average selling prices. Average selling prices declined largely due to sales mix, increased market competition and the non-recurring favorable impact in 1999 of the settlement of a contract cancellation. Sales volume grew six percent due to higher demand for the Company's laundry and cleaning products and rising export sales to Asia.Polymer net sales, accounting for 20 percent of the Company's revenue, increased 11 percent, from $126.8 million in 1999 to $140.8 million in 2000. The increase was due to a five percent rise in sales volume coupled with increased average selling prices. Globally, polyurethane polyols' net sales rose $6.7 million, or ten percent, from $70.0 million in 1999 to $76.7 million in 2000. The increase was entirely due to a nine percent rise in sales volume. Both domestic and foreign operations sales increased between years. PA's net sales increased 14 percent from $36.3 million in 1999 to $41.4 million in 2000. The improvement was entirely due to a 14 percent rise in average selling prices resulting from increased raw material costs, which were passed on to customers. Sales volume was flat between years. Polyurethane systems reported a $2.2 million, or 11 percent, increase in net sales. A nine percent rise in sales volume coupled with a two percent increase in average selling prices caused an overall improvement. Specialty products net sales for the year 2000 were $21.1 million, a rise of $0.6 million, or three percent over 1999. Higher average selling prices led to the growth. Gross profit decreased to $112.0 million in 2000 from $120.9 million in 1999. Surfactants gross profit was down $8.3 million, or nine percent, from $87.6 million in 1999 to $79.3 million in 2000. Domestic operations reported a $6.6 million, or nine percent, decrease due to lower average margins. Termination of the previously mentioned supply contract coupled with lower pricing in the higher volume product lines led to the margin decline. Gross profit for foreign operations decreased $1.7 million, or 11 percent, between years. Decreased sales volume for Mexican operations coupled with lower margins reported by the Company's French subsidiary led to the overall decline. Weaker exchange rates in Europe and strong competition contributed to the decrease. Polymers' gross profit increased slightly between years to $27.9 million in 2000 from $27.8 million in 1999. Lower margins offset the impact of increased sales volume. Globally, polyurethane polyols gross profit was down $2.6 million, or 12 percent, between years. Decreased domestic and European margins, due to higher raw material costs, caused the drop in gross profit. PA's gross profit was up $1.9 million, or 42 percent, between years, despite a $0.9 million write-off of damaged catalyst. Improved margins accounted for the increase. A rise in margins and sales volume also led to a $0.7 million, or 17 percent, increase in polyurethane systems gross profit. Specialty products gross profit decreased by $0.7 million, or 13 percent, between years mainly due to lower sales of higher margin products. Operating income was $31.4 million in 2000, a $10.7 million, or 25 percent, decrease from 1999. Operating expenses, consisting of marketing, administrative and research and development expenses, increased two percent between years. Marketing expenses rose $1.4 million, or six percent, primarily due to increased bad debt provision. Administrative expenses increased $0.3 million, or one percent, despite unusually high 1999 expenses that resulted from a $10.2 million legal settlement charge. Administrative expenses for 2000 included $6.1 million of legal and environmental-related charges, most of which related to potential future remediation costs at the Company's Maywood, New Jersey, plant. General legal expense was up $1.4 million, and expense related to the Company's deferred compensation plans was up $0.9 million between years. Philippine joint venture equity income fell $0.7 million, or 51 percent, between years. An $0.8 million unfavorable swing in foreign currency exchange losses, due to a weaker Philippine peso, caused the decline. The impact from foreign exchange fluctuations excluding the joint venture was immaterial to the results of the Company's operations. Pretax income declined $11.3 million, or 32 percent, to $24.5 million in 2000 from $35.8 million in 1999.The effective tax rate was 38.5 percent in 2000 compared to 36.5 percent in 1999. The higher effective tax rate was primarily attributable to the inability to tax benefit losses in Germany and Mexico. A lower tax benefit realized on Philippine income during 2000 also contributed to the higher effective tax rate (see Note 7 of the Notes to the Consolidated Financial Statements for a reconciliation of the statutory rate to the effective tax rate). Net income for the year 2000 was $15.1 million, or $1.53 per share diluted, compared with $22.7 million, or $2.21 per share diluted, for 1999. Fourth Quarter 2001 Compared with 2000 For the quarter ended December 31, 2001, the Company reported net income of $0.1 million, or a $0.01 loss per diluted share, compared to a net loss of $2.8 million, or a $0.34 loss per diluted share, in the fourth quarter of 2000. The newly acquired United Kingdom subsidiary contributed $0.4 million of 2001 fourth quarter net income, or $0.04 per diluted share. Net sales for the quarter grew five percent to $178.1 million from $169.4 million a year ago. Net sales for surfactants increased $12.6 million (10 percent), due to the acquisition of the United Kingdom subsidiary and to increased foreign sales volume. Domestic revenues and volumes declined between quarters. Polymer sales fell $3.9 million (12 percent) on a seven percent decline in sales volumes. Gross profit of $25.1 million was down slightly from the $25.2 million reported in the fourth quarter of 2000. Surfactants gross profit increased $1.2 million, or seven percent, due to a $3.2 million increase recorded by foreign operations. The acquisition of the United Kingdom subsidiary contributed $1.9 million of the increased gross profit. Gross profit for polymers declined $1.9 million, or 25 percent, between quarters due to reduced sales volume coupled with lower margins. All polymer businesses reported decreased quarterly earnings. Gross profit for specialty products was up $0.6 million between quarters. Higher sales volume of higher margin products led to the growth. Operating expenses declined $3.6 million, or 13 percent, in comparison with the fourth quarter of 2000. Administrative expenses dropped $2.9 million, or 19 percent, between quarters. Legal and environmental expense decreased $6.4 million from quarter to quarter due to $6.1 million of prior year Maywood-related charges that did not recur in the fourth quarter of 2001. Most of these changes were related to potential future remediation costs at the Company's Maywood, New Jersey plant. Non-recurring fourth quarter 2000 acquisition investigation expenses of $0.6 million also contributed to the decline. The decline was partially offset by $2.7 million in expense incurred in 2001 related to the implementation of an enterprise resource planning system, $0.8 million in expenses incurred by the new United Kingdom subsidiary and a $1.6 million increase in expense related to the Company's deferred compensation plans. Marketing expenses decreased $0.7 million, or 10 percent, between quarters due mostly to a $1.2 million decrease in domestic bad debt expense resulting from improved collectibility estimates for certain accounts receivable. The decline was somewhat offset by $0.3 million in marketing expense reported by the United Kingdom. Research and development expenses were flat between quarters. Philippine joint venture equity income increased $0.5 million between quarters. Foreign currency exchange losses in 2000 resulting from a weaker Philippine peso accounted for most of the improvement. Interest expenses declined 10 percent between quarters. The decrease was due to lower overall borrowing rates, partially offset by an increased level of debt and lower investment income.Liquidity and Financial Condition Net cash from operations for 2001 totaled $53.4 million compared to $54.6 million for the prior year. Working capital required the use of $0.6 million for the current year, compared to a cash use of $0.7 million during 2000. From year to year accounts receivable decreased by $6.1 million and were partially offset by a $5.4 million decrease in accounts payable and other accrued liabilities. Inventories increased by $0.2 million during 2001 while other working capital items, mainly prepaid expenses, absorbed $1.0 million. Capital expenditures, excluding acquisitions, totaled $34.0 million for the current year compared to $28.4 million during 2000. Current year capital spending included $6.6 million for an enterprise resource planning (ERP) system, which is expected to be completed in 2002. It is anticipated that total 2002 capital spending will rise modestly over 2001 levels, due mostly to higher non-ERP spending. During September 2001 the Company completed the acquisition of Manro Performance Chemicals Limited, located in Stalybridge, UK. This acquisition was made for cash totaling $24.6 million and was initially funded through the Company's committed lines of credit. During March, 2002, the Company's Stepan Europe subsidiary completed a (euro)13.4 million term loan as long-term financing for a portion of the Manro acquisition. Consolidated debt increased by $14.3 million during 2001 to $120.3 million mainly in order to fund the Manro Performance Chemicals Limited acquisition. As of December 31, 2001, the ratio of long-term debt to long-term debt plus stockholders' equity was 41.5 percent compared to 39.3 percent one year earlier. The Company maintains contractual relationships with its domestic banks that provide for revolving credit of up to $60 million, which may be drawn upon, through May 2, 2007, as needed for general corporate purposes under a revolving credit agreement dated May 3, 2002. The Company also meets short-term liquidity requirements through uncommitted domestic bank lines of credit. During September 2002, the Company completed a new $30 million private placement loan with its existing insurance company lenders. The proceeds of the loan were used to repay existing bank debt that had been classified as long-term. The new loan is unsecured and will bear interest at 6.86 percent through the stated maturity date of September 1, 2015. The Company's foreign subsidiaries maintain committed and uncommitted bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. During March 2002, the Company's Stepan Europe subsidiary completed an $11.7 million (denominated in euros) bank term loan as long-term financing for a portion of the Manro acquisition. This loan will mature in 7 years and bears interest at rates set quarterly, based on 90-day EURIBOR. The U.S. parent company does not guaranty this loan. The Company anticipates that cash from operations and from committed credit facilities will be sufficient to fund anticipated capital expenditures, dividends and other planned financial commitments for the foreseeable future. Any substantial acquisitions would require additional funding. The 50 percent owned Philippine joint venture, which is accounted for under the equity method, has $5.1 million of debt, which is not consolidated with or guaranteed by the Company.Market Risk Analysis FOREIGN CURRENCY EXCHANGE RISK Because the Company operates in the global marketplace, its cash flows and operating results are exposed to foreign currency fluctuations. The Company manufactures and sells products in many foreign locations and, therefore, believes its currency exchange risk is well diversified. Except as noted below, substantially all the Company's foreign subsidiaries' financial instruments are denominated in their respective functional currencies. As such, exposure to exchange rate risk on foreign currency financial instruments is insignificant. In addition, the foreign subsidiaries periodically use short-term forward exchange contracts to limit the exposure of certain foreign currency transactions and balances to fluctuating exchange rates. At December 31, 2001, the balance of such contracts was not significant. The Company's 50 percent owned Philippine joint venture has U.S. dollar-denominated debt with the potential for future foreign exchange gains or losses. A 10 percent change in this exchange rate would not have a material effect on the Company's operating results or cash flow. INTEREST RATES The Company's debt was composed of fixed-rate and variable-rate borrowings totaling $83.3 million and $37.0 million, respectively, as of December 31, 2001. For 2002, it is projected that interest on variable-rate borrowings will comprise about 27 percent of the Company's total interest expense. A 10 percent increase or decrease to short-term interest rates would be immaterial to the Company's operating results or cash flow. The fair value of the Company's fixed-rate debt, including current maturities, was estimated to be $87.1 million as of December 31, 2001, which was approximately $3.8 million above the carrying value. Market risk was estimated as the potential increase to the fair value that would result from a hypothetical 10 percent decrease in the Company's weighted average long-term borrowing rates at December 31, 2001, or $2.0 million. Such a rate decrease would be immaterial to future operating results or cash flow. COMMODITY PRICE RISK Certain raw materials used in the manufacture of the Company's products are subject to price volatility caused by weather, petroleum prices and other unpredictable factors. In many cases,accordingly, the Company has not updated theabilitydisclosures contained herein topass on raw material price increases to customers. Therefore, commodity financial instruments are generally not used for raw material purchases. Periodically, firm purchase commitments are entered into which fix the price of a specific commodityreflect events thatwill be deliveredoccurred at afuture time. Such commitments usually cover only a portion of the Company's anticipated requirements. Commodity future and forward contracts are used to a limited extent, most often to aid in managing the Company's utility costs.later date.As
of December 31, 2001, unrealized gains and losses related to such contracts were not material. A hypothetical 10 percent fluctuation in the price of commodities coveredrequired byfirm commitments and forward contracts would have an immaterial effect on the Company's financial position, results of operations and cash flow.Environmental and Legal Matters The Company is subject to extensive federal, state and local environmental laws and regulations. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation could require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During 2001, the Company's expenditures for capital projects related to the environment were $1.1 million. These projects are capitalized and depreciated over their estimated useful lives, which is typically 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing locations were approximately $7.9 million for 2001 and 2000. While difficult to project, it is not anticipated that these recurring expenses will increase significantly in the future. The Company has been named by the government as a potentially responsible party at 16 waste disposal sites where cleanup costs have been or may be incurredRule 12b-15 promulgated under thefederal Comprehensive Environmental Response, CompensationSecurities Exchange Act of 1934, as amended, the Company’s principal executive officer andLiability Act and similar state statutes. In addition, damagesprincipal financial officer arebeing claimed against the Companyproviding Rule 13a-14(a) certifications ingeneral liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it may incurconnection withrespect to the sites. It is the Company's accounting policy to record liabilities when environmental assessments and/or remedial efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. Some of the factors on which the Company basis its estimates include information provided by feasibility studies, potentially responsible party negotiations and the development of remedial action plans. Because reported liabilities are recorded based on estimates, actual amounts could differ from those estimates. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses from $7.4 million to $35.0 million at December 31, 2001, compared to $7.5 million to $35.0 million at December 31, 2000. At December 31, 2001, the Company's reserve was $17.0 million for legal and environmental matters compared to $16.6 million at December 31, 2000. During 2001, non-capital expenditures related to legal and environmental matters approximated $2.6 million compared to $2.5 million, net of insurance recoveries, expended in 2000. While it is difficult to forecast the timing of the expenditures, the Company believes that $3.0 million of the $17.0 million reserve is likely to be paid out in 2002. As of the date ofthisfiling, $2.3 million has been paid out. The timing of future payments is uncertain. For certain sites, estimates cannot be made of the total costs of compliance or the Company's share of such costs; accordingly, the Company is unable to predict the effect thereof on future results of operations. In the event of one or more adverse determinations in any annual or interim period, the impact on results of operations for those periods could be material. However, based upon the Company's present belief as to its relative involvement at these sites, other viable entities' responsibilities for cleanup and the extended period over which any costs would be incurred, the Company believes that these matters will not have a material effect on the Company's financial position. Certain of these matters are discussed in Item 3, Legal Proceedings, in the 2001Form 10-K/Aand in other filings of the Company with the Securities and Exchange Commission,which are available upon request from the Company. See also Note 13, Contingencies, in the Notes to Consolidated Financial Statements for a summary of the environmental proceedings related to certain environmental sites. Recent Accounting Pronouncements In April 2001, the EITF released Issue No. 00-25, "Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products." Issue No. 00-25 provides guidance regarding the reporting of consideration given by a vendor to a reseller of the vendor's products. This issue requires certain considerations from vendor to a reseller of the vendor's products be viewed: (a) as a reduction of the selling prices of the vendor's products and, therefore, be recorded as a reduction of revenue when recognized in the vendor's income statement, or (b) as a cost incurred by the vendor for assets or services received from the reseller and, therefore, be recorded as a cost or an expense when recognized in the vendor's income statement. Issue No. 00-25 is effective for fiscal years beginning after December 15, 2001. The Company's accounting policies are currently consistent with the guidance provided in this issue. Therefore, the adoption of Issue No.00-25 is not expected to have an impact on the Company's financial position or results of operations. In June 2001, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001, for acquisitions entered into prior to June 30, 2001, and effective immediately for acquisitions entered into after June 30, 2001. SFAS No. 141 requires the use of the purchase method of accounting for all transactions initiated after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets subsequent(but otherwise identical to theiracquisition. The new standard establishes that goodwill is no longerprior certifications) and are also furnishing, but not filing, Rule 13a-14(b) certifications in connection with this Form 10-K/A (but otherwise identical tobe amortized. Instead, goodwill will be tested for impairment by applying a fair-value-based test each year, and more frequently, if circumstances indicate a possible impairment. If the carrying amount exceeds the implied fair value of that goodwill, an impairment loss shall be recognized. Equity-method goodwill is not, however, subject to the new impairment rules; the impairment guidance in existing rules for equity-method investments continues to apply. The standard also establishes new accounting guidelines for intangible assets that are determined to have an indefinite useful life. These assets are no longer subject to amortization, but shall be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the carrying amount of an intangible asset exceeds the fair value, an impairment loss shall be recognized in an amount equal to that excess. Any impairment as a result of initial adoption of SFAS No. 142 will be recorded as a cumulative effect of a change in accounting principles. The Company has applied the provisions of SFAS No. 141 and SFAS No. 142 to the September 13, 2001, acquisition of Manro Performance Chemicals in Stalybridge, UK (see Note 3, Acquisitions, in Notes to Consolidated Financial Statements). The provisions of SFAS No. 142 that apply to acquisitions madetheir priorto June 30, 2001, were adopted on Januarycertifications).1
2002. As a result the Company stopped recognizing approximately $0.6 million of goodwill amortization expense in 2002. The Company has also completed the impairment test of goodwill and intangible assets. Results of this test indicated no impairment at January 1, 2002.In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The statement applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. The Company is evaluating the effect of this standard on its financial statements. In August 2001, SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets," was issued. This statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." SFAS No. 144 was effective January 1, 2002. Adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. In June 2002, the Financial Accounting Standards Board issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Based on the information currently available, adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. Item 8. Financial Statements and Supplementary Data
Item 8. Financial Statements and Supplementary Data The following statements and data are included in this item:
Report of Independent
Auditors' Report Consolidated Balance Sheets (December 31, 2001 and 2000)Registered Public Accounting FirmConsolidated Statements of Income (For years ended December 31,
2001, 20002006, 2005 and1999)2004)Consolidated Balance Sheets (December 31, 2006 and 2005)
Consolidated Statements of Cash Flow (For years ended December 31,
2001, 20002006, 2005 and1999)2004)Consolidated Statements of
Stockholders'Stockholders’ Equity (For years ended December 31,2001, 20002006, 2005 and1999)2004)Notes to Consolidated Financial Statements
Selected Quarterly Financial Data
All financial statements, notes and data have been restated, where appropriate, to give effect to the correction discussed in Note2
to the Consolidated Financial Statements.Report of Independent
Auditors' ReportRegistered Public Accounting FirmTo the Board of Directors and Stockholders of
Stepan Company
Northfield, Illinois
We have audited the accompanying consolidated balance sheets of Stepan Company and subsidiaries (the "Company") as of December 31,
20012006 and2000,2005, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31,2001.2006. Our audits also included the financial statement schedulefor the three years in the period ended December 31, 2001,listed in the Index at Item14.15. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.We conducted our audits in accordance with
auditingthe standardsgenerally accepted inof theUnited States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stepan Company and subsidiaries
atas of December 31,20012006 and2000,2005, and the results of their operations and their cash flows for each of the three years in the period ended December 31,20012006, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole,presentspresent fairly, in all material respects, the information set forth therein.As discussedWe have also audited, in
Note 2,accordance with theaccompanyingstandards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Company's internal control over financialstatements have been restated. DELOITTE & TOUCHE LLP Chicago, Illinois November 11, 2002Stepan Company Consolidated Balance Sheetsreporting as of December 31,20012006, based on the criteria established inInternal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and2000our report dated March 2, 2007, expressed an unqualified opinion on management's assessment of the effectiveness of the Company's internal control over financial reporting and an unqualified opinion on the effectiveness of the Company's internal control over financial reporting.
