1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,Washington, D.C. 20549
______________________
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1996MARCH 31, 1997
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO __________
1-4462
----------------------
COMMISSION FILE NUMBER-------------------------------------------------------------
Commission File Number
STEPAN COMPANY
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36 1823834
- ------------------------------- ------------------------------------------------------ ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Edens and Winnetka Road, Northfield, Illinois 60093
- ------------------------------------------------------------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (847) 446-7500
------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT OCTOBER 31, 1996Class Outstanding at April 30,
1997
- --------------------------- ------------------------------ -----------------------------------
Common Stock, $1 par value 9,988,000 Shares9,801,000 shares
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
2-------------------------------------------------------------------------------
Item 1 - Financial
Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
Unaudited
Part I FINANCIAL INFORMATION
- ---------------------------------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
Unaudited
(Dollars in Thousands) 9/30/3/31/97 12/31/96
12/31/95
--------------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 3,9203,033 $ 3,1484,778
Receivables, net 85,104 79,81484,194 85,017
Inventories (Note 2) 46,502 54,36345,040 50,242
Deferred income taxes 9,444 9,44410,703 10,703
Other current assets 3,194 3,3852,908 2,958
-------- -----------------
Total current assets 148,164 150,154$145,878 $ 153,698
-------- -----------------
PROPERTY, PLANT AND EQUIPMENT:
Cost 489,379 454,104504,477 497,882
Less accumulated depreciation 284,313 261,634297,768 290,723
-------- ---------
206,709 207,159
-------- 205,066 192,470
-------- -----------------
OTHER ASSETS 20,450 19,90319,551 20,155
-------- -----------------
Total assets $373,680 $362,527$372,138 $ 381,012
======== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,7226,697 $ 6,9466,973
Accounts payable 40,424 42,53038,840 43,417
Accrued liabilities 40,568 37,42332,255 32,986
-------- -----------------
Total current liabilities 87,714 86,89977,792 83,376
-------- -----------------
DEFERRED INCOME TAXES 36,533 36,46935,279 35,954
-------- -----------------
LONG-TERM DEBT, less current maturities 106,208 109,02397,848 102,567
-------- ---------
OTHER NON-CURRENT LIABILITIES 28,236 27,500
-------- DEFERRED REVENUE 11,211 7,659
-------- -----------------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock,
cumulative, voting without par
value; authorized 2,000,000 shares;
issued 796,972 shares in 19961997
and 797,172796,972 shares in 19951996 19,924 19,92919,924
Common stock, $1 par value;
authorized 15,000,000 shares;
issued 10,117,90610,137,306 shares in 1997
and 10,131,706 shares in 1996 and 10,086,653 shares in 1995 10,118 10,08710,137 10,132
Additional paid-in capital 4,950 4,5685,215 5,066
Cumulative translation adjustments (4,437) (3,691)(6,202) (4,820)
Retained earnings (approximately
$47,258$49,382 unrestricted in 19961997 and
$37,904$46,689 in 1995) 103,969 93,2921996) 109,490 106,513
-------- --------
134,524 124,185138,564 136,815
Less - Treasury stock, at cost 2,510 1,7085,581 5,200
-------- -----------------
Stockholders' equity 132,014 122,477132,983 131,615
-------- -----------------
Total liabilities and
stockholders' equity $373,680 $362,527$372,138 $ 381,012
======== =================
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
2
3
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30,March 31, 1997 and 1996 and 1995
Unaudited
(In Thousands, Three Months Ended Nine Months Ended
except per share amounts) September 30 September 30
-------------------------- ------------------------Three Months
Ended March 31
-------------------
1997 1996
1995 1996 1995
----------- ------------- ----------- ------------------- --------
NET SALES $ 137,922 $ 130,410 $ 406,491 $ 401,454
----------- ------------- ----------- -----------
COSTS AND EXPENSES:$139,670 $130,643
Cost of Sales 116,421 109,763 334,267 328,345
General and115,625 104,768
-------- --------
Gross Profit 24,045 25,875
-------- --------
Operating Expenses:
Marketing 4,866 4,749
Administrative 2,171 10,157 12,248 21,880
Marketing 5,104 4,628 14,641 13,8504,765 5,037
Research, Development and Technical
Services 5,043 4,695 14,568 13,7784,909 4,792
-------- --------
14,540 14,578
-------- --------
Operating Income 9,505 11,297
Other Income (Expense):