2001 2000 (Dollars in thousands) As Restated* As Restated* ------------ ------------Assets Current Assets: Cash and cash equivalents $ 4,224 $ 3,536 Receivables, less allowances of $2,272 in 2001 and $3,154 in 2000 103,190 98,488 Inventories (Note 4) 59,330 57,013 Deferred income taxes (Note 7) 8,810 8,523 Other current assets 5,233 4,191 -------- -------- Total current assets 180,787 171,751 -------- -------- Property, Plant and Equipment: Land 6,156 5,786 Buildings and improvements 75,720 69,654 Machinery and equipment 564,150 529,564 Construction in progress 20,091 13,292 -------- -------- 666,117 618,296 Less: accumulated depreciation 454,684 420,149 -------- -------- Property, plant and equipment, net 211,433 198,147 -------- -------- Long-term investments 7,674 8,005 -------- -------- Other assets 38,861 39,689 -------- -------- Total assets $438,755 $417,592 ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Current maturities of long-term debt (Note 5) $ 10,745 $ 9,586 Accounts payable 62,410 57,255 Accrued liabilities (Note 11) 35,004 36,902 -------- -------- Total current liabilities 108,159 103,743 -------- -------- Deferred income taxes (Note 7) 28,603 32,312 -------- -------- Long-term debt, less current maturities (Note 5) 109,588 96,466 -------- -------- Deferred compensation (Note 2) 16,653 16,737 -------- -------- Other non-current liabilities (Note 12) 21,401 19,275 -------- -------- Stockholders' Equity (Note 8): 5 1//s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP Chicago, Illinois March 2, percent convertible preferred stock, cumulative, voting, without par value; authorized 2,000,000 shares; issued and outstanding 583,252 shares in 2001 and 583,469 shares in 2000 14,581 14,587 Common stock, $1 par value; authorized 30,000,000 shares; issued 9,604,003 shares in 2001 and 9,411,106 shares in 2000 9,604 9,411 Additional paid-in capital 16,531 12,968 Accumulated other comprehensive loss (Note 1) (15,870) (13,028) Retained earnings (approximately $48,987 unrestricted in 2001 and $45,849 in 2000) 144,658 135,642 Less: Treasury stock, at cost, 782,232 shares in 2001 and 590,188 shares in 2000 (15,153) (10,521) -------- -------- Stockholders' equity 154,351 149,059 -------- -------- Total liabilities and stockholders' equity $438,755 $417,592 ======== ========2007* See Note 2 for explanation3
Stepan Company
Consolidated Statements of
restatement.IncomeFor the years ended December 31, 2006, 2005 and 2004
(In thousands, except per share amounts)
2006 2005 2004 Net Sales(Note 1)
$ 1,172,583 $ 1,078,377 $ 935,816 Cost of Sales
1,046,797 955,515 824,849 Gross Profit
125,786 122,862 110,967 Operating Expenses:
Marketing
34,452 32,467 29,615 Administrative
45,844 35,339 36,204 Research, development and technical services (Note 1)
29,637 29,588 25,969 109,933 97,394 91,788 Operating Income
15,853 25,468 19,179 Other Income (Expense):
Interest, net (Note 5)
(8,885 ) (7,801 ) (7,237 ) Income (Loss) from equity in joint venture (Note 1)
(812 ) (729 ) 2,320 Other, net
1,233 708 371 (8,464 ) (7,822 ) (4,546 ) Income Before Provision for Income Taxes and Minority Interest
7,389 17,646 14,633 Provision for income taxes (Note 7)
900 4,170 4,320 Minority interest (Note 1)
(181 ) (53 ) (11 ) Income Before Cumulative Effect of Change in Accounting Principle
6,670 13,529 10,324 Cumulative effect of change in accounting principle, net of income taxes (Note 2)
— (370 ) — Net Income
$ 6,670 $ 13,159 $ 10,324 Basic earnings per share of common stock (Note 16)
Income before cumulative effect of change in accounting principle
$ 0.64 $ 1.41 $ 1.06 Cumulative effect of change in accounting principle
$ — $ (0.04 ) $ — Net Income Per Common Share
$ 0.64 $ 1.37 $ 1.06 Diluted earnings per share of common stock (Note 16)
Income before cumulative effect of change in accounting principle
$ 0.63 $ 1.39 $ 1.05 Cumulative effect of change in accounting principle
$ — $ (0.04 ) $ — Net Income Per Common Share
$ 0.63 $ 1.35 $ 1.05 Shares Used to Compute Net Income Per Common Share (Note 16):
Basic
9,133 9,005 8,970 Diluted
9,284 9,725 9,038 The accompanying Notes to Consolidated Financial Statements are an integral part of these
financialstatements.4
Stepan Company
Consolidated
Statements of Income For the years endedBalance SheetsDecember 31,
2001, 20002006 and1999
2001 2000 1999 (In thousands, except per share amounts) As Restated* As Restated* As Restated* ------------ ------------ ------------Net Sales (Note 1) $711,517 $698,937 $694,659 -------- -------- -------- Cost of Sales 604,288 586,911 573,714 -------- -------- -------- Gross Profit 107,229 112,026 120,945 -------- -------- -------- Operating Expenses: Marketing 24,884 25,166 23,799 Administrative 28,644 32,822 32,531 Research, development and technical services (Note 1) 22,869 22,680 22,593 -------- -------- -------- 76,397 80,668 78,923 -------- -------- -------- Operating Income 30,832 31,358 42,022 Other Income (Expenses): Interest, net (Note 5) (6,903) (7,586) (7,681) Equity in earnings of joint venture (Note 1) 1,869 703 1,427 -------- -------- -------- (5,034) (6,883) (6,254) -------- -------- -------- Income Before Provision for Income Taxes 25,798 24,475 35,768 Provision for Income Taxes (Note 7) 9,726 9,423 13,043 -------- -------- -------- Net Income $ 16,072 $ 15,052 $ 22,725 ======== ======== ======== Net Income Per Common Share (Note 15): Basic $ 1.73 $ 1.59 $ 2.37 ======== ======== ======== Diluted $ 1.65 $ 1.53 $ 2.21 ======== ======== ======== Shares Used to Compute Net Income Per Common Share (Note 15): Basic 8,837 8,948 9,232 ======== ======== ======== Diluted 9,721 9,829 10,272 ======== ======== ========* See Note 2 for explanation of restatement.2005
(Dollars in thousands)
2006 2005 Assets
Current Assets:
Cash and cash equivalents
$ 5,369 $ 16,641 Receivables, less allowances of $3,540 in 2006 and $3,119 in 2005
160,525 149,922 Inventories (Note 4)
82,837 76,399 Deferred income taxes (Note 7)
10,362 8,239 Other current assets
9,376 8,047 Total current assets
268,469 259,248 Property, Plant and Equipment:
Land
10,792 10,125 Buildings and improvements
101,230 94,188 Machinery and equipment
722,616 685,832 Construction in progress
25,072 16,214 859,710 806,359 Less: accumulated depreciation
634,106 595,240 Property, plant and equipment, net
225,604 211,119 Goodwill, net (Note 3)
7,841 7,414 Other intangible assets, net (Note 3)
7,360 8,775 Other non-current assets
36,781 29,603 Total assets
$ 546,055 $ 516,159 Liabilities and Stockholders’ Equity
Current Liabilities:
Current maturities of long-term debt (Note 5)
$ 23,761 $ 16,777 Accounts payable
108,084 102,264 Accrued liabilities (Note 12)
48,650 43,863 Total current liabilities
180,495 162,904 Deferred income taxes (Note 7)
2,046 2,210 Long-term debt, less current maturities (Note 5)
107,403 108,945 Other non-current liabilities (Note 13)
74,574 74,361 Commitments and Contingencies (Notes 6 and 14)
Minority Interest(Note 1)
751 905 Stockholders’ Equity(Note 8):
5 1/2 percent convertible preferred stock, cumulative, voting, without par value; authorized 2,000,000 shares; issued and outstanding 572,854 shares in 2006 and 575,254 shares in 2005
14,321 14,381 Common stock, $1 par value; authorized 30,000,000 shares; issued 10,342,762 shares in 2006 and 10,142,853 shares in 2005
10,343 10,143 Additional paid-in capital
33,553 26,812 Accumulated other comprehensive loss (Note 1)
(14,292 ) (23,867 ) Retained earnings (approximately $32,219 unrestricted in 2006 and $32,520 in 2005)
161,184 162,663 Less: Treasury stock, at cost, 1,134,958 shares in 2006 and 1,102,309 shares in 2005
(24,323 ) (23,298 ) Stockholders’ equity
180,786 166,834 Total liabilities and stockholders’ equity
$ 546,055 $ 516,159 The accompanying Notes to Consolidated Financial Statements are an integral part of these
financialstatements.5
Stepan Company
Consolidated Statements of Cash Flows
For the years ended December 31,
2001, 20002006, 2005 and1999
2001 2000 1999 (Dollars in thousands) As Restated* As Restated* As Restated* ------------ ------------ ------------Cash Flows From Operating Activities Net income $ 16,072 $ 15,052 $ 22,725 Depreciation and amortization 39,972 39,277 39,452 Deferred revenue (470) (1,761) (5,165) Deferred income taxes (2,431) (3,877) 4,088 Environmental and legal liabilities 331 5,069 (4,999) Other non-cash items 526 1,609 (282) Changes in working capital: Receivables, net 6,062 (1,399) (15,199) Inventories (167) (7,255) 1,169 Accounts payable and accrued liabilities (5,427) 7,723 10,174 Other current assets (1,042) 201 (575) -------- -------- -------- Net Cash Provided By Operating Activities 53,426 54,639 51,388 -------- -------- -------- Cash Flows From Investing Activities Expenditures for property, plant and equipment (34,014) (28,442) (32,697) Business acquisitions (24,640) -- (450) Other non-current assets 1,891 (1,226) (968) -------- -------- -------- Net Cash Used In Investing Activities (56,763) (29,668) (34,115) -------- -------- -------- Cash Flows From Financing Activities Revolving debt and notes payable to banks, net 22,200 (1,500) 11,400 Other debt borrowings 1,188 -- -- Other debt repayments (9,107) (7,531) (10,832) Purchases of treasury stock, net (4,632) (9,548) (8,851) Dividends paid (7,056) (6,730) (6,505) Stock option exercises 3,151 1,397 1,088 -------- -------- -------- Net Cash Provided By (Used In) Financing Activities 5,744 (23,912) (13,700) -------- -------- -------- Effect of Exchange Rate Changes on Cash (1,719) (1,492) (587) -------- -------- -------- Net Increase (Decrease) in Cash and Cash Equivalents 688 (433) 2,986 Cash and Cash Equivalents at Beginning of Year 3,536 3,969 983 -------- -------- -------- Cash and Cash Equivalents at End of Year $ 4,224 $ 3,536 $ 3,969 ======== ======== ======== Supplemental Cash Flow Information Cash payments of income taxes, net of refunds $ 11,652 $ 13,262 $ 10,564 Cash payments of interest $ 7,862 $ 8,775 $ 8,780* See Note 2 for explanation of restatement.2004
(Dollars in thousands)
2006 2005 2004 Cash Flows From Operating Activities
Net income
$ 6,670 $ 13,159 $ 10,324 Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of accounting change
— 370 — Depreciation and amortization
38,384 38,769 39,169 Deferred compensation
3,672 2,094 693 Deferred income taxes
(10,143 ) (5,406 ) (4,310 ) Other non-cash items
802 (93 ) (1,420 ) Changes in assets and liabilities:
Receivables, net
(8,000 ) (19,145 ) (15,949 ) Inventories
(4,613 ) (1,516 ) (4,009 ) Other current assets
(1,091 ) 1,438 (1,019 ) Accounts payable and accrued liabilities
7,759 8,884 20,677 Pension liabilities
(2,554 ) 4,057 698 Environmental and legal liabilities
3,610 (607 ) (1,398 ) Deferred revenues
5,017 38 503 Excess tax benefit from stock options
(685 ) — — Net Cash Provided By Operating Activities
38,828 42,042 43,959 Cash Flows From Investing Activities
Expenditures for property, plant and equipment
(45,970 ) (41,519 ) (33,766 ) Dividend from Philippine joint venture, net of tax withholdings
— — 1,700 Formation of China joint venture
— — 945 Other, net
(2,524 ) 13 2,939 Net Cash Used In Investing Activities
(48,494 ) (41,506 ) (28,182 ) Cash Flows From Financing Activities
Revolving debt and notes payable to banks, net
12,934 (11,399 ) (481 ) Other debt borrowings
2,271 43,154 17,680 Other debt repayments
(12,474 ) (14,230 ) (23,908 ) Purchases of treasury stock, net
— — (30 ) Dividends paid
(8,149 ) (7,869 ) (7,731 ) Stock option exercises
3,297 534 718 Excess tax benefit from stock options
685 — — Other, net
(315 ) (408 ) (335 ) Net Cash Provided By (Used In) Financing Activities
(1,751 ) 9,782 (14,087 ) Effect of Exchange Rate Changes on Cash
145 62 336 Net Increase (Decrease) in Cash and Cash Equivalents
(11,272 ) 10,380 2,026 Cash and Cash Equivalents at Beginning of Year
16,641 6,261 4,235 Cash and Cash Equivalents at End of Year
$ 5,369 $ 16,641 $ 6,261 Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds
$ 7,037 $ 10,639 $ 8,359 Cash payments of interest
$ 9,004 $ 7,670 $ 7,673 The accompanying Notes to Consolidated Financial Statements are an integral part of these
financialstatements.6
Stepan Company
Consolidated Statements of
Stockholders'Stockholders’ EquityFor the years ended December 31,
2001, 20002006, 2005 and1999
Convertible Additional Preferred Common Paid-in Treasury (Dollars in thousands) Stock Stock Capital Stock ----------- ------ ---------- --------Balance, January 1, 1999 as previously reported $19,611 $9,998 $10,962 $(11,015) Prior period adjustments -- -- (514) (5,038) ------- ------ ------- -------- Balance January 1, 1999 as restated* 19,611 9,998 10,448 (16,053) Sale of 85,250 shares of common stock under stock option plan -- 85 1,003 -- Purchase of 317,048 shares of common and 38,646 shares of preferred treasury stock, net of sales* -- -- -- (8,851) Retirement of 400,000 shares of common treasury stock -- (400) (516) 9,572 Conversion of preferred stock to common stock (36) 2 34 -- Net income* -- -- -- -- Other comprehensive loss: Foreign currency translation adjustments -- -- -- -- Unrealized gain(loss) on securities* Comprehensive income* -- -- -- -- Cash dividends paid: -- -- -- -- Preferred stock ($1.375 per share) -- -- -- -- Common stock (61.25(cent) per share)* -- -- -- -- Non-qualified stock option income tax benefit -- -- 422 -- ------- ------ ------- -------- Balance, December 31, 1999* 19,575 9,685 11,391 (15,332) Sale of 113,950 shares of common stock under stock option plan -- 114 1,283 -- Purchase of 421,069 shares of common and 16,015 shares of preferred treasury stock, net of sales* -- -- (117) (9,548) Retirement of shares of treasury stock: 400,000 shares of common stock -- (400) (565) 8,975 188,535 shares of preferred stock (4,713) -- 239 5,384 Conversion of preferred stock to common stock (275) 12 262 Net income* -- -- -- -- Other comprehensive loss: Foreign currency translation adjustments -- -- -- -- Unrealized gain(loss) on securities* Comprehensive income* -- -- -- -- Cash dividends paid: -- -- -- -- Preferred stock ($1.375 per share) -- -- -- -- Common stock (66.25(cent) per share)* -- -- -- -- Non-qualified stock option income tax benefit -- -- 475 -- ------- ------ ------- -------- Balance, December 31, 2000* 14,587 9,411 12,968 (10,521) Sale of 192,650 shares of common stock under stock option plan -- 193 2,958 -- Purchase of 210,865 shares of common stock, net of sales* -- -- (5) (4,632) Conversion of preferred stock to common stock (6) -- 6 -- Net income* -- -- -- -- Other comprehensive loss: Foreign currency translation adjustments -- -- -- -- Unrealized gain(loss) on securities* -- -- -- -- Minimum pension liability adjustment (net of income tax of $595) -- -- -- -- Comprehensive income* -- -- -- -- Cash dividends paid: -- -- -- -- Preferred stock ($1.375 per share) -- -- -- -- Common stock (70.75(cent) per share)* -- -- -- -- Non-qualified stock option income tax benefit -- -- 604 -- ------- ------ ------- -------- Balance, December 31, 2001* $14,581 $9,604 $16,531 $(15,153) ======= ====== ======= ========Accumulated Other Comprehensive Retained Comprehensive (Dollars in thousands) Loss Earnings Income ------------- -------- -------------Balance, January 1, 1999 as previously reported $ (9,050) $127,478 -- Prior period adjustments -- 1,198 -- -------- -------- ------- Balance January 1, 1999 as restated* (9,050) 128,676 Sale of 85,250 shares of common stock under stock option plan -- -- -- Purchase of 317,048 shares of common and 38,646 shares of preferred treasury stock, net of sales* -- -- -- Retirement of 400,000 shares of common treasury stock -- (8,656) -- Conversion of preferred stock to common stock -- -- -- Net income* -- 22,725 $22,725 Other comprehensive loss: Foreign currency translation adjustments (1,581) -- (1,581) Unrealized gain(loss) on securities* (22) (22) ------- Comprehensive income* -- -- $21,122 ======= Cash dividends paid: -- -- -- Preferred stock ($1.375 per share) -- (858) -- Common stock (61.25(cent) per share)* -- (5,647) -- Non-qualified stock option income tax benefit -- -- -- -------- -------- ------- Balance, December 31, 1999* (10,653) 136,240 -- Sale of 113,950 shares of common stock under stock option plan -- -- -- Purchase of 421,069 shares of common and 16,015 shares of preferred treasury stock, net of sales* -- -- -- Retirement of shares of treasury stock: 400,000 shares of common stock -- (8,010) -- 188,535 shares of preferred stock -- (910) -- Conversion of preferred stock to common stock -- -- -- Net income* -- 15,052 $15,052 Other comprehensive loss: Foreign currency translation adjustments (1,771) -- (1,771) Unrealized gain(loss) on securities* (604) -- (604) ------- Comprehensive income* -- -- $12,677 ======= Cash dividends paid: -- -- -- Preferred stock ($1.375 per share) -- (815) -- Common stock (66.25(cent) per share)* -- (5,915) -- Non-qualified stock option income tax benefit -- -- -- -------- -------- ------- Balance, December 31, 2000* (13,028) 135,642 -- Sale of 192,650 shares of common stock under stock option plan -- -- -- Purchase of 210,865 shares of common stock, net of sales* -- -- -- Conversion of preferred stock to common stock -- -- -- Net income* -- 16,072 $16,072 Other comprehensive loss: Foreign currency translation adjustments (1,414) -- (1,414) Unrealized gain (loss) on securities* (444) -- (444) Minimum pension liability adjustment (net of income tax of $595) (984) -- (984) ------- Comprehensive income* -- -- $13,230 ======= Cash dividends paid: -- -- -- Preferred stock ($1.375 per share) -- (802) -- Common stock (70.75(cent) per share)* -- (6,254) -- Non-qualified stock option income tax benefit -- -- -- -------- -------- ------- Balance, December 31, 2001* $(15,870) $144,658 -- ======== ======== =======* As Restated; see Note 2 for explanation of restatement.2004
(Dollars in thousands)
Convertible
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Treasury
Stock
Accumulated
Other
Comprehensive
LossRetained
EarningsComprehensive
Income
Balance January 1, 2004
$ 14,552 $ 9,900 $ 22,277 $ (19,882 ) $ (19,560 ) $ 154,780 — Sale of 131,605 shares of common stock under stock option plan
— 131 1,949 — — — — Purchase of 72,774 shares of common stock, net of sales
— — — (1,729 ) — — — Conversion of preferred stock to common stock
(15 ) 1 14 — — — — Net income
— — — — — 10,324 $ 10,324 Other comprehensive income/(loss):
Foreign currency translation adjustments
— — — — 4,974 — 4,974 Unrealized gain on securities (net of income taxes of $161)
— — — — 242 — 242 Minimum pension liability adjustment (net of income taxes of $1,515)
— — — — (2,195 ) — (2,195 ) Comprehensive income
— — — — — — $ 13,345 Cash dividends paid:
Preferred stock ($1.375 per share)
— — — — — (800 ) — Common stock (77.25¢ per share)
— — — — — (6,931 ) — Non-qualified stock option income tax benefit
— — 209 — — — — Balance, December 31, 2004
14,537 10,032 24,449 (21,611 ) (16,539 ) 157,373 — Sale of 103,194 shares of common stock under stock option plan
— 103 1,937 — — — — Purchase of 62,864 shares of common stock, net of sales
— — — (1,687 ) — — — Conversion of preferred stock to common stock
(156 ) 8 148 — — — — Net income
— — — — — 13,159 $ 13,159 Other comprehensive income/(loss):
Foreign currency translation adjustments
— — — — (4,024 ) — (4,024 ) Unrealized gain on securities (net of income taxes of $38)
— — — — 60 — 60 Minimum pension liability adjustment (net of income taxes of $1,920)
— — — — (3,364 ) — (3,364 ) Comprehensive income
— — — — — — $ 5,831 Cash dividends paid:
Preferred stock ($1.375 per share)
— — — — — (796 ) — Common stock (78.50¢ per share)
— — — — — (7,073 ) — Non-qualified stock option income tax benefit
— — 278 — — — — Balance, December 31, 2005
14,381 10,143 26,812 (23,298 ) (23,867 ) 162,663 — Sale of 197,171 shares of common stock under stock option plan
— 197 3,973 — — — — Purchase of 33,220 shares of common stock, net of sales
— — — (1,037 ) — — — Conversion of preferred stock to common stock
(60 ) 3 57 — — — — Equity based compensation
— — 420 — — — — Deferred compensation
— — 1,606 12 — — — Net income
— — — — — 6,670 $ 6,670 Other comprehensive income:
Foreign currency translation adjustments
— — — — 5,805 — 5,805 Unrealized gain on securities (net of income taxes of $78)
— — — — 124 — 124 Minimum pension liability adjustment (net of income taxes of $3,035)
— — — — 4,199 — 4,199 Comprehensive income
— — — — — — $ 16,798 Defined benefit pension liability transition adjustment (net of income taxes of $351)
— — — — (553 ) — — Cash dividends paid:
Preferred stock ($1.375 per share)
— — — — — (789 ) — Common stock (80.50¢ per share)
— — — — — (7,360 ) — Non-qualified stock option income tax benefit
— — 685 — — — — Balance, December 31, 2006
$ 14,321 $ 10,343 $ 33,553 $ (24,323 ) $ (14,292 ) $ 161,184 — The accompanying Notes to Consolidated Financial Statements are an integral part of these
financialstatements7
Notes to Consolidated Financial Statements
For the years ended December 31,
2001, 20002006, 2005 and199920041. Summary of Significant Accounting Policies
Nature of Operations
Stepan
Company'sCompany (the"Company"“Company”) operations consist predominantly of the production and sale of specialty and intermediate chemicals, which are sold to other manufacturers for use in a variety of end products. Principal markets for all products are manufacturers of cleaning and washing compounds (including detergents, shampoos, fabric softeners, toothpastes and household cleaners), paints, cosmetics, food and beverages, agricultural products, plastics, furniture, automotive equipment, insulation and refrigeration.Principles of Consolidation The consolidated financial statements include the accounts of the Company and its wholly owned foreign subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. The investment in the 50 percent owned joint venture in the Philippines is accounted for on the equity method and is included in the "Other Assets" caption on the Consolidated Balance Sheet. The Company's share of the net earnings of the investment is included in consolidated net income. Cash and Cash Equivalents The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents. Concentration of Credit Risks The Company grants credit to its customers who are widely distributed across the Americas, Europe, Asia and the Pacific. The Company does not have any one single customer whose business represents more than 10 percent of the Company's consolidated revenue. There is no material concentration of credit risk. Inventories Inventories are valued at cost, which is not in excess of market value, and include material, labor and plant overhead costs. The last-in, first-out (LIFO) method is used to determine the cost of most Company inventories. The first-in, first-out (FIFO) method is used for all other inventories. Inventories priced at LIFO as of December 31, 2001 and 2000, amounted to 86 and 91 percent of total inventories, respectively.Property, Plant and Equipment Depreciation of physical properties is provided on a straight-line basis over the estimated useful lives of various assets. Lives used for calculating depreciation are 30 years for buildings, 15 years for building improvements and from three to 15 years for machinery and equipment. Major renewals and betterments are capitalized in the property accounts, while maintenance and repairs ($19,366,000, $18,472,000, and $17,815,000 in 2001, 2000 and 1999, respectively), which do not renew or extend the life of the respective assets, are charged to operations currently. 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. Included in property, plant and equipment are costs related to the acquisition and development of internal-use software. Capitalized costs include external direct costs of materials and services consumed in obtaining and developing the software. For development projects where major internal resources are committed, payroll and payroll-related costs incurred during the application development phase of the project are also capitalized. The capitalized costs are amortized over the useful life of the software, which is generally three to ten years. Costs incurred in the preliminary project phase are expensed. At December 31, 2001, the consolidated "Construction in progress" amount included $6,012,000 of capitalized costs related to the Company's enterprise resource planning system implementation project. Interest charges on borrowings applicable to major construction projects are capitalized. Revenue Recognition Revenue is recognized upon shipment of goods to customers. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are recognized as earned and reported as reductions of revenue in the statement of income. Environmental Expenditures Environmental expenditures that relate to current operations are expensed or capitalized as appropriate. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. 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. Because reported liabilities are recorded based on estimates, actual amounts could differ from those estimates. Legal costs related to environmental matters are expensed as incurred. Expenditures that mitigate or prevent environmental contamination and that benefit future operations are capitalized. Capitalized expenditures are depreciated generally utilizing a 10 year life. See Note 13, Contingencies.Intangible Assets Included in other assets are intangible assets consisting of patents, agreements not to compete, trademarks, customer lists and goodwill, all of which were acquired as part of business acquisitions. These assets are presented net of amortization provided on a straight-line basis over their estimated useful lives generally ranging from five to 15 years. In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001, for acquisitions entered into prior to June 30, 2001, and effective immediately for acquisitions entered into after June 30, 2001. SFAS No. 141 requires the use of the purchase method of accounting for all transactions initiated after June 30, 2001. SFAS No. 142 requires that the goodwill acquired as a result of a business combination should not be amortized. The Company has applied the provisions of SFAS No. 141 and SFAS No. 142 to the September 2001 acquisition of Manro Performance Chemicals Limited (see Note 3). Research and Development Costs The Company's research and development costs are expensed as incurred. These expenses are aimed at discovery and commercialization of new knowledge with the intent that such effort will be useful in developing a new product or in bringing about a significant improvement to an existing product or process. Total expenses were $13,729,000, $13,383,000 and $13,113,000 in 2001, 2000 and 1999, respectively. The balance of expenses reflected in the Consolidated Statements of Income relates to technical services, which include routine product testing, quality control and sales support service. Income Taxes The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the enacted marginal tax rate. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. Translation of Foreign Currencies Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year end. The resulting translation adjustments are included in stockholders' equity. Revenues and expenses are translated at average exchange rates prevailing during the year. Gains or losses on foreign currency transactions and the related tax effects are reflected in net income.Long-Lived Assets Operating assets and associated goodwill are written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis. No impairment loss has needed to be recognized for applicable assets of continuing operations. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," encourages, but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. The Company has chosen to continue to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. Accordingly, compensation cost for stock options is measured as the excess, if any, of the quoted market price of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock. See Note 9, Stock Option Plans. Per Share Data Basic earnings per share amounts are computed based on the weighted-average number of common shares outstanding. Net income used in computing basic earnings per share has been reduced by dividends paid to preferred stockholders. Diluted earnings per share amounts are based on the increased number of common shares that would be outstanding assuming the exercise of certain outstanding stock options (under the treasury stock method) and the conversion of the convertible preferred stock, when such conversion would have the effect of reducing earnings per share. See Note 15, Earnings Per Share. Comprehensive Income Comprehensive income includes net income and all other nonowner changes in equity that are not reported in net income. For the year ended December 31, 2001, the Company's comprehensive income included net income, foreign currency translation gains and losses, unrealized gains and losses on securities and a minimum pension liability adjustment. For the years ended December 31, 2000 and 1999, the Company's comprehensive income included net income, unrealized gains and losses on securities and foreign currency translation gains and losses. Comprehensive income is disclosed in the Consolidated Statements of Stockholders' Equity. At December 31, 2001, the total accumulated other comprehensive loss of $15,870,000 was comprised of $13,816,000 of foreign currency translation adjustments, $1,070,000 of unrealized losses on securities and $984,000 of minimum pension liability adjustments (net of income taxes of $595,000). At December 31, 2000, the accumulated other comprehensive loss of $13,028,000 was comprised of $12,402,000 of foreign currency translation adjustments and $626,000 of unrealized losses on securities.Segment Reporting The Company reports financial and descriptive information about its reportable operating segments. Operating segments are components of the Company that have separate financial information that is regularly evaluated by the chief operating decision maker to assess segment performance and allocate resources. The Company discloses segment revenue, operating income, assets, capital expenditures and depreciation and amortization expenses. Enterprise-wide financial information about the revenues derived from the Company's products, the geographic locations in which the Company earns revenues and holds assets is also disclosed. See Note 14, Segment Reporting. Derivative Instruments In June 1998, the FASB issued SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities," effective for fiscal years beginning after June 15, 1999. The new standard establishes accounting and reporting requirements for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. Such instruments are to be recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in fair value must be recognized currently in earnings or in other comprehensive income if specific hedge criteria are met. Special accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the statement of income, to the extent effective. If a transaction is designated to receive hedge accounting, the Company must establish at the inception of the hedge the method it will use for assessing the effectiveness of the hedge and the measurement approach for determining the ineffective aspect of the hedge. The Company has limited transactions that fall under the accounting rules of SFAS No. 133. Company policy prohibits the use of financial instruments for trading or speculative purposes. Periodically, the Company enters into forward contracts to minimize exposure related to changing natural gas prices for a portion of the natural gas requirements used in its production facilities. In addition, the Company's foreign subsidiaries make limited use of short-term forward exchange contracts to minimize the exposure of certain foreign currency transactions and balances to fluctuating exchange rates. As of December 31, 2001, the effects of the forward commodity and exchange contracts were not material to the Company's consolidated financial statements. Deferred Compensation The Company maintains deferred compensation plans. These plans allow management to defer receipt of their bonuses and directors to defer receipt of director fees until retirement or departure from the Company. The plans allow the participant to choose to invest in either Stepan common stock or a limited variety of mutual funds. These assets are owned by the Company and subject to the claims of general creditors of the Company. These plans are accounted for under the requirements of the consensus reached by the Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board ("FASB") in issue No. 97-14, "Accounting for DeferredCompensation Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested". A description of the Company's deferred compensation accounting policy follows: The deferred compensation liability to the participants who elect deferral is recorded after the underlying compensation is earned, and recorded as expense. The purchase of Stepan common shares for the plans is recorded as a regular treasury stock purchase. The purchase of mutual funds is recorded as long term investments. Fluctuations in the value of these assets are recorded as adjustments from the deferred compensation liability and compensation costs included in administrative expense. The dividends, interest and capital gains from the mutual fund assets are recorded as investment income and included in "Other Income" as interest expense, net of investment income. Unrealized gains and losses resulting from market fluctuations of the mutual funds are recorded as other comprehensive income or expense in stockholders' equity.Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recent Accounting PronouncementsPrinciples of Consolidation
The consolidated financial statements include the accounts of the Company and its subsidiaries. The Company consolidates all wholly and majority-owned subsidiaries in which the Company exercises controlling influence. The equity method is used to account for investments in which the Company exercises significant but non-controlling influence. See Joint Ventures below. All significant intercompany balances and transactions have been eliminated in consolidation.
Joint Ventures
The Company is a partner in two joint ventures: Nanjing Stepan Jinling Chemical Limited Liability Company (Stepan China) in Nanjing, China, and Stepan Philippines Inc. in Bauan, Batangas, Philippines. Stepan China was formed to manufacture the Company’s aromatic polyester polyols for China’s domestic market. The Company and its partner own 55 percent and 45 percent, respectively, of the joint venture. The Company includes Stepan China’s accounts in its consolidated financial statements, and the joint venture partner’s interests in Stepan China’s income and net assets are reported in the “Minority Interest” lines of the Consolidated Statements of Income and the Consolidated Balance Sheets, respectively. In
April 2001,2004, Stepan China’s financial statements were included in theEITF released Issue No. 00-25, "Vendor Income Statement CharacterizationCompany’s consolidated financial statements on a three-month lag basis. The reporting lag was reduced to one month in the third quarter ofConsideration Paid2005 and was eliminated as of December 31, 2005. The impact of the additional months of activity on the Company’s 2005 quarterly and annual consolidated financial statements was not significant.8
Stepan Philippines Inc. owns and operates a manufacturing facility, which produces surfactants that are sold in the Philippines and Southeast Asia. The Company and its partner each hold a 50 percent interest in the joint venture. The Company’s investment in Stepan Philippines Inc. is accounted for under the equity method and is included in the “Other non-current assets” caption on the Consolidated Balance Sheets. The Company’s share of Stepan Philippines Inc.’s net earnings is included in the “Income from Equity in Joint Venture” line of the Consolidated Statements of Income.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less from the date of purchase to be cash equivalents.
Concentration of Credit Risks
The Company grants credit to its customers who are widely distributed across the Americas, Europe and Asia. The Company does not have any one customer whose business represents more than 10 percent of the Company’s consolidated revenue. There is no material concentration of credit risk.
Inventories
Inventories are valued at cost, which is not in excess of market value, and include material, labor and plant overhead costs. The last-in, first-out (LIFO) method is used to determine the cost of the Company’s domestic inventories. The first-in, first-out (FIFO) method is used for all other inventories. Inventories priced at LIFO as of December 31, 2006 and 2005, amounted to 77 and 78 percent of total inventories, respectively.
Property, Plant and Equipment
Depreciation of physical properties is provided on a straight-line basis over the estimated useful lives of various assets. Lives used for calculating depreciation are generally 30 years for buildings and 15 years for building improvements. For assets classified as machinery and equipment, lives generally used for calculating depreciation expense are from ten to 15 years for manufacturing equipment, from five to ten years for furniture and fixtures, from three to five years for vehicles and from three to ten years for computer equipment and software. Manufacturing of chemicals is capital intensive with over 90 percent of the assets included in machinery and equipment representing manufacturing equipment. Major renewals and betterments are capitalized in the property accounts, while maintenance and repairs ($27,940,000, $28,114,000, and $24,444,000 in 2006, 2005 and 2004, respectively), which do not renew or extend the life of the respective assets, are charged to operations currently. 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.
Included in the computer equipment and software component of machinery and equipment within property, plant and equipment are costs related to the acquisition and
9
development of internal-use software. Capitalized costs include external direct costs of materials and services consumed in obtaining and developing the software. For development projects where major internal resources are committed, payroll and payroll-related costs incurred during the application development phase of the project are also capitalized. The capitalized costs are amortized over the useful lives of the software, which are generally three to ten years. Costs incurred in the preliminary project phase are expensed.
Interest charges on borrowings applicable to major construction projects are capitalized.
Operating assets are written down to fair value whenever an impairment review indicates that the carrying value cannot be recovered on an undiscounted cash flow basis.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers, at which time title and risk of loss pass to the customer. For arrangements where the Company consigns product to a
Resellercustomer location, revenue is recognized when the customer uses the inventory. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due to customers are estimated and recorded in the same period as the sales to which the discounts relate and reported as reductions of revenue in the Consolidated Statements of Income.Cost of sales comprises raw material costs, including inbound freight expense to deliver the raw materials, manufacturing plant labor expenses and various manufacturing overhead expenses, which include utility, maintenance, operating supply, amortization and manufacturing asset depreciation expenses. Cost of sales also includes outbound freight expenses, purchasing and receiving costs, quality assurance expenses, inter-plant transfer costs and warehouse expenses.
Marketing expense comprises salary and the related fringe benefit expenses for marketing and sales personnel and operating costs, such as outside agent commissions, automobile rental and travel-related expenses, which support the sales and marketing functions. Bad debt charges and any depreciation expenses related to marketing assets (e.g. computers) are also classified as marketing expense.
Administrative expense comprises salary and the related fringe benefit expenses and operating costs for the Company’s various administrative functions, which include information services, finance, legal, and human resources. Compensation expense related to the Company’s deferred compensation plans and legal and environmental remediation expenses are also classified as administrative expense.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed in cost of sales or capitalized as appropriate. Expenditures that mitigate or prevent environmental contamination and that benefit future operations are capitalized. Capitalized expenditures are depreciated generally utilizing a 10 year life. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed. Liabilities are recorded when environmental assessments and/or remedial efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within the
10
range is a better estimate than any other amount, the minimum is accrued. Some of the
Vendor's Products." Issue No. 00-25 provides guidance regardingfactors on which thereportingCompany bases its estimates include information provided by feasibility studies, potentially responsible party negotiations and the development ofconsideration given byremedial action plans. Because reported liabilities are recorded based on estimates, actual amounts could differ from those estimates. Legal costs related to environmental matters are expensed as incurred. See Note 14.Goodwill and Other Intangible Assets
Intangible assets include patents, agreements not to compete, trademarks, customer lists and goodwill, all of which were acquired as part of business acquisitions. The Company separately identifies intangible assets other than goodwill and amortizes them in accordance with their useful lives, generally ranging from five to 15 years. Goodwill is not amortized. Goodwill is subject to annual tests for impairment. Intangible assets are tested for impairment when events indicate that an impairment may have occurred. At December 31, 2006, there was no impairment of goodwill or other intangible assets. For more details see Note 3.
Research and Development Costs
The Company’s research and development costs are expensed as incurred. These expenses are aimed at discovery and commercialization of new knowledge with the intent that such effort will be useful in developing a
vendornew product or in bringing about a significant improvement to an existing product or process. Total expenses were $18,850,000, $18,292,000 and $16,005,000 in 2006, 2005 and 2004, respectively. The balance of expenses reflected on the Consolidated Statements of Income relates to technical services, which include routine product testing, quality control and sales support service.Income Taxes
The provision for income taxes includes federal, foreign, state and local income taxes currently payable and those deferred because of temporary differences between the financial statement and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using enacted marginal tax rates. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a
resellertax benefit will not be realized. Deferred income tax expenses or credits are based on the changes in the asset or liability from period to period. See Note 7.Translation of Foreign Currencies
Assets and liabilities of consolidated foreign subsidiaries are translated into U.S. dollars at exchange rates in effect at year end. The resulting translation adjustments are included in stockholders’ equity. Revenues and expenses for the consolidated foreign subsidiaries and equity income or losses for the Company’s unconsolidated Philippines joint venture are translated at average exchange rates prevailing during the year. Gains or losses on foreign currency transactions are reflected in the “Other, net” caption of the
vendor's products. This issue requires certain considerations from vendorConsolidated Statements of Income. The foreign exchange gains and losses recognized by year were $64,000 gain in 2006, $76,000 gain in 2005 and $103,000 loss in 2004.11
Stock-Based Compensation
On January 1, 2006, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 123(R),Share-Based Payment, which replaced SFAS No. 123,Accounting for Stock-Based Compensation, and superseded Accounting Principles Board (APB) Opinion No. 25,Accounting for Stock Issued to
a resellerEmployees. The accounting standard applies to new awards and to awards modified, repurchased or cancelled after the adoption date and to the unvested portion of awards outstanding as of thevendor's productsadoption date. SFAS No. 123(R) requires the fair value of all share-based payment transactions to beviewed: (a) as a reduction of the selling prices of the vendor's products and, therefore, recorded as a reduction of revenue whenrecognized in thevendor'sfinancial statements. Prior to January 1, 2006, the Company used the intrinsic value method of APB Opinion No. 25, which resulted in the recognition of no stock-based compensation expense. The Company elected to adopt the new accounting standard using the modified prospective application method. Because prior period financial statements are not restated, financial results are not comparable as reported. The following table reconciles the actual net income and earnings per share results for the years ended December 31, 2005 and 2004, to pro forma results for the same periods, as if the Company had applied the fair value recognition provisions of SFAS No. 123 for periods prior to January 1, 2006. In December 2004, the Company’s Board of Directors approved the immediate acceleration of the vesting periods for most of the stock options that were unvested at that time. As a result, there were very few unvested stock options outstanding throughout 2005, which accounts for the large decline in pro forma compensation expense from 2004 to 2005.
(In thousands, except per share amounts)
For the Years Ended
December 312005 2004 Net income, as reported
$ 13,159 $ 10,324 Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards,
net of related tax effects
30 1,517 Net income, pro forma
$ 13,129 $ 8,807 Earnings per share:
Basic — as reported
$ 1.37 $ 1.06 Basic — pro forma
$ 1.37 $ 0.89 Diluted — as reported
$ 1.35 $ 1.05 Diluted — pro forma
$ 1.35 $ 0.89 See Note 9 for detailed information about the Company's stock-based compensation.
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Earnings Per Share
Basic earnings per share amounts are computed based on the weighted-average number of common shares outstanding. Net income used in computing basic earnings per share has been reduced by dividends paid to preferred stockholders. Diluted earnings per share amounts are based on the increased number of common shares that would be outstanding assuming the exercise of certain outstanding stock options (under the treasury stock method), the conversion of the convertible preferred stock, when such conversion would have the effect of reducing earnings per share, and directors’ stock awards. See Note 16.
Comprehensive Income
Comprehensive income includes net income and all other non-owner changes in equity that are not reported in net income. For the years ended December 31, 2006, 2005 and 2004, the Company’s comprehensive income included net income, foreign currency translation gains and losses, unrealized gains and losses on investment securities and defined benefit pension liability adjustments. Comprehensive income is disclosed in the Consolidated Statements of Stockholders’ Equity.
Accumulated other comprehensive loss as reported in the Consolidated Balance Sheets at December 31, 2006 and 2005, comprised the following:
(Dollars in thousands)
December 31 2006 2005 Foreign currency translation gains/(losses)
$ 966 ($ 4,839 ) Unrealized gains on securities (net of income taxes of $360 in 2006 and $282 in 2005)
550 426 Defined benefit pension liability adjustments
(net of income taxes of $9,751 in 2006 and $12,435 in 2005)
(15,808 ) (19,454 ) Total accumulated other comprehensive loss
($ 14,292 ) ($ 23,867 ) Segment Reporting
The Company reports financial and descriptive information about its reportable operating segments. Operating segments are components of the Company that have separate financial information that is regularly evaluated by the chief operating decision maker to assess segment performance and allocate resources. The Company discloses segment revenue, operating income, assets, capital expenditures and depreciation and amortization expenses. Enterprise-wide financial information about the revenues derived from the Company’s products, the geographic locations in which the Company earns revenues and holds assets is also disclosed. See Note 15.
13
Derivative Instruments
Derivative instruments are recognized on the balance sheet as either an asset or a liability measured at fair value. Changes in fair value are recognized currently in earnings or in other comprehensive income if specific hedge criteria are met. Special accounting for qualifying hedges allows a derivative instrument’s gains and losses to offset related results on the hedged item in the statement of income, to the extent effective. If a transaction is designated to receive hedge accounting, the Company establishes at the inception of the hedge the method it will use for assessing the effectiveness of the hedge and the measurement approach for determining the ineffective aspect of the hedge.