Interest, net 1,643 2,046 5,362 6,038
----------- ------------- ----------- -----------
130,382 131,289 381,086 383,891
----------- ------------- ----------- -----------
PRE-TAX INCOME (LOSS) 7,540 (879) 25,405 17,563
PROVISION FOR INCOME
TAXES (BENEFIT) 3,338 (329) 10,395 6,586
----------- ------------- ----------- -----------Net (1,870) (1,987)
Income (Loss) from Equity Joint
Ventures (96) (167)
-------- --------
(1,966) (2,154)
-------- --------
Income Before Income Taxes 7,539 9,143
Provision for Income Taxes 3,062 3,508
-------- --------
NET INCOME (LOSS) $ 4,2024,477 $ (550) $ 15,010 $ 10,977
=========== ============= =========== ===========
NET INCOME (LOSS) PER
COMMON SHARE5,635
======== ========
Net Income Per Common Share (Note 3)
Primary $0.39 $ (0.08) $1.42 $1.02
=========== ============= =========== ===========0.43 $ 0.54
======== ========
Fully Diluted $0.38 $ - $1.35 $1.00
=========== ============= =========== ===========
DIVIDENDS PER COMMON SHARE $0.1175 $0.110 $0.3525 $0.330
=========== ============= =========== ===========
AVERAGE COMMON SHARES
OUTSTANDING 10,007 9,998 10,017 9,976
=========== ============= =========== ===========0.41 $ 0.51
======== ========
Dividends per Common Share $ 0.1250 $ 0.1175
======== ========
Average Common Shares Outstanding 9,839 10,016
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
4
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the NineThree Months Ended September 30,March 31, 1997 and 1996 and 1995
Unaudited
(Dollars In Thousands) 9/30/3/31/97 3/31/96 9/30/95
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $15,010 $10,977$ 4,477 $ 5,635
Depreciation and amortization 24,716 22,9238,876 8,395
Deferred revenue net 3,552 (1,775)recognition (724) (641)
Customer prepayments 2,000 2,700
Deferred income taxes 88 (352)(599) (628)
Non-current environmental and legal
liabilities (540) -
Other non-cash items 746 (638)284 192
Changes in Working Capital:
Receivables, net (5,290) (7,718)823 1,879
Inventories 7,861 (2,275)5,202 3,307
Accounts payable and accrued
liabilities 1,039 2,065(5,308) (8,969)
Other 191 21850 278
-------- --------
Net Cash Provided by Operating
Activities 47,913 23,42514,541 12,148
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and
equipment (35,326) (23,771)(9,332) (11,285)
Investment in subsidiaries or joint
ventures (3,848) (3,750)venture - (50)
Other non-current assets 243 110228 80
-------- --------
Net Cash Used for Investing
Activities (38,931) (27,411)(9,104) (11,255)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER
RELATED ACTIVITIES
Revolving debt and notes payable to
banks, net 2,200 (21,711)(3,729) 1,101
Other debt borrowings 3,947 40,000- -
Other debt repayments (9,190) (12,048)
(Purchases) sales(1,247) (36)
Sales of treasury stock, net (802) 101(381) 320
Dividends paid (4,333) (4,098)(1,500) (1,447)
Other non-cash items (32) 360(325) 47
-------- --------
Net Cash (Used for) Provided byUsed for Financing and
Other Related Activities (8,210) 2,604(7,182) (15)
-------- --------
NET (DECREASE) INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 772 (1,382)(1,745) 878
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 4,778 3,148 2,452
-------- --------
CASH AND CASH EQUIVALENTS AT END OF -------- --------
PERIOD $3,920 $1,070$ 3,033 $ 4,026
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $7,454 $5,694$ 855 $ 2,573
Income taxes $8,559 $9,244$ 1,872 $ 786
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1996March 31, 1997 and December 31, 19951996
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated financial statements included herein have been
prepared by the company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate and make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report to Stockholders and the Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1995.1996. In the
opinion of management all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of Stepan Company as of September 30, 1996,March 31, 1997, and the consolidated
results of operations for
the three and nine months then ended, and cash flows for the ninethree months then ended, have
been included.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in Thousands) 9/30/963/31/97 12/31/9596
------- --------
Inventories valued primarily on LIFO basis -
Finished products $27,638 $32,204$29,952 $30,689
Raw materials 18,864 22,15915,088 19,553
------- ---------------
Total inventories $46,502 $54,363$45,040 $50,242
======= ===============
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$12,702,000$12,900,000 and $12,100,000$12,800,000 higher than reported at September 30, 1996,March 31, 1997, and
December 31, 1995,1996, respectively.