The Company has limited derivative transactions. Company policy prohibits the use of financial instruments for trading or
(b)speculative purposes. The Company does, however, enter into forward contracts to minimize exposure related to rising natural gas prices. The Company may contract up to 100 percent of its forecasted natural gas requirements. Because the Company anticipates taking delivery of the gas for use in its manufacturing operations, the forward contracts qualify for the normal purchase exception of SFAS No. 133, as amended. As a result, the contracts are not accounted for as derivative instruments. The cost of the natural gas is charged to expense at the time the gas is delivered and used. To the extent forecasts are adjusted resulting in contracted volume exceeding forecasted volume, which is generally insignificant, the excess contracted volume is accounted for as acost incurred byderivative instrument and, accordingly, marked to market through earnings at thevendorapplicable measurement date. At December 31, 2006, the Company had open forward contracts forassets or services received fromthereseller and, therefore, recorded aspurchase of 0.7 million dekatherms of natural gas in 2007 at a cost of $5,988,000.The Company’s foreign subsidiaries periodically use short-term forward exchange contracts to limit the exposure of certain foreign currency transactions and balances to fluctuating exchange rates. At December 31, 2006, the Company’s French subsidiary had one forward contract for the January 2007 purchase of $500,000.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48 (FIN 48),Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109,Accounting for Income Taxes. The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or
an expense when recognizedexpected to be taken, inthe vendor's income statement. Issue No. 00-25a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties accounting in interim periods, disclosure and transition. The interpretation is effective for fiscal years beginning after December 15,2001.2006. TheCompany's accounting policies are currently consistent withCompany continues to evaluate theguidance provided inimpact of adopting FIN 48. At thisissue. Therefore,point, the Company does not believe that the adoption ofIssue No.00-25 is not expected toFIN 48 will havean impacta material effect onthe Company'sits financial position,orcash flows and results of operations.In
June 2001,September 2006, the FASB issued SFAS No.141, "Business Combinations"157,Fair Value Measurements. This statement defines fair value, provides a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. The guidance in the new standard is applicable in circumstances where other accounting pronouncements mandate or permit fair value measurements. SFAS No.142, "Goodwill and Other Intangible Assets,"157, which is effective for financial14
statements issued for fiscal years beginning after
DecemberNovember 15,2001, for acquisitions entered into prior to June 30, 2001, and effective immediately for acquisitions entered into after June 30, 2001. SFAS No. 141 requires the use of the purchase method of accounting for all transactions initiated after June 30, 2001. SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets subsequent to their acquisition. The2007, does not require any newstandard establishes that goodwill is no longer to be amortized. Instead, goodwill will be tested for impairment by applying a fair-value-based test each year, and more frequently, if circumstances indicate a possible impairment. If the carrying amount exceeds theimpliedfair value measurements. The Company is in the process ofthat goodwill, an impairment loss is recognized. Equity-method goodwill is not, however, subject todetermining thenew impairment rules; the impairment guidance in existing rules for equity-method investments continues to apply. The standard also establishes new accounting guidelines for intangible assetseffect thatare determined to have an indefinite useful life. These assets are no longer subject to amortization, but must be tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. If the carrying amount of an intangible asset exceeds the fair value, an impairment loss must be recognized in an amount equal to that excess. Any impairment as a result of initialadoption of SFAS No.142157 will have on its financial position, cash flows and results of operations.In September 2006, the FASB issued SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. This statement amends certain requirements set forth in previous pension and postretirement accounting standards. SFAS No. 158 requires that the overfunded or underfunded status of a defined benefit postretirement plan be
recordedrecognized asa cumulative effectan asset or liability in the statement ofchangesfinancial position. Changes inaccounting principles. The Company has appliedtheprovisionsfunded status are to be recognized in comprehensive income. This requirement is effective for fiscal years ending after December 15, 2006. Adoption of SFAS No.141 and158 did not have an effect on the Company’s results of operations or cash flows. Furthermore, the adoption of the new standard did not have a significant effect on the Company’s financial position. See Note 11. In addition to the foregoing requirement, SFAS No.142158 mandates, with limited exceptions, that the funded status of a defined benefit postretirement plan be measured as of the date of an entity’s year-end statement of financial position. The Company already complies with this requirement.In September 2006, the SEC released Staff Accounting Bulletin (SAB) No. 108,Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.SAB No. 108 provides guidance regarding the methodology for quantifying and evaluating the materiality of financial statement misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Application of the guidance in SAB No. 108 did not have a material effect on the Company’s financial position, cash flows or results of operations.
In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities.SFAS No. 159 expands the scope of what entities may carry at fair value by offering an irrevocable option to record many types of financial assets and liabilities at fair value. Changes in fair value would be recorded in an entity’s income statement. This accounting standard also establishes presentation and disclosure requirements that are intended to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for the
September 13, 2001, acquisition of Manro Performance Chemicals in Stalybridge, UK (see Note 3, Acquisitions).Company on January 1, 2008. Earlier application is permitted under certain circumstances. TheprovisionsCompany will begin to assess the impact, if any, that the adoption of SFAS No.142 that apply to acquisitions made prior to June 30, 2001, were159 will have on its financial position, cash flows and results of operations.2. Asset Retirement Obligations
The Company adopted
on January 1, 2002.FIN 47,Accounting for Conditional Asset Retirement Obligations, effective December 31, 2005. As a result, the Companystopped recognizing approximately $0.6 millionrecorded a liability for the eventual, future disposal ofgoodwill amortization expense in 2002.asbestos at the Company’s various locations. TheCompany has also completed the impairment test of goodwill and intangible assets. Results of this test indicated no impairment at January 1, 2002. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143, which is effective for fiscal years beginning after June 15, 2002, supersedes previous guidance for financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associatedasset retirementcosts. The statement applies to legal obligations associated withobligation reflects theretirement of long-lived assets that result from the acquisition, construction, development and/or the normal operation of a long-lived asset. The Company is evaluating the effect of this standard on its financial statements. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets". This statement addresses financial accountingspecial handling andreporting for the impairment ordisposal oflong-lived assets and supersedes SFAS No. 121, "Accounting forasbestos as set forth by theImpairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 144 was effective January 1, 2002. Adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities". The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002. Based on the information currently available, adoption of this standard is not expected to have an impact on the Company's financial position or results of operations. Reclassifications Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform to the 2001 presentation.2. Restatement Subsequent to the issuance of its financial statements for the year ended December 31, 2001, the managementregulations of the various countries in which the Companydetermined that the accounting treatment that had previously been affordedoperates. The asbestos is primarily used tothe deferred compensation arrangements entered into with its managersinsulate storage anddirectorsprocessing tanks, reactors, boilers and infrastructure assets, such as flooring, walls and ceilings. The impact of adopting FIN 47 wasnot ina non-cash after-tax charge of $370,000 against income for 2005. In accordance with therequirementsguidance of FIN 47, theconsensus reached bycharge for theEITFcumulative effect of initially applying theFASB in issue No. 97-14, "Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested". This consensus requires that assets and liabilities of the deferred compensation plan be presented separately on the balance sheet; that fluctuations in asset values should result in compensation expense or income; and that, based on the categories of assets underlying the plan, investment income and expense should be recorded in the income statement and unrealized market appreciation should beinterpretation was reported as acomponentchange in accounting principle in the Consolidated15
Statements of
other comprehensiveIncome. The effect on 2005 operating income was not material. The asset retirement obligation was $539,000 andincluded in stockholders' equity. Historically,$604,000 at December 31, 2006 and 2005, respectively.Below is a reconciliation of the
Company had recordedJanuary 1, 2006, and December 31, 2006, carrying values of theassetsCompany’s asset retirement obligations:
(In thousands)
Asset retirement obligation, January 1
$ 604 Liabilities incurred in 2006
— Liabilities settled in 2006
(88 ) Accretion expense
23 Asset retirement obligation, December 31
$ 539 3. Goodwill and
liabilities relatedOther Intangible AssetsThe Company’s net carrying values of goodwill were $7,841,000 and $7,414,000 as of December 31, 2006 and December 31, 2005, respectively. The entire amount of goodwill relates to the
plans on asurfactants’ reportable segment. The change in netbasis whencarrying value resulted from theawards were madeeffects of currency translation.The following table reflects the components of all other intangible assets, which all have finite lives, as of December 31, 2006 and
did not recognize2005. The changes inasset value in income. As a result,theconsolidated financial statementsintangible assets’ carrying amounts, except non-compete agreements, were due to the effects of currency translation.
(In thousands)
Gross Carrying
AmountDecember 31
Accumulated
AmortizationDecember 31
2006 2005 2006 2005 Other Intangible Assets:
Patents
$ 2,000 $ 2,000 $ 1,133 $ 1,000 Trademarks
5,510 5,512 3,279 2,916 Customer lists
4,806 4,660 4,155 3,655 Know-how(a)
8,484 8,457 4,873 4,283 Non-compete agreements
— 2,381 — 2,381 Total
$ 20,800 $ 23,010 $ 13,440 $ 14,235
(a) 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. 16
Aggregate amortization expense for the years ended December 31,
2001, 20002006 and1999 have been restated from the amounts previously reported to give effect to the correction of this accounting error. A summary2005, was $1,509,000 and $1,696,000, respectively. Estimated amortization expense for identifiable intangibles assets for each of thesignificant effects of the restatementfive succeeding fiscal years is as follows:As of December 31, 2001:
As Previously (Dollars in thousands) Reported Adjustments As Restated ---------- ----------- -----------Assets Deferred income taxes $ 10,684 $(1,874) $ 8,810 Long term investments -- 7,674 7,674 Liabilities Deferred income taxes $ 35,040 $(6,437) $ 28,603 Deferred compensation - current and long-term -- 17,615 17,615 Stockholders' Equity Additional paid-in capital $ 16,893 $ (362) $ 16,531 Accumulated other comprehensive loss (14,800) (1,070) (15,870) Retained earnings 142,110 2,548 144,658 Treasury stock (8,659) (6,494) (15,153)As of December 31, 2000:
As Previously (Dollars in thousands) Reported Adjustments As Restated ---------- ----------- -----------Assets Deferred income taxes $ 10,866 $(2,343) $ 8,523 Long term investments -- 8,005 8,005 Liabilities Deferred income tax $ 39,170 $(6,858) $ 32,312 Deferred compensation - current and long-term -- 17,637 17,637 Stockholders' Equity Additional paid-in capital $ 13,343 $ (375) $ 12,968 Accumulated other comprehensive loss (12,402) (626) (13,028) Retained earnings 133,308 2,334 135,642 Treasury stock (4,071) (6,450) (10,521)For the year ended December 31, 2001:
As (Dollars and shares in thousands,except Previously per share amounts) Reported Adjustments As Restated ---------- ----------- -----------Net income $16,152 $ (80) $16,072 Net Income Per Common Share Basic $ 1.66 $0.07 $ 1.73 Diluted 1.59 0.06 1.65 Shares Used to Compute Net Income Per Share Basic 9,249 (412) 8,837 Diluted 10,133 (412) 9,721 Other Comprehensive Loss $ 2,398 $ 444 $ 2,842For the year ended December 31, 2000:
As (Dollars and shares in thousands, except Previously per share amounts) Reported Adjustments As Restated ---------- ----------- -----------Net income $15,008 $ 44 $15,052 Net Income Per Common Share Basic $ 1.52 $0.07 $ 1.59 Diluted 1.47 0.06 1.53 Shares Used to Compute Net Income Per Share Basic 9,355 (407) 8,948 Diluted 10,236 (407) 9,829 Other Comprehensive Loss $ 1,771 $ 604 $ 2,375For the year ended December 31, 1999:
As (Dollars and shares in thousands, except Previously per share amounts) Reported Adjustments As Restated ---------- ----------- -----------Net income $22,129 $ 596 $22,725 Net Income Per Common Share Basic $ 2.22 $0.15 $ 2.37 Diluted 2.08 0.13 2.21 Shares Used to Compute Net Income Per Share Basic 9,592 (360) 9,232 Diluted 10,632 (360) 10,272 Other Comprehensive Loss $ 1,581 $ 22 $ 1,6033. Acquisitions On September 13, 2001, the Company acquired the stock of Manro Performance Chemicals Limited based in Stalybridge, UK, and changed its name to Stepan UK Limited. Manro Performance Chemicals Limited manufactures surfactants for a wide range of customers, and specializes in anionic surfactants, hydrotropes and acid catalysts.The acquisition was accounted for as a purchase in accordance with SFAS No. 141. The acquisition cost was $24.6 million, which was $1.2 million in excess of the fair value of Manro Performance Chemicals Limited net assets. The $1.2 million excess acquisition cost over net assets was recorded as goodwill, which in accordance with SFAS No. 142, will not be amortized. The purchase price allocation was finalized in the first half of 2002. This acquisition was funded through the Company's committed lines of credit. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of the acquisition. At September 13, 2001 (unaudited) --------------------------------------- (Dollars in thousands) Current assets $13,937 Property, plant and equipment 17,950 Goodwill 1,211 ------- Total assets acquired $33,098 ======= Current liabilities $ 8,458 Total liabilities assumed 8,458 ------- Net assets acquired $24,640 ======= Following are the unaudited pro forma financial results prepared under the assumption that the acquisition of Manro Performance Chemicals Limited had been completed at the beginning of the year 2000. These pro forma financial results include the assumption that the acquisition price of $24.6 million was funded through the Company's committed lines of credit. Applied weighted average interest rates were 6.97 percent in 2000 and 4.63 percent in 2001.(Dollars and shares in thousands, except per share Twelve Months Ended amounts) December 31 ------------------- 2001 2000 -------- -------- Net Sales $743,369 $741,097 Income Before Income Taxes $ 27,273 $ 23,154 Net Income $ 16,994 $ 14,239 Net Income Per Common Share: Basic $ 1.83 $ 1.50 ======== ======== Diluted $ 1.75 $ 1.45 ======== ======== Shares used to compute Earnings Per Common Share: Basic 8,837 8,948 ======== ======== Diluted 9,721 9,829 ======== ======== These pro forma statements represent the Company's determination of adjustments associated with the purchase of Manro Performance Chemicals Limited and are based upon available information and certain assumptions that the Company believes to be reasonable. Consequently, the actual results may differ from the Pro Forma results.
(In thousands)
For year ended 12/31/07
$ 1,243 For year ended 12/31/08
$ 1,139 For year ended 12/31/09
$ 1,116 For year ended 12/31/10
$ 1,111 For year ended 12/31/11
$ 1,111 4. Inventories
The composition of inventories
wasis as follows:December 31 (Dollars in thousands) 2001 2000 ----------------- Finished products $33,932 $37,560 Raw materials 25,398 19,453 ------- ------- Total inventories $59,330 $57,013 ======= =======
December 31 (Dollars in thousands)
2006 2005 Finished products
$ 56,128 $ 48,154 Raw materials
26,709 28,245 Total inventories
$ 82,837 $ 76,399 If the first-in, first-out (FIFO) inventory valuation method had been used for all inventories, inventory balances would have been approximately
$7,500,000$24,555,000 and$8,900,000$21,259,000 higher than reported at December 31,20012006, and2000, respectively.5. Debt Debt was composed of the following:December 31,------------------- (Dollars in thousands) Maturity Dates 2001 2000 --------------- -------- -------- Unsecured promissory notes 6.59% 2003 - 2013 $ 30,000 $ 30,000 7.77% 2002 - 2010 24,545 27,272 7.22% 2002 - 2007 18,000 21,000 7.69% 2002 -2005,8,000 10,000 9.70% 2002 - 2003 1,667 2,667 Unsecured bank debt 2003 35,200 13,000respectively.5. Debt
of foreign subsidiaries payable in foreign currency 2002 -Debt comprises the following:
(Dollars in thousands)
Maturity Dates December 31 2006 2005 Unsecured private placement notes
5.69%
2012-2018 $ 40,000 $ 40,000 6.86%
2009-2015 30,000 30,000 6.59%
2007-2012 16,364 19,091 7.77%
2007-2008 5,455 8,182 Unsecured U.S. bank debt
2011 9,400 — Debt of foreign subsidiaries
Secured bank term loans, foreign Currency
2007-2010 18,737 22,315 Other, foreign currency
2007-2015 11,208 6,134 Total Debt
131,164 125,722 Less current maturities
23,761 16,777 Long-term debt
$ 107,403 $ 108,945 17
During 2006,
2,921 2,113 -------- -------- Total debt 120,333 106,052 Less current maturities 10,745 9,586 -------- -------- Long-term debt $109,588 $ 96,466 ======== ======== Unsecured bank debt at December 31, 2001, consisted of borrowings underthe Company negotiated a new, committed $60,000,000 revolving credit agreement, withinteresta term of five years, and simultaneously cancelled a similar agreement that would have expired in 2007. As of December 31, 2006, the Company had borrowings totaling $9,400,000 on this new loan agreement. During 2006, the Company borrowed under this agreement at varying rates,averaging 3.88 percent during the year.which averaged 5.91 percent. The revolving credit agreement requires acommitmentfacility feeto be paidon theunused portion oftotal commitment that is based on thecommitment, which averaged 0.13 percent during the year.Company’s leverage ratio. Periodically, theCompany alsocompany had other borrowings under notes payable to U.S. banksunderfor which there were no outstanding balances at December 31,20012006 or 2005.The debt of foreign subsidiaries consists mostly of bank term loans to Stepan Europe, Stepan Mexico and
2000.to the Company’s China joint venture, all in local currencies. The European bank term loans have scheduled maturities through 2010 and bear interest at 90-day EURIBOR plus 1.8 percent. The Mexican bank term loan has scheduled maturities through 2009, and bears interest at 10.35 percent. The China joint venture has bank term loans totaling $2,562,000 that mature through 2008 and short-term loans totaling $1,793,000, both in local currency, with interest averaging 5.79 percent. The Company guarantees its pro rata share (55 percent) of the China joint venture’s bank debt. Other foreign currency debt is composed primarily of borrowings under uncommitted lines of credit to the Company’s European subsidiaries. Except for the debt of the Company’s China joint venture, the foreign debt that is currently outstanding is secured by the assets of the respective entities but is not guaranteed by the U.S. parent.The various loan agreements contain provisions, which, among others, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends.
Unrestricted retained earnings were $48,987,000 and $45,849,000 at December 31, 2001 and 2000, respectively.The Company is in compliance withall debt covenants.its U.S. loan agreements as of December 31, 2006. Unrestricted retained earnings were $32,219,000 and $32,520,000 at December 31, 2006 and 2005, respectively.Due to European severance costs and changes to French pension accounting standards, the Company’s French subsidiary was out of compliance with its loan agreements as of December 31, 2006. The Company obtained a compliance waiver from its French banks.
Debt at December 31,
2001,2006, matures as follows:$10,745,000$23,761,000 in2002; $46,579,0002007; $12,615,000 in2003; $10,709,0002008; $10,744,000 in2004; $10,709,0002009; $7,733,000 in2005; $8,582,0002010; $16,420,000 in20062011 and$33,009,000$59,891,000 after2006.2011.The fair value of the
Company'sCompany’s fixed-rate debt at December 31, 2006, including current maturities, was estimated to be$87.1 million$94,162,000 compared to a carrying value of$83.3 million as of December 31, 2001.$92,801,000.Net interest expense for the years ended December 31 was composed of the following:
(Dollars
(Dollars in Thousands)
2006 2005 2004 Interest Expense
$ 9,063 $ 8,065 $ 7,567 Interest Income
(178 ) (115 ) (157 ) 8,885 7,950 7,410 Capitalized Interest
— (149 ) (173 ) Interest, Net
$ 8,885 $ 7,801 $ 7,237 18
The Company maintains standby letters of credit under its workers’ compensation insurance agreements and for other purposes as needed from time to time. The insurance letters of credit are renewed annually and amended to the amounts required by the insurance agreements. As of December 31, 2006, the Company had a total of $1,411,000 in
thousands) 2001 2000 1999 ------ ------ ------ Interest expense $7,858 $8,724 $8,661 Interest income (229) (124) (211) Investment income (265) (742) (695) ------ ------ ------ 7,364 7,858 7,755 Capitalized interest (461) (272) (74) ------ ------ ------ Interest expense, net $6,903 $7,586 $7,681 ====== ====== ======outstanding standby letters of credit. 6. Leased Properties
The Company leases certain property and equipment (primarily transportation equipment, buildings and
computer equipment)land) under operatingleases.leases, which are denominated in local currencies. Total rental expense was$4,174,000, $4,242,000$4,545,000, $3,987,000, and$3,661,000$3,936,000 in2001, 20002006, 2005 and1999,2004, respectively.MinimumConsolidated Company minimum future rental payments under operating leases with terms in excess of one year as of December 31,
2001,2006, are:(Dollars
(Dollars in thousands)
Year Amount 2007 $ 3,117 2008 2,863 2009 2,165 2010 1,950 2011 1,456 Subsequent to 2011 7,893 Total minimum future rental payments $ 19,444 In January 2005, the Company’s Brazilian subsidiary entered into an agreement to purchase a subsidiary of a multinational cleaning products company for a minimal purchase price. The purchase contract included a 10-year capital lease agreement under which $463,000 was paid for the first 24 months with gross remaining payments due of $2,136,000. At the end of the lease agreement, all of the relevant assets will be transferred and assigned to the Company. The assets and liabilities under the capital lease were recorded at the present value of the minimum lease payments. The leased assets are recorded under the property, plant and equipment caption of the Condensed Consolidated Balance Sheet. The capital lease liability is recorded under the other non-current liabilities caption of the Condensed Consolidated Balance Sheet. The amortization of the assets held under the capital lease is included in
thousands) Year Amount ---- ------- 2002 $ 2,591 2003 2,168 2004 1,742 2005 1,546 2006 1,259 Subsequent to 2006 6,947 ------- Totaldepreciation expense for 2006. Following is a summary of property held under the capital lease:
(Dollars in thousands)
December 31, 2006 Machinery and equipment
$ 961 Building
301 Land
99 1,361 Less: Accumulated depreciation
(217 ) Total property, net
$ 1,144 19
The minimum future
rentallease payments$16,253 =======under the capital lease as of December 31, 2006, for each of the next five years and in the aggregate are:
(Dollars in thousands)
Year Amount 2007 $ 267 2008 267 2009 267 2010 267 2011 267 Subsequent to 2011 801 Total minimum lease payments
$ 2,136 Less: Amount representing interest
(976 ) Capital lease liability at December 31, 2006
$ 1,160 7. Income Taxes
The
provisionprovisions for taxes on income and the related income before taxeswereare as follows:(Dollars in thousands) 2001 2000 1999 ------- ------- ------- Taxes on Income Federal Current $ 9,036 $ 9,901 $ 6,269 Deferred (2,596) (3,417) 2,916 State Current 1,393 1,700 1,181 Deferred (344) (456) 682 Foreign Current 1,681 2,104 1,983 Deferred 556 (409) 12 ------- ------- ------- Total $ 9,726 $ 9,423 $13,043 ======= ======= ======= Income before Taxes Domestic $21,277 $20,922 $30,102 Foreign 4,521 3,553 5,666 ------- ------- ------- Total $25,798 $24,475 $35,768 ======= ======= =======Deferred
(Dollars in thousands)
2006 2005 2004 Taxes on Income
Federal
Current
$ 4,765 $ 6,153 $ 5,912 Deferred
(4,931 ) (4,483 ) (2,477 ) State
Current
1,175 821 707 Deferred
(1,325 ) (543 ) (558 ) Foreign
Current
5,789 2,602 2,011 Deferred
(4,573 ) (380 ) (1,275 ) Total
$ 900 $ 4,170 $ 4,320 Income before Taxes and Minority Interest
Domestic
$ 353 $ 7,673 $ 12,212 Foreign
7,036 9,973 2,421 Total
$ 7,389 $ 17,646 $ 14,633 20
The variations between the effective and statutory U.S. federal income
taxes have not been provided on $34,534,000tax rates are summarized as follows:
2006
2005
2004
(Dollars in thousands)
Amount % Amount % Amount % Federal income tax provision at statutory tax rate
$ 2,586 35.0 $ 6,176 35.0 $ 5,122 35.0 State tax provision (benefit) on income less applicable federal tax benefit
(98 ) (1.3 ) 181 1.0 97 0.7 Foreign income taxed at different rates(a)
(1,246 ) (16.9 ) (1,270 ) (7.2 ) (112 ) (0.8 ) Effect of equity in foreign joint venture
452 6.1 440 2.5 (555 ) (3.8 ) Domestic production activities deduction
(134 ) (1.8 ) (223 ) (1.3 ) — — Repatriation of foreign earnings
— — 485 2.7 700 4.8 Charitable contribution of intellectual property
— — — — (980 ) (6.7 ) U.S. tax credits(b)
(1,964 ) (26.6 ) (1,899 ) (10.8 ) (265 ) (1.8 ) Non-deductible expenses and other items, net(c)
1,304 17.7 280 1.7 313 2.1 Total income tax provision
$ 900 12.2 $ 4,170 23.6 $ 4,320 29.5
(a) Includes the effect of changes in valuation allowances for foreign entities of $885,000, or 11.5 percent, in 2006.
(b) During 2006, the Company generated biodiesel credits of $1,601,000 compared to $1,430,000 in 2005. There were no biodiesel credits in 2004.
(c) 2006 includes $560,000 for the tax effect on the gross up of pre-tax earnings due to biodiesel credits, $398,000 in adjustments for federal income tax contingencies and $346,000 for the tax effects on various non-deductible expenses. 21
At December 31, the tax effect of
undistributedsignificant temporary differences representing deferred tax assets and liabilities is as follows:
(Dollars in thousands)
2006 2005 Deferred Tax Liabilities:
Depreciation
$ (25,754 ) $ (29,460 ) Safe harbor leases
— (235 ) Deferred Tax Liabilities
$ (25,754 ) $ (29,695 ) Deferred Tax Assets:
Pensions
$ 10,098 $ 12,445 State income tax accrual
(40 ) (114 ) Deferred revenue
2,490 1,085 Other accruals and reserves
4,508 3,325 Amortization of intangibles
342 430 Inventories
1,445 672 Legal and environmental accruals
10,090 8,805 Deferred compensation
10,365 9,020 Bad debt and rebate reserves
1,699 1,686 Subsidiaries net operating loss carryforwards
2,846 3,154 Tax credits
746 596 Other
4 4 Deferred Tax Assets
$ 44,593 $ 41,108 Valuation Allowance
$ (1,458 ) $ (2,459 ) Net Deferred Tax Assets
$ 17,381 $ 8,954 Reconciliation to Consolidated Balance Sheet:
Current deferred tax assets
$ 10,362 $ 8,239 Non-current deferred tax assets (in other non-current assets)
9,065 3,222 Current deferred tax liabilities (in accrued liabilities)
— (297 ) Non-current deferred tax liabilities
(2,046 ) (2,210 ) Net Deferred Tax Assets
$ 17,381 $ 8,954 Undistributed earnings of
the Company'sforeign subsidiariesor on the equity in income of its foreign joint venture.and related companies that are deemed to be permanently reinvested amounted to $51,226,000 at December 31, 2006 compared to $45,226,000 at December 31, 2005. In general, the Company reinvests earnings of foreign subsidiaries in their operations indefinitely. However, the Company will repatriate earnings from a subsidiary where excess cash has accumulated and it is advantageous for tax or foreign exchange reasons. Because of the probable availability of foreign tax credits, it is not practicable to estimate the amount, if any, of the deferred tax liability on earnings reinvested indefinitely.The variations between the effective and statutory federal income tax rates are summarized as follows:
2001 2000 1999 ------------- ------------- -------------- (Dollars in thousands) Amount % Amount % Amount % ------ ---- ------ ---- ------- ----Federal Income tax provision at statutory tax rate $9,029 35.0 $8,566 35.0 $12,519 35.0 State taxes on income less applicable federal tax benefit 682 2.6 809 3.3 1,211 3.4 Foreign income taxed at different rates 655 2.5 452 1.9 (42) (0.1) Effect of equity income from foreign joint venture (654) (2.5) (198) (0.8) (499) (1.4) Other items 14 0.1 (206) (0.9) (146) (0.4) ------ ---- ------ ---- ------- ---- Total income tax provision $9,726 37.7 $9,423 38.5 $13,043 36.5 ====== ==== ====== ==== ======= ====The net deferred tax liabilityTax loss carryforwards at December 31,
was comprised2006, amounted to $7,800,000 compared with $8,329,000 at the end of 2005. All of thefollowing: (Dollarstax loss carryforwards have an indefinite carryforward period. Tax credit carryforwards at December 31, 2006, amounted to $746,000 compared to $596,000. Of the tax credit carryforwards, $746,000 expires inthousands) 2001 2000 -------- -------- Current deferred income taxes Assets $ 9,448 $ 9,055 Liabilities (638) (532) -------- -------- Total net current deferred tax assets 8,810 8,523 Non-current deferred income taxes Assets 19,576 15,558 Liabilities (48,179) (47,870) -------- -------- Total net non-current deferred tax liabilities (28,603) (32,312) -------- -------- Net deferred tax liability $(19,793) $(23,789) ======== ========2015.22
At December 31, 2006, the Company had valuation allowances of $1,458,000, which were attributable to the tax
effectloss carryforwards in Germany and Brazil. At December 31, 2005, the Company had valuation allowances ofsignificant temporary differences representing deferred$2,459,000, which were attributable to the taxassetsloss carryforwards in Germany andliabilitiesBrazil.The Company's wholly owned subsidiary in Germany recorded sufficient earnings during 2006, to allow the Company to utilize tax loss carryforwards in the amount of $410,000 for which a valuation allowance had previously been recorded. In addition, $475,000 of Germany’s valuation allowance was
as follows: (Dollarsreleased due to anticipated increased future earnings. This adjustment more accurately reflects the Company’s estimate using the more likely than not test for the valuation allowance.Due to a favorable tax law change in
thousands) 2001 2000 -------- -------- Tax over book depreciation $(40,884) $(44,512) Safe Harbor leases (2,032) (2,329)Mexico the Company benefited from a tax reduction of $635,000 during 2006. A transitional tax rule and election available under the law change impacts how inventories and cost of goods sold are recognized for tax purposes. In order to utilize the benefit of the law change in Mexico, the favorable election was made during 2006.The reserve for tax contingencies related to issues in the U.S. and foreign locations was $1,857,000 at December 31, 2006 compared to $870,000 at December 31, 2005. This balance is the Company's best estimate of the potential liability for tax contingencies. The increase in the tax contingency reserve was primarily due to revised estimates of possible tax exposures in state and foreign jurisdictions. Inherent uncertainties exist in estimates of tax contingencies due to changes in tax law; both legislated and concluded through the various jurisdictions' tax court systems. It is the opinion of the Company's management that the possibility is remote that costs ultimately incurred in excess of those accrued, if any, will have a material adverse impact on the Company's financial statements.
In June of 2006, the FASB issued FIN 48,Accounting for Uncertainty in Income Taxes, effective for fiscal years beginning after December 15, 2006. This Interpretation is intended to clarify the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No.
87 pension accounting (2,506) (3,135) State income109,Accounting of Income Taxes, by prescribing a more-likely-than-not threshold to recognize any benefit of a taxaccrual 1,788 1,925 Deferred revenue 1,415 1,608 Book reserves deductibleposition taken or expected to be taken inother periods 21,235 21,313 Other, net 1,191 1,341 -------- -------- Net deferreda taxliability $(19,793) $(23,789) ======== ========return. Tax positions that meet the recognition threshold are reported at the largest amount that is more-likely-than-not to be realized. FIN 48 revised disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. Companies are required to assess all material open positions in all tax jurisdictions and determine the appropriate amount of tax benefits that are recognizable under FIN 48. The Company continues to evaluate the impact of adopting FIN 48. At this point, the Company does not believe that the adoption of FIN 48 will have a material effect on its financial position, cash flows and results of operations. 8.
Stockholders'Stockholders’ EquityThe
Company'sCompany’s preferred stock is convertible at the option of the holder at any time (unless previously redeemed) into shares of common stock at a conversion of 1.14175 shares of common stock for each share of preferred stock. Dividends on preferred stock accrue at a rate of $1.375 per share per annum, which are cumulative from the date of original issue. The Company may not declare and pay any dividend or make any distribution of assets (other than dividends or other distribution payable in shares of common stock) or redeem, purchase or otherwise acquire, shares23
of common stock, unless all accumulated and unpaid preferred dividends have been paid or are contemporaneously declared and paid. The preferred stock is subject to optional redemption by the Company, in whole or in part, at any time,
on or after September 1, 1997. As of September 1, 2001, the redemption price is $25.14 per share and was reduced to the minimumat a redemption price of $25 per shareon September 1, 2002,plus accrued and unpaid dividends thereon to the date fixed for redemption. Preferred stock is entitled to 1.14175 votes per share on all matters submitted to stockholders for action and votes together with the common stock as a single class, except as otherwise provided by law or the Certificate of Incorporation of the Company. There is no mandatory redemption or sinking fund obligation with respect to the preferred stock.On November 3, 2000, 400,000At December 31, 2006 and 2005, treasury stock consisted of 1,134,958 and 1,102,309 shares of common stock,
and 188,535 shares of preferred stock held in treasury were retired in accordance with the Board of Directors' authorization. Atrespectively.9. Stock-based Compensation
On December 31,
2000, treasury2006, the Company had stockconsisted of no shares of preferred stock and 590,188 shares of common stock. No retirement of treasury stock took place during 2001. At December 31, 2001, treasury stock consisted of no shares of preferred stock and 782,232 shares of common stock. 9.options outstanding under its 1992 Stock OptionPlansPlan (1992 Plan) and stock options and stock awards outstanding under its 2000 Stock Option Plan (2000 Plan) and its 2006 Incentive Compensation Plan (2006 Plan). TheCompany has three fixed2006 Plan was approved by shareholders at the Company’s annual shareholder meeting held on April 25, 2006. Stock options and stockoption plans: the 1982 Plan, the 1992 Planawards are granted to executives, key employees andthe 2000 Plan.outside directors. No furthergrantsoptions or awards may bemade under the 1982 Plan and no optionsgrantedunder the 1982 Plan remain outstanding at December 31, 2001. The 1992 Plan extends participation to directors who are not employees of the Company. It authorizes the award of up to 1,600,000 shares of the Company's common stock for stock options ("options") and stock appreciation rights ("SAR"). SARs entitle the employee to receive an amount equal to the difference between the fair market value of a share of stock at the time the SAR is exercised and the exercise price specified at the time the SAR is granted. No further grants may be madeunder the 1992 Planafter December 31, 2001.or the 2000 Plan. The20002006 Planwhich also extends participation to non-employee directors,authorizes the award of 1,000,000 shares of theCompany'sCompany’s common stock for stock options,SARstock appreciation rights and stock awards.AThe compensation cost that was charged against income for all plans was $420,000 for the year ended December 31, 2006. No stock-based compensation was charged against income for the years ended December 31, 2005 and 2004, as the Company did not begin recognizing fair value stock-based compensation expense in its financial statements until January 1, 2006, with the adoption of SFAS No. 123(R). The total income tax benefit recognized in the income statement for share-based compensation arrangements was $93,000 for the same period. The following provides information regarding the stock option and stock awardis a grant of shares ofgrants.Stock Options
Under all plans, stock
to an employee, the earnings vesting or distribution of which is subject to certain conditions established by the Compensation and Development Committee of the Board of Directors. Optionsoption awards are grantedatwith an exercise price equal to the market priceonof the Company’s stock at the date of grant.An option may not be exercised within two years fromThe market price is defined as thedateaverage ofgrantthe opening andno option will be exercisable after 10 years from the date granted. Theclosing prices for Companyaccounts for these plans under APB Opinion No. 25, under which no compensation cost has been recognized for the Company'scommon stockoption grants. Had compensation cost for options granted under these stock option plans been determined basedonthe fair value atthe grant datefor awards in 2001, 2000 and 1999 consistent with the provisionsof SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts: (Dollars in thousands, except per share data) 2001 2000 1999 ------- ------- ------- Net Income -as reported$16,072 $15,052 $22,725 Net Income - pro forma 15,147 14,052 21,868 Basic Earnings per share - as reported 1.73 1.59 2.37 Basic Earnings per share - pro forma 1.62 1.48 2.28 Diluted Earnings per share - as reported 1.65 1.53 2.21 Diluted Earnings per share - pro forma 1.56 1.44 2.14in the New York Stock Exchange – Composite Transactions. The option awards generally vest based on two years of continuous service and have 8- to 10-year contractual terms. The fair value of each optiongrantaward is estimated on the date of grant using the Black-Scholesoption-pricingoption valuation modelwithincorporating the assumptions noted in the followingweighted-average assumptions used for grants in 2001, 2000 and 1999: expected dividend yield of 2.75 percent in 2001, and 2.50 percent in 2000 and 1999.table. Expected volatility is based on the historical volatility of24.2 percent in 2001, 24.7 percent in 2000 and 26.7 percent in 1999;the Company’s stock. The Company also uses historical data to estimate the expectedlivesterm of7.5 years; andoptions granted. The risk-freeinterestrate is the U.S. Treasury note rate that corresponds to the expected option term at the date of5.14 percent in 2001, 6.72 percent in 2000 and 5.21 percent in 1999.grant.24
For the Years Ended December 31 2006 2005 2004 Expected dividend yield
3.00 % 2.80 % 2.80 % Expected volatility
23.15 % 23.10 % 22.70 % Expected life
7.9 years 7.5 years 7.5 years Risk-free interest rate
4.77 % 4.15 % 3.95 % A summary of option activity under the
status of the Company'sCompany’s stock option plansatfor the year ended December 31,2001, 2000 and 1999, and changes2006, is presented below:
Shares Weighted-
Average
Exercise PriceWeighted-
Average
Remaining
ContractualTerm
Aggregate
Intrinsic Value
($000)Options
Outstanding at January 1, 2006
1,340,719 $ 23.89 Granted
106,995 26.50 Exercised
(197,171 ) 21.15 Forfeited or expired
(32,727 ) 24.02 Outstanding at December 31, 2006
1,217,816 24.57 4.91 $ 8,652 Vested or expected to vest at December 31, 2006
1,214,456 24.56 4.90 $ 8,634 Exercisable at December 31, 2006
1,114,321 24.38 4.53 $ 8,118 The weighted-average grant-date fair values of options granted during the years
thenended December 31, 2006, 2005 and 2004 were $6.45, $5.01 and $5.58, respectively. The total intrinsic values of options exercised during the years ended December 31, 2006, 2005, and 2004 were $1,805,000, $712,000, and $1,076,000, respectively.As of December 31, 2006, there was $370,000 of total unrecognized compensation cost related to unvested stock options granted under the Company’s stock option plans. That cost is
presented as follows:
Weighted- Weighted- Weighted- Average Average Average 2001 Exercise 2000 Exercise 1999 Exercise Shares Price Shares Price Shares Price ---------- --------- ---------- --------- ---------- ---------Options outstanding, beginning of year 1,502,899 $20.49 1,222,363 $19.38 1,247,591 $18.76 Options exercised (192,650) 16.35 (113,950) 12.26 (85,250) 12.76 Options canceled (78,171) 24.48 (24,238) 25.43 (4,036) 30.97 Options granted 26,630 23.30 418,724 21.77 64,058 23.42 ---------- ---------- ---------- Options outstanding, end of year 1,258,708 20.93 1,502,899 20.49 1,222,363 19.38 ---------- ---------- ---------- Option price range $ 14.000- $ 12.563- $ 9.438- at end of year 30.969 30.969 30.969 Option price range $ 12.563- $ 9.438- $ 9.438- for exercised shares 19.750 19.750 19.750 Options available for grant at end of year 912,616 861,075 255,561 Weighted-average fair value of options granted during the year $ 6.22 $ 6.94 $ 6.98 Options exercisable 876,858 1,034,668 931,802expected to be recognized over a weighted-average period of 1.15 years. Cash received from stock option exercises under the Company’s stock option plans for the years ended December 31, 2006, 2005, and 2004 was $3,297,000, $534,000 and $718,000, respectively. The actual tax benefit realized for the tax deductions from stock option exercises totaled $685,000, $278,000, and $209,000 for the years ended December 31, 2006, 2005, and 2004, respectively.
Stock Awards
In February 2006, the Company granted, to employees, stock awards under the 2000 Stock Option Plan. These are the only such awards granted under the plan. The stock awards vest only upon the Company’s achievement of certain levels of consolidated net income and return on invested capital by the end of the specified measurement period, in this case December 31, 2008. The number of Company shares of common stock ultimately distributed, if any, is contingent upon the level of consolidated net income and return on invested capital attained. The fair value
25
of stock awards equals the grant-date market price of the Company’s common stock, discounted for the estimated amount of dividends that would not be received during the measurement period. Compensation expense is recorded each reporting period based on the probable number of awards that will ultimately vest given the projected level of consolidated net income and return on invested capital. If at the end of the measurement period the performance objectives are not met, no compensation cost is recognized and any compensation expense recorded in prior periods will be reversed. Compensation cost is currently computed based on management’s assessment that the minimum level of the performance objectives will be achieved by the end of the measurement period.
A summary of stock award activity for the year ended December 31, 2006, is presented below:
Shares Weighted-Average Grant Date
Fair Value
Unvested Stock Awards
Unvested at January 1, 2006
— — Granted
84,000 $ 23.97 Vested
— — Forfeited
2,000 $ 23.93 Unvested at December 31, 2006
82,000 $ 23.97 As of December 31, 2006, under the current Company assumption as to the number of stock award shares that will probably vest at the measurement period ended December 31, 2008, there was $314,000 of unrecognized compensation cost related to unvested stock awards. That cost is expected to be recognized over a period of 2.0 years. No stock award shares vested during the year ended December 31, 2006.
In general, it is the Company’s policy to issue new shares of its common stock upon the exercise of stock options
outstandingor the vesting of stock awards.10. Deferred Compensation and Related Investments
The Company sponsors deferred compensation plans that allow management to defer receipt of their bonuses and outside directors to defer receipt of their fees until retirement or departure from the Company or as elected. The deferred amounts are invested in mutual funds or Company common stock. The compensation expense and related deferred compensation obligation to the participants who elect deferral are recorded when the underlying compensation is earned. The deferred obligation may increase or decrease based on the performance results of investment options — a limited selection of mutual funds or Company common stock — chosen by the plan participants. The Company maintains at least enough Company common stock in treasury to cover the equivalent number of common stock shares resulting from participants electing the Company common stock investment option, which periodically requires the Company to purchase its common shares from the open market. When plan distributions are made to retired/departed participants, such distributions are made, in cash or shares of Stepan Company common stock at the option of the participant, in amounts equivalent to the payment date value of the investment choices made by the participant. Since the deferred compensation obligations
26
may be settled in cash, each reporting period the Company must record any appreciation in the value of the participant’s plan balances as additional compensation expense. Conversely, declines in the market value of the investment choices made by the participant reduce compensation expense in the periods that the market value declines. The resulting increases and reductions of compensation expense are recorded in the “Administrative” expense line of the Consolidated Statements of Income. The additional compensation expense resulting from the appreciation of the market value and earnings of the selected investment options was $3,672,000 in 2006, $2,094,000 in 2005 and $693,000 in 2004. The Company’s deferred compensation liability was $24,069,000 and $22,118,000 at December 31,
2001, is2006 and 2005, respectively.In December 2006, the Company, with prior Board of Director approval, adopted an amended and restated management incentive plan. The amendment provided participants with an irrevocable 2006 election to transfer all or a portion of their deferred compensation accounts that were attributable to pre-2007 bonuses to an alternate Company common stock investment option. The number of share equivalents credited to the participants’ accounts for this option was based on the December 31, 2006, closing price of the Company’s common stock. The share equivalents transferred to the alternate investment option can be distributed (upon a participant’s retirement or departure from the Company) only in shares of Stepan Company common stock (i.e., there can be no cash settlements of these amounts). Furthermore, such amounts cannot be transferred to the plan’s other investment options. As a result of the irrevocable 2006 election, the share equivalent amounts transferred to the participants’ deferred compensation accounts were treated as
follows:
Options Outstanding Options Exercisable ------------------------------------- ----------------------- Weighted- Average Weighted- Weighted- Number Remaining Average Number Average Range of Outstanding Contractual Exercise Exercisable Exercise Exercise Price at 12/31/01 Life Price at 12/31/01 Price - --------------- ----------- ----------- --------- ----------- ---------$14.000 270,000 2.23 $14.00 270,000 $14.00 $18.219 - $19.750 350,202 3.78 19.34 350,202 19.34 $21.750 - $30.969 638,506 7.47 24.74 256,656 28.99 --------- ------- 1,258,708 5.32 $20.93 876,858 $20.52 ========= =======10. Pension Plansequity instruments, and on December 31, 2006, $1,542,000 was reclassified from the deferred compensation liability to additional paid-in capital in the Stockholders’ Equity section of the Consolidated Balance Sheets. In addition to the irrevocable 2006 election noted above, the amended plan rules also mandate that all future deferrals of bonuses to the Company common stock investment option will all be directed to the alternate Company common stock investment option. The Company implemented this plan change to reduce some of the deferred compensation plan expense volatility as expense treatment is not required for future fluctuations in the value of these shares.The Company purchases shares of mutual funds in accordance with the mutual fund investment selections made by the participants. Such investments are classified as available-for-sale and included in “Other non-current assets” in the Consolidated Balance Sheets. These investments are recorded at cost when purchased and adjusted to their fair market values at the end of each reporting period with unrealized gains and losses recorded as direct adjustments to stockholders’ equity in “Accumulated other comprehensive loss”. If the accumulated unrealized loss for a particular mutual fund is considered other-than-temporary, the loss is reclassified out of “Accumulated other comprehensive loss” and recorded as an impairment loss in the Consolidated Statements of Income. The fair value of the affected mutual fund would then become its new cost basis for future gain/loss computations. Impairment losses, realized gains and losses from sales of mutual funds, dividend income and capital gains distributions are recorded in the “Other, net” caption under the “Other Income (Expense)” section of the Consolidated Statements of Income. The Company uses the average cost method to determine investment gains and losses.