3. NET INCOME PER COMMON SHARE
---------------------------
Primary net income per common share amounts are computed by dividing net
income less the convertible preferred stock dividend requirement by the
weighted average number of common shares outstanding. Fully diluted net
income per share amounts are based on an 6
increased number of common shares
that would be outstanding assuming the
exercise of certain outstanding stock options and the conversion of the
convertible preferred stock, when such conversion would have the effect of
reducing net income per share. For computation of earnings per share,
reference should be made to Exhibit 11.
4. 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's operations are subject to extensive local, state and federal
regulations, including the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("Superfund") and the Superfund
amendments of 1986. The company, and others, have been named as potentially
responsible parties at affected geographic sites. As discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this filing, the company believes that it has made
adequate provisions for the costs it may incur with respect to these sites.
The company has estimated a range of possible environmental and legal
losses from $4.1 million to $31.5$26.2 million at September 30, 1996.March 31, 1997. At September 30, 1996,March 31,
1997, the company's reserve was $13.1$20.5 million for legal and environmental
matters compared to $8.7$21.0 million at December 31, 1995.1996.
At certain of the 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 Part II, Item 1, Legal Proceedings, of
this filing, in Item 3, Legal Proceedings, in the 19951996 Form 10-K
Annual Report and in other filings of the company with the Securities and
Exchange Commission, which filings are available upon request from the company.
5. ACQUISITIONSUBSEQUENT EVENT
----------------
In April 1996,1997, the company acquired a sulfonation plantcompleted its previously announced acquisition
of the West Coast anionic surfactant business from Shell Group
in Cologne, Germany. This plant, being organized as a German subsidiary,
allows the company to serve Northern European customers with a wide range
of sulfate and sulfonate products used in household, personal care,
individual, institutional and agricultural markets. The purchase
consisted of land, sulfonation equipment, and intangible assets.Lonza, Inc. The
acquisition was accounted for asconsists of intangible assets, including customer lists,
goodwill, know-how and a purchase, and the results of the
subsidiary have beennon-compete covenant. No manufacturing facilities
were included in the accompanying condensed consolidated
financial statements since the date of acquisition. Had the results of
this subsidiary been included commencing with operations in 1996, the
reported results would not have been materially affected.
7agreement.
6. SUBSEQUENT EVENT
In October 1996, the company reached an agreement with Reichhold Company,
based in Research Triangle Park, North Carolina, for the expansion of
Stepan's phthalic anhydride plant located at the company's Millsdale,
Illinois, facility. Under terms of the agreement, Reichhold Company will
provide funding for the expansion. The expansion is expected to be
completed by the fourth quarter of 1997. The capacity of the phthalic
anhydride plant will increase from 180 to 240 million pounds annually.
7. RECLASSIFICATIONS
-----------------
Certain amounts in the 19951996 financial statements have been reclassified to
conform with the 19961997 presentation.
8
STEPAN COMPANY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the company's financial condition and results of
operations during the interim period included in the accompanying condensed
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
For the first three quarters of 1996,quarter ended March 31, 1997, net cash from operations totaled $47.9$14.5
million, an increase of $24.5$2.4 million, or 20 percent, over the same period last year.year's first
quarter. The current year increase wascame as a productresult of higher earnings, insurance recoveries and
customer prepayments as well as decreased working capital requirementsimprovements, partially offset by lower net income.
For the first quarter of 1997, net income was down by $1.2 million compared to
the prior year. Forsame quarter in 1996. Insurance recoveries received during the first quarter
essentially offset a trade receivable increase which was driven by higher sales
compared to the fourth quarter of 1996. Inventories fell by $5.2 million for the
current year period, net income and
customer prepayments were up by $4.0 million and $5.5 million, respectively.
Also contributing favorably were inventories which decreased by $7.9 million in
1996quarter compared to a $2.3 million increase in 1995.
Capital expenditures totaled $35.3decrease of $3.3 million for the first
nine monthsquarter of 1996,
up from $23.81996.
Capital expenditures totaled $9.3 million for the current quarter, down by $2.0
million compared to $11.3 million for the same period last year.in 1996. During April
1997, the company also entered into an agreement to purchase certain portions of
the anionic surfactant business of Lonza, Inc., of Fair Lawn, New Jersey.
For allthe first three months of 1996, cash
used for investing activities is expected to exceed last year's total mainly
due to higher capital spending.