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The aggregate fair value of the mutual fund investments and gross unrealized gains or losses related to such investments at December 31, 2006 and 2005, were as follows:
(Dollars in thousands)
2006 2005 Aggregate fair value
$ 13,648 $ 10,836 Gross unrealized gains
911 733 Gross unrealized losses
1 25 The following table displays additional information about the mutual fund investments with gross unrealized losses at December 31, 2006 and 2005:
Length of Time in Loss Position Less than 12 Months 12 Months or Greater Total (Dollars in thousands)
Fair
Value
Unrealized
LossesFair
Value
Unrealized
LossesFair
Value
Unrealized
LossesDecember 31, 2006
$ 473 $ 1 — — $ 473 $ 1 December 31, 2005
$ 2,942 $ 17 $ 241 $ 8 $ 3,183 $ 25 Dividend income and realized gains and losses from sales of mutual fund investments recorded in the Consolidated Statements of Income and unrealized gains and losses recorded directly to stockholders’ equity for the years ended December 31, 2006, 2005 and 2004, were as follows:
(Dollars in thousands)
For the Years Ended
December 312006 2005 2004 Dividend income
$ 1,026 $ 424 $ 471 Realized gains/(losses)
143 208 2 Unrealized gains (net of taxes)
124 60 242 There were no impairment losses recorded in 2006, 2005 or 2004.
11. Post Retirement Benefit Plans
Defined Benefit Plans
The Company has funded non-contributory defined benefit plans covering substantially all U.S. employees and two unfunded non-qualified defined benefit pension plans (a supplemental executive plan and an outside directors plan). There is also a funded defined benefit plan for the Company’s United Kingdom subsidiary. The benefits under these plans are based primarily on years of service and compensation levels. The Company generally funds the qualified pension plans up to the maximum amount deductible for income tax purposes.
Throughout the first half of 2006, amendments were made to four of the Company’s defined benefit pension plans: the U.S. funded salaried defined benefit pension plan, the non-qualified unfunded supplemental executive defined benefit pension plan, the Maywood, New
28
Jersey, hourly defined benefit pension plan and the Stepan United Kingdom (UK) defined benefit pension plan. The
plans'amendments, which were similar for all four plans, took effect on July 1, 2006. The Company froze the defined benefit pension plans at June 30, 2006, and, as a result, accruals for service benefits ceased as of that date. Benefits earned through June 30, 2006, are available to participants when they retire, in accordance with the terms of the plans. The noted defined benefit pension plans were replaced with Company contributions to participants’ defined contribution accounts equal to a fixed percent of base salary. This change had no impact on current retirees or former employees with vested benefits or employees who terminated or retired by June 30, 2006. The Company will continue to recognize pension expense and cash funding obligations for the frozen defined benefit plans over the remaining lives of the pension liabilities. The Company also continues to recognize pension expense for the frozen unfunded supplemental executive defined benefit plan. Details of the effects of the pension plan amendments follow.U.S. Salaried and Supplemental Executive Defined Benefit Pension Plans
In February 2006, the Company’s Board of Directors approved amendments to the Company’s U.S. funded salaried defined benefit pension plan and its non-qualified unfunded supplemental executive defined benefit pension. As a result of the announced pension plan amendments, the Company remeasured the obligations and assets
consist principallyofmarketable equity securitiesthe salaried andgovernment and corporate debt securities.supplemental executive defined benefit pension plans at February 14, 2006. Theplans' assets atassumptions used in the remeasurement of the pension plan obligations were the same as those used in the December 31,2001 and 2000, included $10,239,000 and $10,023,000, respectively,2005, measurement. The effects of theCompany's common stock. Net 2001, 2000plan amendments were reductions of $14,310,000 and1999 periodic pension cost for$493,000 in theplans consisted of the following: (Dollars in thousands) 2001 2000 1999 ------- ------- ------- Service cost $ 2,273 $ 2,119 $ 2,415 Interest cost onprojectedbenefit obligation 4,434 4,190 3,813 Expected return on plan assets (6,233) (5,812) (5,156) Amortization of unrecognized net transition assets -- (557) (557) Amortization of unrecognized prior service cost 475 437 412 Amortization of unrecognized net loss(gain) (418) (477) 79 ------- ------- ------- Net pension expense(income) $ 531 $ (100) $ 1,006 ======= ======= ======= Changes inbenefit obligations for theyears endingsalaried and supplemental executive defined benefit pension plans, respectively. In addition, the amendments triggered an $111,000 curtailment loss that was recognized as a component of the net periodic benefit cost recorded for the three- month period ended March 31, 2006.Maywood, New Jersey, Hourly Defined Benefit Pension Plan
In April 2006, the hourly workers at the Company’s Maywood, New Jersey, plant ratified a new union contract, which resulted in amendments to the hourly defined benefit pension plan. The Company remeasured the obligations and assets of the Maywood hourly defined benefit pension plan at April 18, 2006. With the exception of the discount rate, which was increased from 5.75 percent to 6.25 percent, the assumptions used in the remeasurement of the pension plan obligations were the same as those used in the December 31,
2001 and 2000, were2005, measurement. The amendment triggered a $281,000 curtailment loss that was recognized asfollows: (Dollars in thousands) 2001 2000 ------- ------- Benefit obligation at beginning of year $59,714 $53,243 Service cost 2,273 2,119 Interest cost 4,434 4,190 Plan amendments 92 844 Actuarial loss 2,598 1,522 Benefits paid (2,211) (2,204) ------- ------- Benefit obligation at end of year $66,900 $59,714 ======= =======Changes in the fair value of plan assets during years 2001 and 2000 were as follows: (Dollars in thousands) 2001 2000 ------- ------- Fair value of plan assets at beginning of year $73,664 $76,249 Actual return on plan assets (8,319) (792) Employer contributions 185 411 Benefits paid (2,211) (2,204) ------- ------- Fair value of plan assets at enda component of theyear $63,319 $73,664 ======= =======net periodic benefit cost recorded for the three-month period ended June 30, 2006.Stepan UK Defined Benefit Pension Plan
In June 2006, Stepan UK pension plan trustees approved amendments to the Stepan UK defined benefit pension plan. As a result, the plan obligations and assets were remeasured at June 5, 2006. The
reconciliationdiscount rate used to measure the plan obligations was updated to a current rate ofthe funded status of the plans5.00 percent compared to 4.70 percent used to measure plan obligations at December 31, 2005. The effect of the plan amendments wasas follows: (Dollarsa $1,816,000 reduction inthousands) 2001 2000 ------- -------- Plan assets (less than) in excess of $(3,581) $ 13,950the projected benefit obligationsUnrecognized prior service cost 2,173 2,556 Unrecognized net loss(gain) 6,211 (11,359) ------- -------- Net amount recognized $ 4,803 $ 5,147 ======= ========of the Stepan UK defined benefit pension plan. No curtailment gain or loss was triggered as a result of the remeasurement.29
In December 2006, the Company adopted SFAS No. 158,Employers’ Accounting for Defined Benefit Pension and Other Post Retirement Plans.The
foregoing accumulated benefit obligation and fair valuefollowing table displays the incremental effect ofplan assets amounts include both overfunded and underfunded plans. Atapplying the new accounting standard on the individual lines of the consolidated balance sheet at December 31,2001, the projected benefit obligation, the accumulated benefit obligation2006:
(Dollars in thousands)
Before
Application of
SFAS No. 158
Adjustments After
Application of
SFAS No. 158
Other non-current assets
$ 37,369 $ (588 ) $ 36,781 Total assets
546,643 (588 ) 546,055 Accrued liabilities
53,262 (4,612 ) 48,650 Other non-current liabilities
69,997 4,577 74,574 Accumulated other comprehensive loss
(13,739 ) (553 ) (14,292 ) Total stockholders’ equity
181,339 (553 ) 180,786 30
Obligations and
fair value of plan assets for the underfunded plans were $15,508,000, $15,026,000 and $9,940,000, respectively.Funded Status at December 31
(Dollars in thousands)
United States United Kingdom 2006 2005 2006 2005 Change in benefit obligation
Benefit obligation at beginning of year
$ 118,958 $ 105,862 $ 17,423 $ 14,768 Service cost
1,806 3,617 409 665 Interest cost
6,056 5,952 865 729 Plan participant contributions
— — 141 282 Actuarial (gain) / loss
(2,834 ) 6,803 (477 ) 2,921 Curtailment
(14,803 ) (295 ) (1,816 ) — Benefits paid
(3,105 ) (2,981 ) (267 ) (178 ) Foreign exchange impact
— — 2,387 (1,764 ) Benefit obligation at end of year
$ 106,078 $ 118,958 $ 18,665 $ 17,423
(Dollars in thousands)
United States United Kingdom 2006 2005 2006 2005 Change in plan assets
Fair value of plan assets at beginning of year
$ 73,798 $ 70,025 $ 10,912 $ 9,772 Actual return on plan assets
9,730 4,959 1,047 1,883 Employer contributions
5,896 1,795 483 284 Plan participant contributions
— — 141 282 Benefits paid
(3,105 ) (2,981 ) (267 ) (178 ) Foreign exchange impact
— — 1,502 (1,131 ) Fair value of plan assets at end of year
$ 86,319 $ 73,798 $ 13,818 $ 10,912 Funded status
$ (19,759 ) $ (45,160 ) $ (4,847 ) $ (6,511 ) Unrecognized net actuarial loss
— 44,895 — 3,997 Unrecognized prior service cost
— 1,551 — — Net amount recognized
$ (19,759 ) $ 1,286 $ (4,847 ) $ (2,514 ) The amounts recognized in the Consolidated Balance Sheets at December 31,
consisted2006, consist ofthe following: (Dollars
(Dollars in thousands)
United States United Kingdom Current liability
$ (297 ) $ — Non-current liability
(19,462 ) (4,847 ) Net amount recognized
$ (19,759 ) $ (4,847 ) The amounts recognized in
thousands) 2001 2000 ------- ------- Prepaid benefit cost $ 6,762 $ 7,558 Accrued benefit liability (5,037) (3,480) Intangible asset 1,499 1,069 Accumulatedaccumulated other comprehensiveloss 1,579 -- ------- ------- Net amountincome at December 31, 2006, consist of
(Dollars in thousands)
United States United Kingdom Net actuarial loss
$ 22,786 $ 1,835 Prior service cost
938 — Net amount recognized
$ 23,724 $ 1,835 31
The amounts recognized
$ 4,803 $ 5,147 ======= ======= The prepaid benefit cost and intangible asset amounts are includedinthe "Other Assets" caption ofthe Consolidated BalanceSheets.Sheets at December 31, 2005, consist of
(Dollars in thousands)
United States United Kingdom Accrued benefit cost
$ (29,741 ) $ (5,058 ) Intangible asset
1,682 — Accumulated other comprehensive income
29,345 2,544 Net amount recognized
$ 1,286 $ (2,514 ) Below is information for pension plans with accumulated benefit obligations in excess of plan assets at December 31:
(Dollars in thousands)
United States United Kingdom 2006 2005 2006 2005 Projected benefit obligation
$ 106,078 $ 118,958 $ 18,665 $ 17,423 Accumulated benefit obligation
106,078 103,539 18,665 15,970 Fair value of plan assets
86,319 73,798 13,818 10,912 32
Components of Net Periodic Benefit Cost and Other Amounts Recognized in Other Comprehensive Income
Net periodic pension costs for the years ended December 31, 2006, 2005 and 2004 were as follows:
(Dollars in thousands)
United States United Kingdom 2006 2005 2004 2006 2005 2004 Service cost
$ 1,806 $ 3,617 $ 3,411 $ 409 $ 665 $ 601 Interest cost
6,056 5,952 5,643 865 729 676 Expected return on plan assets
(6,693 ) (6,575 ) (6,592 ) (789 ) (620 ) (584 ) Amortization of prior service cost
221 355 380 — — — Amortization of net loss
1,435 1,952 1,162 85 61 75 Curtailment loss
392 — — — — — Net periodic benefit cost
$ 3,217 $ 5,301 $ 4,004 $ 570 $ 835 $ 768 Other changes in plan assets and benefit obligations recognized in other comprehensive income for the years ended December 31, 2006, 2005 and 2004 were as follows:
(Dollars in thousands)
United States United Kingdom 2006 2005 2004 2006 2005 2004 Change in additional minimum liability
$ (6,525 ) $ 3,804 $ 4,065 $ (709 ) $ 1,479 $ (355 ) The estimated amounts that will be amortized from accumulated other comprehensive
loss amount is includedincome into net periodic benefit cost inthe "Stockholders' Equity" section of the Consolidated Balance Sheets.2007 are as follows:
(Dollars in thousands)
United States United Kingdom Net actuarial loss
$ 1,233 $ — Prior service cost
197 — Total
$ 1,430 $ — Estimated Future Benefit Payments
(Dollars in thousands)
United States United Kingdom 2007
$ 3,990 $ 39 2008
4,413 92 2009
4,820 94 2010
5,210 96 2011
5,591 129 2012 – 2016
34,232 1,508 33
Assumptions
The weighted-average assumptions
as ofused to determine benefit obligations at December 312001, 2000 and 1999,were as follows:2001 2000 1999 ----------- ---------- ----------- Discount
United States United Kingdom 2006 2005 2006 2005 Discount rate
6.00 % 5.75 % 5.10 % 4.70 % Rate of compensation increase
— 4.01 % — 4.70 % The weighted-average assumptions used to determine net periodic benefit costs for years ended December 31 were as follows:
(Dollars in thousands)
United States United Kingdom 2006 2005 2004 2006 2005 2004 Discount rate
5.75 % 5.75 % 6.00 % 4.90 % 5.20 % 5.40 % Expected long-term return on plan assets
8.50 % 8.50 % 8.50 % 6.50 % 7.20 % 6.80 % Rate of compensation increase
4.01 % 4.01 % 4.01 % 4.70 % 4.70 % 4.70 % Investment Strategies and Policies
U.S. Plans
Plan assets are invested using active investment strategies, as compared to passive or index investing. An investment consulting firm hires and monitors underlying investment management firms for each asset category. Managers within each asset category cover a range of investment styles and approaches and are combined in a way that controls for capitalization and style biases (for equities), and interest rate
7.25% 7.50% 7.75% Expectedrisk (for fixed income, or bonds) versus benchmark indexes, while focusing primarily on stock and bond selection to improve returns. International equities use the same capitalization and style biases, but do so for non-US companies from developed countries. Real estate uses private core real estate strategies, which provide stable and high levels of current income and enhanced core strategies, which seek slightly higher returns emphasizing appreciation. Absolute return investments produces low volatility returns with a low correlation to traditional assets by combining individual hedge funds that can generate positive returns in a variety of markets.Risk is controlled through diversification among multiple asset categories, managers, styles, and securities. The investment management firm recommends asset allocations based on the Company’s plan needs and benchmark data for similar plans. The asset allocation targets are approved by the Company’s Plan Committee. Risk is further controlled both at the manager and asset category level by assigning targets for risk versus investment returns. Real estate uses guidelines for advisor allocation, investment size, geographic diversification and leverage. Absolute return investments invest in multiple funds using one of five different strategies. The investment manager and evaluates performance by the underlying managers against these targets.
34
Allowable investment categories include:
Equities: Common stocks of large, medium, and small companies, including both U.S. and non-U.S. based companies. The long-term target allocation for equities, excluding Company stock, is 51 percent.
Fixed Income (Debt): Bonds or notes issued or guaranteed by the U.S. government, and to a lesser extent, by non-U.S. governments, or by their agencies or branches, mortgage backed securities, including collateralized mortgage obligations, corporate bonds and dollar-denominated debt securities issued in the U.S. by non-U.S. banks and corporations. Up to 15 percent of the fixed income assets may be in debt securities that are below investment grade. The target allocation for fixed income is 26 percent.
Real Estate: Private real estate funds using office, apartment, industrial, retail, and other property types. No greater than 40 percent can be invested with any advisor, no more than 33 percent in any fund, no greater than 33 percent in any of eight U.S. regions, and portfolio leverage is limited to 30 percent. The target allocation for real estate is four percent.
Absolute Return Investments (Hedge Funds): Utilizes fund of funds approach using long/short, market neutral, event-driven, convertible arbitrage, and fixed income arbitrage strategies. The target allocation for absolute return is four percent.
Employer Securities: The retirement Plans also hold shares of the Company’s common and preferred stock, which are purchased or sold by the trustee from time to time, as directed by the Plan Committee. The Plans did not purchase or sell employer securities during 2006 or 2005. The target allocation for employer securities is 15 percent.
In addition to these primary investment types, excess cash may be invested in futures in order to efficiently achieve more fully invested portfolio positions. Otherwise, a small number of investment managers make limited use of derivatives, including futures contracts, options on futures and interest rate swaps in place of direct investment in securities to efficiently achieve equivalent market positions. Derivatives are not used to leverage portfolios.
U.K. Plan
The objective of the U.K. defined benefit pension fund investment strategy is to maximize the long term rate of return on plan assets
8.50% 8.50% 8.50%within a medium level of risk in order to minimize the cost of providing pension benefits. To that end, the plan assets are invested in an actively managed pooled fund that diversifies its holdings among equity securities, debt securities, property and cash. Although there are no formal target allocations for the plan assets, the fund will generally be heavily invested in equity securities. Equity securities are selected from U.K., European, U.S. and emerging market companies. Bonds comprise both U.K. government notes and bonds of U.K. and other countries’ corporate notes. 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.35
Plan Assets
The Company’s asset allocations for its pension plans at December 31, 2006 and 2005, by asset category, were as follow:
United States United Kingdom 2006 2005 2006 2005 Asset Category
Equity securities
67 % 66 % 84 % 85 % Fixed income (debt) securities
26 % 26 % 11 % 8 % Real estate securities
4 % 4 % — — Absolute return securities
3 % 4 % — — Other
— — 5 % 7 % Total
100 % 100 % 100 % 100 % Equity securities for the U.S. plans include the Company’s common stock in the amounts of $13,161,000 (15 percent of total plan assets) and $11,175,000 (15 percent of total plan assets) at December 31, 2006 and 2005, respectively.
Long-term Rate of
compensation increase 4.00%-6.00% 4.00%-6.00% 4.25%-6.25%Return for Plan Assets U.S. Plans
The
plans' net transitionaloverall expected long-term rate of return on assets of 8.5 percent is based on plan asset allocation, capital markets forecasts and expected benefits of active investment management. For fixed income, the expected return is based on a long-term risk-free return assumed to be 6.0 percent for U.S. government securities, plus an additional 0.5 percent reflecting the risk premium for corporate bonds in the portfolio, for an overall average return of 6.5 percent. For equities, a 3.0 percent premium is added to the 6.0 percent risk-free rate for an expected return of 9.0 percent. For real estate, the expected return is 7.0 percent. For absolute return, the expected return is 7.7 percent.The overall investment return forecast reflects the target allocations and the capital markets forecasts for each asset category, plus a premium for active asset management expected over the long-term.
U.K. Plan
The overall expected long term return on plan assets is a weighted average of the expected long term returns for equity securities, debt securities and other assets. The redemption yield at the measurement date on U.K. government fixed interest bonds and the yield on corporate bonds are
fully amortizedused as proxies for the return on the debt portfolio. Weighting by the relative proportion of each36
within the actual portfolio leads to the expected return on debt securities. For equities, a premium of three percent added to the risk-free rate. The holding of other assets is less significant. An overall expected return in line with U.K. bank base interest rates is adopted.
Cash Flows
The Company expects to contribute approximately $4,185,000 to its funded U.S. qualified defined benefit pension plans in 2007. The Company also expects to pay $297,000 in 2007 related to its unfunded non-qualified pension plans. Stepan UK expects to contribute approximately $427,000 to its funded defined benefit pension plan in 2007.
Defined Contribution Plans
In July 2006, the Company established funded qualified defined contribution plans covering the employees affected by the freezes of the U.S. salaried, Maywood hourly and United Kingdom defined benefit pension plans. The U.S. plans have a fixed Company contribution rate of four percent of base salaries. No employee contribution is required. In addition to the fixed contributions, the Company makes additional discretionary transition contributions to partially compensate certain U.S. participants for the anticipated loss in benefits resulting from freezing the defined benefit plans. The transition contributions will be made through 2010. The United Kingdom plan requires employee and Company contributions of 6.15 percent and 7.5 percent of base salaries, respectively. Defined contribution pension plan expense was $2,232,000 for the year ended December 31,
2001.2006, of which $857,400 related to the U.S. transition contributions. There was no comparable expense in 2005 or 2004.The
prior service costsCompany also sponsors a funded qualified profit sharing plan for its U.S. salaried employees and for some hourly employees. Company contributions arebeing amortized overdetermined each year using a formula that is tied to Company profits. The contributions are allocated to participants’ accounts on theaverage remaining service livesbasis ofemployees expected to receive benefits. 11.the participants’ base earnings. Profit sharing expense was $800,000 and $865,000 for the years ended December 31, 2006 and 2005, respectively. There was no profit sharing expense in 2004.12. Accrued Liabilities
Accrued liabilities consisted of: December 31 ----------------- (Dollars in thousands) 2001 2000 ------- ------- Accrued payroll and benefits $15,817 $14,829 Accrued customer discounts 8,669 9,800 OtherThe composition of accrued liabilities
10,518 12,273 ------- ------- Total accrued liabilities $35,004 $36,902 ======= ======= 12.is as follows:
December 31 (Dollars in thousands)
2006 2005 Accrued payroll and benefits
$ 18,907 $ 22,389 Accrued customer discounts
6,403 7,284 Other accrued liabilities
23,340 14,190 Total accrued liabilities
$ 48,650 $ 43,863 37
13. Other Non-Current Liabilities
Other non-current liabilities were comprisedThe composition of
the following: December 31 ----------------- (Dollars in thousands) 2001 2000 ------- ------- Deferred revenue $ 2,568 $ 3,264 Environmental and legal matters 13,964 13,632 Other non-current liabilities 4,869 2,379 ------- ------- Totalother non-current liabilities$21,401 $19,275 ======= ======= During and prior to 1998, the Company received prepayments on certain multi-year commitments for future shipments of products. As the commitments are fulfilled, a proportionate share of the deferred revenueisrecognized into income. In 2000, the term of a current contract was extended, and the recognition rate of deferred revenue into income was revised to correspond to the extended term. Related deferred revenue at December 31, 2001 and 2000, were $3,297,000 and $3,767,200, respectively, of which the amount recognizable within one year is included in the "Accrued Liabilities" caption in the Consolidated Balance Sheets. 13.as follows:
December 31 (Dollars in thousands)
2006 2005 Deferred revenue
$ 6,068 $ 1,185 Environmental and legal matters
17,408 17,337 Deferred compensation liability
23,369 21,369 Pension liability
24,309 31,162 Other non-current liabilities
3,420 3,308 Total other non-current liabilities
$ 74,574 $ 74,361 14. Contingencies
There are a variety of legal proceedings pending or threatened against the Company. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The
Company'sCompany’s operations are subject to extensive local, state and federal regulations, including thefederalU.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986("Superfund"(“Superfund”).TheOver the years, the Companyand othershas received requests for information related to or has been named by the government as a PRP at 22 waste disposal sites where clean up costs have beennamed as potentially responsible parties at affected geographicor may be incurred under CERCLA and similar state statutes. In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it may incur with respect to these sites.After partial remediation payments at certain sites, theThe Company has estimated a range of possible environmental and legal losses from
$7.4$13.8 million to$35.0$42.9 million at December 31,2001,2006. At December 31, 2006, the Company’s accrued liability for such losses, which represents the Company’s best estimate within the estimated range of possible environmental and legal losses, was $22.1 million compared to$7.5 million to $35.0$18.6 million at December 31,2000. At December 31, 2001, the Company's best estimate of reserve for such losses was $17.0 million for legal and environmental matters compared to $16.6 million at December 31, 2000. The Company made payments of $2.6 million in 2001 and $2.5 million in 2000 related to legal costs, settlements and costs related to remedial design studies at various sites.2005.For certain sites, estimates cannot be made of the total costs of compliance, or the
Company'sCompany’s share of such costs; accordingly, the Company is unable to predict the effect thereof onfuturethe Company’s financial position, cash flows and results of operations.InManagement believes that in the event of one or more adverse determinations in any annual or interim period, the impact on the Company’s cash flows and results of operations for those periods could be material. However, based upon theCompany'sCompany’s present belief as to its relative involvement at these sites, other viableentities'entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, the Company believes that these matters, individually and in the aggregate, will not have a material effect on theCompany'sCompany’s financial position.38
Following are summaries of
proceedings related totheCompany's environmental sites:material contingencies at December 31, 2006:Maywood, New Jersey, Site
The
Company's siteCompany’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions ofthe Comprehensive Environmental Response Compensation and Liability Act (CERCLA)CERCLA because of certain alleged chemical contamination. Pursuant to an Administrative Order on Consent entered into betweenthe United States Environmental Protection Agency (USEPA)USEPA and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company completed a Remedial Investigation Feasibility Study (RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source Areas (Operable Unit 1) in September 2002. In addition, the Companyhas alsosubmittedadditional information regardingtheremediation, most recentlyDraft Final FS for Groundwater (Operable Unit 2) inOctober 2002. Discussions between USEPA and the Company are continuing.June 2003. The Company is awaiting the issuance of a Record of Decision (ROD) from USEPA relating to thecurrently owned and formerly owned Company propertyMaywood site and the proposed chemical remediation. The final ROD will be issued sometime afterthea public comment period.In 1985,Also, the
Company entered into a Cooperative Agreement with the United States of America represented by theNew Jersey Department ofEnergy (Agreement). Pursuant to this Agreement, the Department of Energy (DOE) took title to radiological contaminated materials and was to remediate, at its expense, all radiological waste on the Company's property in Maywood, New Jersey. The Maywood property (and portions of the surrounding area) were remediated by the DOE under the Formerly Utilized Sites Remedial Action Program,Environmental Protection (NJDEP) filed afederal program under which the U.S. Government undertook to remediate properties which were used to process radiological material for the U.S. Government. In 1997, responsibility for this clean-up was transferred to the United States Army Corps of Engineers (USACE). On January 29, 1999, the Company received a copy of a USACE Report to Congress dated January 1998 in which the USACE expressed their intention to evaluate, with the USEPA, whether the Company and/or other parties might be responsible for cost recovery or contribution claims related to the Maywood site. Subsequent to the issuance of that report, the USACE advised the Company that it had requested legal advice from the Department of Justice as to the impact of the Agreement.By letter dated July 28, 2000, the Department of Justice advised the Company that the USACE and USEPA had referred to the Justice Department claimscomplaint against the Companyfor response costs incurred or to be incurred by the USACE, USEPAandthe DOE in connection with the Maywood site and the Justice Department statedother entities on February 6, 2006, alleging that theUnited States is entitled to recovery of its response costs from the company under CERCLA. The letter referred to both radiological and non-radiologicaldefendants discharged hazardouswastesubstances at the Maywood site andstated that the United States has incurred unreimbursed response costs to dateat neighboring properties not part of$138 million. Costs associated with radiological waste atthe Maywood sitewhichresulting in damage to natural resources and theCompany believes represent allincurrence of response costs. The complaint was amended and removed to federal court buta small portion of the amount referredwas remanded toin the Justice Department letter, could be expected to aggregate substantially in excess of that amount. In the letter, the Justice Department invited the Company to discuss settlement of the matter in order to avoid the need for litigation. The Company believes that its liability, if any, for such costs has been resolved by the aforesaid Agreement. Despite the fact that the Company continues to believe that it has no liability to the United States for such costs, discussions with the Justice Department are currently ongoing to attempt to resolve this matter.state court on September 22, 2006.The Company believes it has adequate reserves for claims associated with the Maywood
site.site, and has recorded a liability for the estimated probable costs it expects to incur at the Maywood site related to remediation of chemical contamination. However, depending on the results of the ongoing discussionsregarding the Maywood site,with USEPA, the final cost ofthesuch remediation could differ from the current estimates.In addition, under the terms of a settlement agreement reached on November 12, 2004, the United States Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985 under which the United States will take title to and responsibility for radioactive waste removal at the Maywood site, including past and future remediation costs incurred by the United States.
Ewan, D’Imperio and
D'ImperioLightman Drum Company SitesDuring the mid-1970’s, Jerome Lightman and the Lightman Drum Company allegedly disposed of hazardous substances at several sites in New Jersey. The Company has been named as a potentially responsible party (PRP) in the case
USEPAUnited States v.JeromeLightman(92 CV 4710 D. N. J.(1:92-cv-4710 D.N.J.), which involves the D’Imperio Superfund Site and the Ewanand D'ImperioSuperfundSitesSite, both located in New Jersey.Trial onThe Company has reached an agreement in principal with respect to theissuepast costs and future allocation percentage in said litigation for costs related to the D’Imperio Superfund Site, including costs to comply with USEPA’s Unilateral Administrative Orders, as well as for the past costs and allocation percentage at the Ewan Superfund Site. Such agreement in principal is subject to additional approvals, including final execution of a settlement agreement in the first half of 2007. On a related matter, if the aforementioned litigation is settled, the Company, as a39
condition of settlement, will dismiss its appeal currently pending in the United States Third Circuit Court of Appeals objecting to the lodging of a partial consent decree in favor of the
Company's liabilityUnited States Government in this litigation. Under the partial consent decree, the government recovered past costs atthese sites was completed in March 2000.the D’Imperio Superfund Site from all PRPs including the Company. The Company paid its assessed share but will not seek to recover the sums it paid if the settlement isawaiting a decision from the court. If the Company is found liable at either site, a second trial as to the Company's allocated share of clean-up costs at these sites will likely be held in 2003.finalized. The Company believes that a resolution of its liability for this litigation will not have a material impact on the financial position, results of operations or cash flows of the Company.Regarding the D’Imperio Superfund Site, USEPA previously indicated it
has adequate defenseswould seek penalty claims against the Company based on the Company’s alleged noncompliance with the Modified Unilateral Administrative Order issued in January 2000 (Order). In December 2004, the Company entered into a Consent Decree with USEPA, which resolves USEPA’s claims asserted against the Company for the alleged noncompliance with the Order. The settlement amount paid pursuant to theissueConsent Decree did not have a material impact on the financial position, results ofliability.operations or cash flows of the Company. In addition, theevent of an unfavorable outcomeCompany received notice from the NJDEP dated March 21, 2001, that NJDEP will pursue cost recovery against the alleged responsible parties, including the Company, in connection with the D’Imperio Superfund Site. The NJDEP’s claims include costs related to remediation of theissueD’Imperio Superfund Site in the amount ofliability,$434,406 (as of November 3, 2000) and alleged natural resource damages in the amount of $529,584. The NJDEP settled such claims against the alleged responsible parties, resulting in the Companybelieves it has adequate reserves. Lightman Drum Site Thepaying its portion ($83,061) in July 2002.In addition to the Ewan and D’Imperio Superfund Sites, the Company received a Section 104(e) Request for Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company Site located in Winslow Township, New Jersey. The Company responded to this request on May 18, 2000. In addition, the Company received a Notice of Potential Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it will participate in the performance of the RI/
FS. However, based onFS as a member of thecurrent information known regarding this site,Lightman Yard PRP Group. Due to the addition of other PRPs, the Companyis unable to predict what its liability, if any, will be for this site. Liquid Dynamics Site Theallocation percentage has decreased.However, the allocation has not yet been finalized by the Lightman Yard PRP Group. In the fourth quarter of 2005, the Company
receivedpaid aGeneral Noticethird assessment in the amount ofPotential Liability letter from the USEPA dated October 18, 2002, regarding the Liquid Dynamics Site located in Chicago, Illinois.$42,280.The
Company submitted a response to USEPA on November 5, 2002, stating that it is interested in negotiating a resolution of its potential responsibility at this site. Based on the fact that theCompany believes it is a de minimis PRP at this site, theCompany believes thata resolution of its liability at this site will not have a material impactbased on current information it has adequate reserves for thefinancial condition of the Company.Jerome Lightman-related environmental sites.Wilmington Site
During the third quarter of 1994, theThe Company
received and respondedis currently contractually obligated toa Request for Information from the Commonwealth of Massachusetts Department of Environmental Protection relatingcontribute to theCompany'sresponse costs associated with the Company’s formerly-owned site at 51 Eames Street, Wilmington, Massachusetts.TheRemediation at this site is being managed by its current owner to whom the Company sold the property in 1980. Under the agreement, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. To date, the Company has paid the current owner $1.2 million for the Company’s portion of environmental response costs through the third quarter of 2006 (the current owner of the site bills the Company one calendar quarter in arrears). At December 31, 2006, the Company has increased its reserve from $0.7 million to $1.1 million for current and future claims associated with this site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.40
In addition, the Company received a
copyNotice ofanother Request for InformationPotential Liability letter from USEPA dated January 12, 2006, regarding this site. The Company’s response was filed on January 31, 2006. The Company then received a special notice letter from USEPA dated June 19, 2006, advising the Company and the other PRPs at the site,dated October 18, 2002.that they have 45 days to begin negotiations with USEPA to conduct certain response actions, including an RI/FS at the site. TheCompany'sPRPs responded to USEPA on August 25, 2006, that they will agree to participate in such negotiations in order to reach an agreement on the performance of an RI/FS for the site. The PRPs are awaiting a response from USEPA.The Company and other prior owners also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this
requestwaiver while the parties continue to discuss the resolution of any potential claim, which may be filed.On February 15, 2007, the Company executed a settlement agreement with 19 plaintiffs regarding alleged personal injury claims they asserted against the Company and other prior owners regarding this site. The plaintiffs’ attorney executed the settlement on behalf of his clients. The agreement is
due on November 29, 2002.expected to be submitted to the court for approval during March. As a result of this settlement, the Company recorded a fourth quarter charge of $3.0 million for this settlement.The Company
is currently investigatingbelieves that based on current information it has adequate reserves for the claims related to thismatter and therefore, cannot predict what its liability, if any, will be for thissite.14.15. Segment Reporting
The Company has three reportable segments: surfactants, polymers and specialty products. 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, biodiesel and other specialized applications. Polymers
derivegenerates its revenues from the sale of phthalic anhydride,polyurethanepolyols and polyurethane systems used in plastics, building materials and refrigeration systems. Specialty products sell chemicals used in food, flavoring and pharmaceutical applications.The Company evaluates the performance of its segments and allocates resources based on operating income before interest income/expense, other income/expense items and income tax provisions. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
All intercompany transactionsEffective January 1, 2005, the Company changed the components of its segment operating income to reflect a change in the information now used by the chief operating decision makers in reviewing segment results. In 2005, the Company began charging corporate manufacturing expenses, which are
eliminated from segments' revenues.corporate support expenses for engineering, purchasing and transportation, against the reportable segments’ operating income. In prior years, these expenses were charged to unallocated corporate expense.41
Segment data for the three years ended December 31,
2001, 20002006, 2005 and1999, was2004, are as follows:Specialty Segment (Dollars in thousands) Surfactants Polymers Products Totals ----------- -------- --------- -------- 2001 Net sales $558,927 $127,722 $24,868 $711,517 Operating income 35,168 17,264 7,807 60,239 Assets 337,880 43,427 17,724 399,031 Capital expenditures 22,408 2,529 1,689 26,626 Depreciation and amortization expense 30,472 5,656 1,290 37,418Specialty Segment (Dollars in thousands) Surfactants Polymers Products Totals ----------- -------- --------- -------- 2000 Net sales $537,006 $140,786 $21,145 $698,937 Operating income 41,718 21,001 3,130 65,849 Assets 310,820 53,314 18,121 382,255 Capital expenditures 23,333 3,427 986 27,746 Depreciation and amortization expense 30,276 5,981 1,334 37,591 1999 Net sales $547,359 $126,774 $20,526 $694,659 Operating income 51,123 21,453 4,454 77,030 Assets 315,580 52,434 18,760 386,774 Capital expenditures 24,423 4,846 807 30,076 Depreciation and amortization expense 31,091 5,856 1,128 38,075
(Dollars in thousands)
Surfactants Polymers Specialty
ProductsSegment
Totals2006
Net sales
$ 880,327 $ 264,167 $ 28,089 $ 1,172,583 Operating income
21,249 26,106 3,225 50,580 Assets
393,399 99,057 24,099 516,555 Capital expenditures
32,526 8,181 4,967 45,674 Depreciation and amortization expenses
29,216 5,948 1,281 36,445 2005
Net sales
$ 823,603 $ 228,457 $ 26,317 $ 1,078,377 Operating income
20,084 26,652 5,257 51,993 Assets
366,843 86,957 21,698 475,498 Capital expenditures
26,651 13,056 1,536 41,243 Depreciation and amortization expenses
29,426 5,523 1,810 36,759 2004
Net sales
$ 709,487 $ 199,235 $ 27,094 $ 935,816 Operating income
24,871 22,549 6,618 54,038 Assets
358,223 78,602 18,635 455,460 Capital expenditures
27,212 5,274 807 33,293 Depreciation and amortization expenses
29,263 6,145 1,303 36,711 42
Below are reconciliations of segment data to the
accompanyingconsolidated financial statements:
(Dollars in thousands) 2001 2000 1999 -------- -------- --------Operating income - segment totals $ 60,239 $ 65,849 $ 77,030 Unallocated corporate expenses(a) (29,407) (34,491) (35,008) Interest expense (6,903) (7,586) (7,681) Income from equity in joint venture 1,869 703 1,427 -------- -------- -------- Consolidated income before income taxes $ 25,798 $ 24,475 $ 35,768 ======== ======== ======== Assets - segment totals $399,031 $382,255 $386,774 Unallocated corporate assets(b) 39,724 35,337 31,988 -------- -------- -------- Consolidated assets $438,755 $417,592 $418,762 ======== ======== ======== Capital expenditures - segment totals $ 26,626 $ 27,746 $ 30,076 Unallocated corporate expenditures 7,388 696 2,621 -------- -------- -------- Consolidated capital expenditures $ 34,014 $ 28,442 $ 32,697 ======== ======== ======== Depreciation and amortization expense - segment totals $ 37,418 $ 37,591 $ 38,075 Unallocated corporate depreciation expense 2,554 1,686 1,377 -------- -------- -------- Consolidated depreciation and amortization expense $ 39,972 $ 39,277 $ 39,452 ======== ======== ========(a) Includes corporate administrative and corporate manufacturing expenses which are not included in segment operating income and not used to evaluate segment performance. (b) Includes items such as deferred tax asset, prepaid pension asset, joint venture investment, long term investments, corporate fixed assets and LIFO inventory reserve which are not allocated to segments.
(Dollars in thousands)
2006 2005 2004 Operating income—segment totals
$ 50,580 $ 51,993 $ 54,038 Unallocated corporate expenses
(34,727 ) (26,525 ) (27,528 ) Unallocated corporate manufacturing expenses
— — (7,331 ) Interest expense
(8,885 ) (7,801 ) (7,237 ) Income (Loss) from equity in joint venture
(812 ) (729 ) 2,320 Other, net
1,233 708 371 Consolidated income before income taxes and minority interest
$ 7,389 $ 17,646 $ 14,633 Assets—segment totals
$ 516,555 $ 475,498 $ 455,460 Unallocated corporate assets
29,500 40,661 37,316 Consolidated assets
$ 546,055 $ 516,159 $ 492,776 Capital expenditures—segment totals
$ 45,674 $ 41,243 $ 33,293 Unallocated corporate expenditures
296 276 473 Consolidated capital expenditures
$ 45,970 $ 41,519 $ 33,766 Depreciation and amortization expenses – segment totals
$ 36,445 $ 36,759 $ 36,711 Unallocated corporate depreciation expenses
1,939 2,010 2,458 Consolidated depreciation and amortization expenses
$ 38,384 $ 38,769 $ 39,169 Company-wide geographic data for the years ended December 31,
2001, 20002006, 2005 and1999, is2004, are as follows (net sales attributed to countries based on selling location):
(Dollars in thousands) 2001 2000 1999 -------- -------- --------Net sales United States $550,208 $569,357 $553,966 All foreign countries 161,309 129,580 140,693 -------- -------- -------- Total $711,517 $698,937 $694,659 ======== ======== ======== Long-lived assets United States $172,090 $180,369 $193,436 All foreign countries 39,343 17,778 15,045 -------- -------- -------- Total $211,433 $198,147 $208,481 ======== ======== ========15.