Since December 31, 1995,1997, total company debt has decreased by $3.0$5.0
million, to finish the third quarter at $112.9$104.5 million. Since year-end,At quarter-end, the ratio of long-term debt to long-termlong-
term debt plus shareholders' equity (long-term debt
ratio) has decreasedstood at 42.4 percent, down from 47.143.8
percent to 44.6 percent. For the balanceas of 1996, the company expects total company debt to remain essentially level with a
slight decrease in the long-term debt ratio from quarter to quarter.December 31, 1996.
The company maintains contractual relationships with its domestic banks which
provide for $45 million of revolving credit which may be drawn upon as needed
for general corporate purposes. At September 30, 1996,March 31, 1997, the company had $15.2$6.5 million
outstanding under this revolving credit line. The company also meets short-term
liquidity requirements through uncommitted bank lines of credit and bankers'
acceptances. 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.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends, acquisition andacquisitions, joint venture investments and other planned financial
commitments for the foreseeable future.
9
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30,March 31, 1997 and 1996
and 1995- ------------------------------------------
Net income for the thirdfirst quarter ended September 30, 1996,March 31, 1997, was $4.2$4.5 million, or $.39$.43
per share, compared to a $550,000 lossdown 20 percent from $5.6 million, or $.08$.54 per share reported for the
same quarter a year earlier. The loss in the prior year quarter stemmed from a
$5.0 million provision for legal and environmental costs that was prompted by a
remedial feasibility study. Net sales rose sixincreased seven percent to $137.9$139.7
million, from $130.4$130.6 million reported last year. Net sales by product group
were:
(Dollars in Thousands) Three Months
Ended September 30
-------------------------------March 31
------------------------------
1997 1996 1995 % Change
-------- -------- -------------------
Net Sales:
Surfactants $100,611 $91,738 + 10$107,718 $102,270 +5
Polymers 29,851 29,931 -24,928 20,392 +22
Specialty Products 7,460 8,741 - 157,024 7,981 -12
-------- --------
Total $137,922 $130,410 + 6$139,670 $130,643 +7
======== ========
Surfactants net sales increased due mainly to a 15nine percent increaserise in sales
volume. Domestic netImproved domestic sales, increased due principally to volume gains across
many product lines. Foreign operations reported higher sales due primarily to
the newly acquired German subsidiary and improved sales volumes in Canada and
Mexico.
Surfactants gross profit decreased 12 percent from $14.7 million to $12.9
millionmost notably for the third quarter of 1996, in spite of the sales growth. Startup
losses incurred by the German subsidiarycompany's laundry and
the Philippine joint venture have
precipitated the decrease in gross profit. Furthermore, the Canadian and
Mexican gross profit slipped amid rising volumes that reflect heightened
competitive pressure on margins. Excluding large and unplanned maintenance
expenditures, domestic gross profit managed to report a moderate gain on
growing sales volume.
Polymers net sales were flat. Included in the results were higher net sales
for both polyurethane polyols and polyurethane systems which grew 41 and 16
percent, respectively, on much improved sales volumes. Offsetting the results
was a 31 percent drop in sales of phthalic anhydride (PA). The drop in PA
sales was precipitated by significantly lower selling prices due to a sharp
decline in raw material costs between years. PA sales volume actually grew by
nine percent.
Polymers gross profit for the quarter surged 95 percent to $7.4 million from
$3.8 million recorded in the prior year. Margins and sales volumes increased
for all polymers businesses, although polyurethane polyolscleaning product lines, accounted for most of the improvement.
Specialty productsvolume and net sales were down duegains.
Foreign operations also contributed to a decline inthe overall sales volume. Gross
profit slipped by $.9 million to $1.2 millionvolume growth, but the
related net sales dipped slightly between years partly as a result of the decline in
sales.
Operating expenses for the third quarter declined 37 percent from the same
quarter a year ago. The decline was entirely due to lower administrative
expenses which dropped 79 percent as a
10
result of significantly lower legal and environmental costs. Last year's
quarter included a $5.0 million provision in response to a Remedial
Investigation Feasibility Study. The current quarter also benefited from a
$3.3 million insurance recovery related to the company's claims for coverage of
environmental risks. Marketing expenses rose 10 percent primarily due to
higher payroll expenses. Research and development expenses increased seven
percent due primarily to higher employee related spending as well as outside
contracting service expenses.
Interest expense for the quarter was 20 percent lower compared to the same
quarter last year. The decrease was due to a higher amount of interest being
capitalized as part of long term construction projects.