(Dollars in thousands)
2006 2005 2004 Net sales
United States
$ 801,017 $ 751,962 $ 646,523 France
126,615 113,856 107,536 United Kingdom
90,981 84,775 78,100 All other countries
153,970 127,784 103,657 Total
$ 1,172,583 $ 1,078,377 $ 935,816 Long-lived assets
United States
$ 153,244 $ 150,061 $ 147,199 United Kingdom
30,478 27,381 30,247 Germany
13,899 12,886 15,964 All other countries
43,184 36,980 33,798 Total
$ 240,805 $ 227,308 $ 227,208 43
16. Earnings Per Share
Below is the computation of basic and diluted earnings per share for the years ended December 31,
2001, 20002006, 2005 and1999:2004:
(In thousands, except per share amounts)
2006 2005 2004 Computation of Basic Earnings per Share
Income before cumulative effect of change in accounting principle
$ 6,670 $ 13,529 $ 10,324 Deduct dividends on preferred stock
789 796 800 Income applicable to common stock
$ 5,881 $ 12,733 $ 9,524 Weighted-average number of shares outstanding
9,133 9,005 8,970 Basic earnings per share
$ 0.64 $ 1.41 $ 1.06 Computation of Diluted Earnings per Share
Income before cumulative effect of change in accounting principle
$ 6,670 $ 13,529 $ 10,324 Deduct dividends on preferred stock
789 — 800 Income applicable to common stock(1)
$ 5,881 $ 13,529 $ 9,524 Weighted-average number of shares outstanding
9,133 9,005 8,970 Add net shares from assumed exercise of options (under treasury stock method)
151 59 68 Add weighted-average shares from assumed conversion of convertible preferred stock(2)
— 661 — Shares applicable to diluted earnings
9,284 9,725 9,038 Diluted earnings per share
$ 0.63 $ 1.39 $ 1.05
(In thousands, except per share amounts) 2001 2000 1999 -------- ------- -------Computation(1) Options to purchase 135,298, 150,770 and 496,972 shares of Basic Earnings per Share Net income $16,072 $15,052 $22,725 Deduct dividends on preferred stock 802 815 858 -------- ------- ------- Income applicable tocommon stock$15,270 $14,237 $21,867 Weighted-average numberwere not included in the computation ofshares outstanding 8,837 8,948 9,232 -------- ------- ------- Basicdiluted earnings per share$ 1.73 $ 1.59 $ 2.37 ======== ======= ======= Computationfor 2006, 2005 and 2004, respectively, because the options’ exercise prices were greater than the average market price for the common stock and their effect would have been antidilutive.
(2) The assumed conversions of Diluted Earnings per Share Net income $16,072 $15,052 $22,725 Weighted-average number of572,854 and 581,482 sharesoutstanding 8,837 8,948 9,232 Add net shares from assumed exercise of options (under treasury stock method) 218 203 324 Add weighted-average shares from assumed conversionof convertible preferred stock666 678 716 -------- ------- ------- Shares applicable tofor 2006 and 2004 were antidilutive, and accordingly, were excluded from the dilutedearnings 9,721 9,829 10,272 -------- ------- ------- Dilutedearnings per share$ 1.65 $ 1.53 $ 2.21 ======== ======= =======calculations.16. Subsequent Events17. Claims Settlement Income
During the quarter ended March
2002,31, 2006, theCompany's Stepan Europe subsidiary completedCompany reached a $900,000 settlement agreement with its electricity provider for lost profits and expenses incurred by the Company as a result of a 2005 unplanned electric outage precipitated by an$11.7 million (denominatedundersized transformer installed by the electricity provider. The settlement income was recorded as a reduction of Cost of Sales ineuros) bank term loan as long-term financing forthe Condensed Consolidated Statements of Income and was allocated to the polymers ($667,000) and surfactants ($233,000) segments.44
On September 1, 2004, a
portionfire at the production facility of theManro acquisition. This loanCompany’s United Kingdom subsidiary, which is included in the surfactants segment, destroyed drying equipment used to manufacture powdered laundry detergent. Because property insurance covered the loss of the equipment, the write-off of the remaining book value of the asset, net of insurance proceeds, had no effect on earnings for the year ended December 31, 2004. In 2005, insurance proceeds related to the fire, amounting to $1,585,000 for property damage and $887,000 for business interruption, were received and recorded as reductions of Cost of Sales in the Condensed Consolidated Statements of Income.18. Severance Cost
In the fourth quarter of 2006, the Company incurred $2,766,000 of severance expenses related to an announced plan to restructure the business functions within its European surfactants organization. The restructuring is an effort to create operational efficiencies and reduce costs by eliminating functional redundancies. The severance expenses were charged to administrative expense for the Company’s surfactants segment. Restructuring activities are expected to be completed in the first quarter of 2007, and it is anticipated that no further significant expenses will
maturebe incurred.19. Related Party Receivable
At December 31, 2006, the ‘Other non-current assets’ classification of the Company’s consolidated balance sheet included a $1,415,000 receivable due from Stepan Philippines Inc. (SPI), a joint venture in
7 yearswhich the Company holds a 50 percent ownership interest. The receivable is primarily for technology royalties due the Company pursuant to a royalty agreement between the Company andbears interestSPI. The receivable balance was $1,066,000 atrates set quarterly,December 31, 2005, and was included in the ‘Receivables’ classification in the current asset section of the Company’s consolidated balance sheet at that time. Payments from SPI to the Company as collection on this receivable are generally made based on90-day EURIBOR plus 1.825 percent. The U.S. parent does not guaranty this loan. In May 2002, the Company replaced its existing U.S. bank revolver with a new loan agreement. The new revolver will provide upSPI having free cash flow, which presently is limited due to$60 million of committed funding for general corporate purposes and may be drawn upon as needed through May 2, 2007. This arrangement provides for borrowings at various interest rates based, at the Company's option, on LIBOR plus a margin or at the bank's prime rate. During September 2002, the Company completed a new $30 million private placement loanSPI's capital expenditures associated with itsexisting insurance Company lenders. The proceedsrecent plant expansion.20. Statement of Cash Flows
Non-cash investing and financing activities for the years ended December 31, 2006, 2005 and 2004, included the receipt of shares of the
loanCompany’s common stock tendered in lieu of cash by employees exercising stock options. The tendered shares, which wereused to repay existing bank debt. The new loan is unsecuredowned by employees for more than six months, had values of $1,037,000 in 2006 (33,220 shares), $1,687,000 in 2005 (62,864 shares) andwill bear interest at 6.86 percent through$1,700,000 in 2004 (71,591 shares) and were recorded as treasury stock.Non-cash investing and financing activities for the
stated maturity date of September 1, 2015.year ended December 31, 2005, included a $680,000 capital lease obligation entered into by the Company’s Brazilian subsidiary. 45
Selected Quarterly Financial Data
(Dollars(Dollars in thousands, except per share data)
Unaudited
2006 Quarter
First Second Third Fourth Year Net Sales
$ 289,612 $ 292,033 $ 302,773 $ 288,165 $ 1,172,583 Gross Profit
32,334 33,244 35,896 24,312 125,786 Interest, net
(2,061 ) (2,179 ) (2,333 ) (2,312 ) (8,885 ) Income (Loss) Before Income Taxes and Minority Interest
4,165 4,404 9,118 (10,298 )(a) 7,389 Net Income (Loss)
3,049 3,077 6,091 (5,547 ) 6,670 Per Diluted Share
0.31 0.31 0.61 (0.63 ) 0.63
2005 Quarter
First Second Third Fourth Year Net Sales
$ 264,252 $ 278,353 $ 265,717 $ 270,055 $ 1,078,377 Gross Profit
29,816 34,703 32,719 25,624 122,862 Interest, net
(1,799 ) (2,006 ) (1,994 ) (2,002 ) (7,801 ) Income (Loss) Before Income Taxes and Minority Interest
4,947 9,186 5,819 (2,306 ) 17,646 Income (Loss) Before Cumulative Effect of Change in Accounting Principle
3,244 6,177 4,166 (58 ) 13,529 Per Diluted Share
0.33 0.64 0.43 (0.03 ) 1.39 Net Income (Loss)
3,244 6,177 4,166 (428 ) 13,159 Per Diluted Share
0.33 0.64 0.43 (0.07 ) 1.35
2001 2000 -------------------------------------- -------------------------------------- As As Previously Previously Reported Adjustments As Restated Reported Adjustments As Restated ---------- ----------- ----------- ---------- ----------- -----------First Quarter Net Sales $176,857 -- $176,857 $174,988 -- $174,988 Gross Profit 25,901 -- 25,901 27,083 -- 27,083 Interest, net (1,956) $ 51 (1,905) (2,051) $ 88 (1,963) Pre-tax Income 6,000 136 6,136 7,003 362 7,365 Net Income 3,628 82 3,710 4,271 220 4,491 Net Income per Share (Diluted) 0.36 0.02 0.38 0.41 0.04 0.45 Second Quarter Net Sales $182,767 -- $182,767 $177,897 -- $177,897 Gross Profit 29,701 -- 29,701 30,680 -- 30,680 Interest, net (1,805) $ 48 (1,757) (2,186) $ 107 (2,079) Pre-tax Income / (Loss) 10,040 (1,222) 8,818 10,859 (513) 10,346 Net Income / (Loss) 6,173 (746) 5,427 6,625 (312) 6,313 Net Income/(Loss) per Share (Diluted) 0.61 (0.05) 0.56 0.64 -- 0.64 Third Quarter Net Sales $173,829 -- $173,829 $176,608 -- $176,608 Gross Profit 26,483 -- 26,483 29,025 -- 29,025 Interest, net (1,819) $ 106 (1,713) (2,099) $ 247 (1,852) Pre-tax Income 7,335 3,870 11,205 9,989 1,325 11,314 Net Income 4,481 2,365 6,846 6,233 813 7,046 Net Income per Share (Diluted) 0.44 0.26 0.70 0.61 0.11 0.72 Fourth Quarter Net Sales $178,064 -- $178,064 $169,444 -- $169,444 Gross Profit 25,144 -- 25,144 25,238 -- 25,238 Interest, net (1,588) $ 60 (1,528) (1,992) $ 300 (1,692) Pre-tax Income / (Loss) 2,551 (2,912) (361) (3,448) (1,102) (4,550) Net Income / (Loss) 1,870 (1,781) 89 (2,121) (677) (2,798) Net Income/(Loss) per Share (Diluted) 0.18 (0.19) (0.01) (0.25) (0.09) (0.34) Year Net Sales $711,517 -- $711,517 $698,937 -- $698,937 Gross Profit 107,229 -- 107,229 112,026 -- 112,026 Interest, net (7,168) $ 265 (6,903) (8,328) $ 742 (7,586) Pre-tax Income / (Loss) 25,926 (128) 25,798 24,403 72 24,475 Net Income / (Loss) 16,152 (80) 16,072 15,008 44 15,052 Net Income per Share (Diluted) 1.59 0.06 1.65 1.47 0.06 1.53(a) Includes a legal settlement charge of $3.0 million and Stepan Europe severance expense of $2.8 million. See Note 2, RestatementItem 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure On April 29, 2002, the Company ended its engagement of Arthur Andersen LLP and retained Deloitte & Touche LLP as its independent accountants. At that time, the Company filed a current report on Form 8-K/A dated May 16, 2002. The text of the Form 8-K/A Report that was filed follows: On April 29, 2002, the Audit Committee and the Board of Directors of the Company decided to no longer engage Arthur Andersen LLP ("Andersen") as the Company's independent public accountants and engaged Deloitte & Touche LLP ("Deloitte") to serve as the Company's independent public accountants for the fiscal year 2002 effective May 16, 2002. Andersen's reports on the Company's consolidated financial statements for each of the years ended 2001 and 2000 did not contain an adverse opinion or disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope or accounting principles. During the years ended December 31, 2001 and 2000, and the subsequent interim period through May 16, 2002, there were no disagreements with Andersen on any matter of accounting principle or practice, financial statement disclosure, or auditing scope or procedure which, if not resolved to Andersen's satisfaction, would have caused them to make reference to the subject matter in connection with their report on the Company's consolidated financial statements for such years or its review report on the Company's financial statements for the fiscal quarter ended March 31, 2002, and there were no reportable events as defined in Item 304(a)(1)(v) of Regulation S-K within the years ended December 31, 2001 and 2000, and the subsequent interim period through May 16, 2002. The Company provided Andersen with a copy of the foregoing disclosures. Andersen's letter, dated May 16, 2002, stating its agreement with such statements, was attached as Exhibit 16 of the Form 8-K/A. During the years ended December 31, 2001 and 2000, and the subsequent interim period through May 16, 2002, the Company did not consult Deloitte with respect to the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company's consolidated financial statements, or any other matters or reportable events as set forth in Items 304(a)(2)(i) and (ii) or Regulation S-K.PART III Item 10. Directors and Executive Officers of the Registrant (a) Directors See Company's Proxy Statement dated March 28, 2002, for Directors of the Registrant, which is incorporated by reference herein. (b) Executive Officers See Executive Officers of the Registrant in Part 1 above. Item 11. Executive Compensation See Company's Proxy Statement dated March 28, 2002 which is incorporated by reference herein. Item 12. Security Ownership of Certain Beneficial Owners and Management See Company's Proxy Statement dated March 28, 2002 which is incorporated by reference herein. Item 13. Certain Relationships and Related Transactions None PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Financial Statements See Item 8 for the Consolidated Financial Statements and supplementary data included in this Form 10-K/A. (b) Reports on Form 8-K None (c) Exhibits See Exhibit Index filed herewith (d) Supplementary Schedule See Supplemental Schedule to Consolidated Financial Statements filed herewith46
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
STEPAN COMPANY By: /s/ James E. Hurlbutt ---------------------------------------
STEPAN COMPANY By: /s/ James E. Hurlbutt
James E. Hurlbutt Vice President - Finance March 22, 2007
47
EXHIBIT INDEX
(31.1)
Certification of President and Corporate Controller November 22, 2002 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ F. Quinn Stepan Chairman,Chief Executive Officerand Director November 22, 2002 - ---------------------------- F. Quinn Stepan /s/ F. Quinn Stepan, Jr. President, Chief Operating Officer and Director November 22, 2002 - ---------------------------- F. Quinn Stepan, Jr. /s/ James E. Hurlbutt(31.2)
Certification of Vice President – Finance (Principal Financial Officer) (32)
Certification of President and Corporate Controller November 22, 2002 - ---------------------------- James E. Hurlbutt /s/ James A. Hartlage SeniorChief Executive Officer (Principal Executive Officer) and Vice President- Technology and Operations November 22,– Finance (Principal Financial Officer) pursuant to Section 906 of the Sarbanes-Oxley Act of 2002- ---------------------------- and Director James A. Hartlage /s/ Thomas F. Grojean Director November 22, 2002 - ---------------------------- Thomas F. Grojean /s/ Paul H. Stepan Director November 22, 2002 - ---------------------------- Paul H. Stepan /s/ Robert D. Cadieux Director November 22, 2002 - ---------------------------- Robert D. Cadieux /s/ Robert G. Potter Director November 22, 2002 - ---------------------------- Robert G. PotterJames E. Hurlbutt, pursuant to powers of attorney executed by each of the directors and officers listed above, does hereby execute this report on behalf of each of such directors and officers in the capacity in which the name of each appears above. November 22, 2002 James E. HurlbuttCERTIFICATIONS I, F. Quinn Stepan, certify that: 1. I have reviewed this amended annual report on Form 10-K/A of Stepan Company; 2. Based on my knowledge, this annual report, as amended, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report, as amended; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, as amended, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report, as amended. Date: November 22, 2002 /s/ F. Quinn Stepan -------------------------------------- F. Quinn Stepan Chairman, Chief Executive OfficerCERTIFICATIONS I, James E. Hurlbutt, certify that: 1. I have reviewed this amended annual report on Form 10-K/A of Stepan Company; 2. Based on my knowledge, this annual report, as amended, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report, as amended; and 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, as amended, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report, as amended. Date: November 22, 2002 /s/ James E. Hurlbutt ------------------------------------------ James E. Hurlbutt Vice President & Corporate ControllerSUPPLEMENTAL SCHEDULE TO CONSOLIDATED FINANCIAL STATEMENTS FOR YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 AS REQUIRED TO COMPLY WITH REGULATION S-X Schedule II - Allowance for Doubtful Accounts: Below is an analysis of the allowance for doubtful accounts for the three years ended December 31: (In Thousands) 2001 2000 1999 ------ ------ ------ Balance, Beginning of Year $3,154 $2,389 $2,263 Provision/(Benefit) charged to income (156) 1,281 222 Accounts written off, net of recoveries (726) (516) (96) ------ ------ ------ Balance, End of Year $2,272 $3,154 $2,389 ====== ====== ====== Certain supplemental schedules are not submitted because they are not applicable or not required, or because the required information is included in the financial statements or notes thereto.EXHIBIT INDEX Exhibit No. Description - ------- ----------- (3)a Copy of the Certificate of Incorporation, and the Certificates of Amendment of Certificate of Incorporation, dated May 6, 1968, April 20, 1972, April 16, 1973, December 2, 1983. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1983, and incorporated herein by reference. (3)a(1) Copy of Certificate of Amendment of Certificate of Incorporation, dated May 24, 1999. (Note 13) (3)b Copy of the Bylaws of the Company as through February 15, 1999. (Note 14) (3)c Copy of Certificate of Amendment, dated April 28, 1993, to Article IV of Certificate of Incorporation. (Note 7) (3)d Copy of Certificate of Amendment, dated May 5, 1987, to Article X of Certificate of Incorporation. (Note 1) (4)h Copy of Loan Agreement, dated June 15, 1995, with Aid Association for Lutherans, the Northwestern Mutual Life Insurance Company and The Mutual Life Insurance Company of New York. (Note 10) (4)i Copy of Revolving Credit and Term Loan Agreement, dated February 20, 1990, with The First National Bank of Chicago and the amendment, dated March 21, 1990. (Note 3) (4)m Copy of Second Amendment, dated September 20, 1991, amending Revolving Credit and Term Loan Agreement, dated February 20, 1990 (see (4)i above). (Note 4) (4)m(1) Copy of Third Amendment, dated December 29, 1992, amending Revolving Credit and Term Loan Agreement, dated February 20, 1990 (see (4)i and (4)m above). (Note 8) (4)m(2) Copy of Fourth Amendment, dated May 31, 1994, amending Revolving Credit and Term Loan Agreement, dated February 20, 1990 (see (4)i, (4)m and (4)m(1) above). (Note 9) (4)n(1) Copy of Certificate of Designation, Preferences and Rights of the 5 1/2% Convertible Preferred Stock, without Par Value and the Amended Certificate, dated August 12, 1992 and April 28, 1993. (Note 7) (4)n(2) Copy of Issuer Tender Offer Statement on Schedule 13E-4, dated August 13, 1992. (Note 6)(4)n(3) Copy of Amendment No. 1 to Schedule 13E-4 (see also (4)n(2) above), dated September 23, 1992. (Note 6) (4)n(4) Copy of the Company's Form 8-A, dated August 13, 1992. (Note 6) (4)o Copy of Revolving Credit and Term Loan Agreement, dated January 9, 1998, with The First National Bank of Chicago. (Note 11) (4)o(1) Copy of Certificate of Amendment, dated March 12, 1999, amending Revolving Credit and Term Loan Agreement, dated January 9, 1998. (Note 12) (4)p Copy of Term Loan Agreement, dated October 1, 1998, with The Northwestern Mutual Life Insurance Company and Connecticut General Life Insurance Company. (Note 14) (4)r Copy of Revolving Credit Agreement, dated May 3, 2002, with Bank One, NA (as agent bank). (Note 17) In accordance with 601(b)(4) (iii) of Regulation S-K, certain debt instruments are omitted, where the amount of securities authorized under such instruments does not exceed 10% of the total consolidated assets of the Registrant. Copies of such instruments will be furnished to the Commission upon request. (10)a Description of the 1965 Directors Deferred Compensation Plan. (Note 2) (10)b Copy of the 1969 Management Incentive Compensation Plan as amended and restated as of January 1, 1992. (Note 5) (10)d Copy of the 1982 Stock Option Plan. (Note 2) (10)e Copy of Leveraged Employee Stock Ownership Plan. (Note 3) (10)f Copy of the Company's 1992 Stock Option Plan. (Note 5) (10)g Copy of the Company's 2000 Stock Option Plan. (Note 15) (16) Letter regarding change in certifying accountant (Note 16) (18) Letter re change in accounting principle for the year ended December 31, 1992. (Note 8) (21) Subsidiaries of Registrant at December 31, 2001. (23) Independent Auditors' Consent. (24) Power of Attorney.(99.1) Certifications of Chief Executive Officer and Corporate Controller (Principal Accounting Officer) (99.2) Copy of Note Purchase Agreement, dated September 1, 2002, with The Northwestern Mutual Life Insurance Company, Thrivent Financial for Lutherans, Connecticut General Life Insurance Company and MONY Life Insurance Company (Note 18) Notes To Exhibit Index Note No. - ---- 1. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1987, and incorporated herein by reference. 2. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1988, and incorporated herein by reference. 3. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1989, and incorporated herein by reference. 4. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991, and incorporated herein by reference. 5. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1992, and incorporated herein by reference. 6. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1992, and incorporated herein by reference. 7. Filed with the Company's Current Report on Form 8-K filed on April 28, 1993, and incorporated herein by reference. 8. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1992, and incorporated herein by reference. 9. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1994, and incorporated herein by reference. 10. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1995, and incorporated herein by reference. 11. Filed with the Company's Annual report on Form 10-K for the year ended December 31, 1997, and incorporated herein by reference.12. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1999, and incorporated herein by reference. 13. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1999, and incorporated herein by reference. 14. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1998, and incorporated herein by reference. 15. Filed with the Company's Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by reference. 16. Filed with the Company's Current Report on Form 8-K/A filed on May 16, 2002, and incorporated herein by reference. 17. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002, and incorporated herein by reference. 18. Filed with the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2002, and incorporated herein by reference.48