Nine Months Ended September 30, 1996 and 1995
Net income for the nine months ended September 30, 1996, was $15.0 million, or
$1.42 per share, up 36 percent from $11.0 million, or $1.02 per share reported
for the same period a year earlier. Net sales rose one percent to $406.5
million, from $401.5 million reported last year. Net sales by product group
were:
(Dollars in Thousands) Nine Months
Ended September 30
----------------------------
1996 1995 % Change
-------- -------- --------
Net Sales:
Surfactants $305,531 $286,016 +7
Polymers 77,265 90,745 -15
Specialty Products 23,695 24,693 -4
-------- --------
Total $406,491 $401,454 +1
======== ========
Surfactants net sales increased due mainly to a 10 percent increase in sales
volume. A large part of the volume gain stemmed from increased demand for high
active products in the United States. Foreign operations also reported higher
sales which was due primarily to the newly acquired German operation and
increased sales volumes in France and Canada.weaker
foreign currency exchange rates.
Surfactants gross profit decreased eight percent from $53.3 million to $48.9$18.9 million for the
first nine monthsquarter of 1996.1996 to $17.3 million for the first quarter of 1997. Both
domestic and foreign operations postedreported lower gross profit. DomesticThe company's
European subsidiaries were the major contributors to a 30 percent fall in
foreign gross profit. France reported a 17 percent drop in gross profit
principally from the impact of a weaker French franc as well as continued
pricing pressures in the European market. Germany reported a loss for the
quarter (Stepan Germany was not acquired until the second quarter of 1996). Both
Canadian and Mexican gross profits were down on decreased primarily as a result of higher manufacturing expensesmargins. Lower selling
prices coupled with tightening
profit margins. Mexicanrecent raw material price increases lowered domestic gross
profit was down 42 percent principally as a
result of a larger sales mix of lower margin products and to a lesser extent
lower sales volume. Canadian gross profit was also down as a result of lower
profit margins. France posted higher gross profit ondespite higher sales volume,
while Germany reported losses. The company expects the German operation to
continue incurring losses in the fourth quarter. Initial losses reported by
the Philippine joint venture have also negatively impacted the Surfactants
earnings. For the full year, the German operation and Philippine joint venture
startup losses are expected to reduce earnings by approximately $.25 per share.
11
Despite a five percent increase in sales volume,volume.
Polymers net sales decreased
sharply due primarily toincreased 22 percent on a 4013 percent dropgain in sales ofvolume.
All product groups contributed to the improved net sales and volume.
Polyurethane systems reported a 66 percent growth in net sales due to 59 percent
growth in sales volume. Polyols net sales increased 19 percent due to increased
domestic sales volume as well as stronger volumes to major export customers.
Improved phthalic anhydride (PA).
The decrease in PAnet sales was precipitated by significantly lowerresulted primarily from higher selling
prices due to a steep decline inincreased raw material costscosts.
Polymers gross profit increased 17 percent from $4.9 million in the first
quarter of 1996 to $5.7 million in the first quarter of 1997. Polyurethane
systems contributed most of the increase in gross profit as both sales volumes
and margins grew. A shift to a more profitable mix of products caused the growth
in systems margins. Polyols gross profit improved in the current quarter due to
stronger volume partially offset by increased raw material costs. PA gross
profit increased on improved margins and sales volume.
Specialty products net sales were down 12 percent due to a lower sales volume.
Gross profit decreased 52 percent on lower volume among higher margin products
with the food and pharmaceutical applications.
Operating expenses were down slightly between years. Also
contributingyears due to the reduced PA sales was a five percent
decrease in sales
volume attributable to sluggish beginning of the year demand. Partially
offsetting the PA results were higher polyurethane polyols and polyurethane
systems sales on stronger sales volume.
Polymers gross profit for the first nine months increased 20 percent to $18.2
million from $15.2 million recorded in the prior year. The increase was
primarily attributable to improved margins. The fiveadministrative expenses partially offset by a two percent increase
in Polymers sales volume also contributed.
Specialty products net sales for the first nine months were down moderately
despitemarketing expenses and a much reduced sales volume. Sales for the same period a year ago
included some lower margin products which had since been discontinued. Gross
profit managed to improve by $.6 million to $5.2 million as a result of the
improved product mix between years.
Operating expenses for the first nine months declined 16two percent from the same
period a year ago. Administrative expenses decreased 44 percent as a result of
lower legalincrease in research and environmental costs, as discussed in the quarter-to-quarter
analysis. Marketing expenses rose six percent primarily due to higher payroll
related expenses as well as increased advertising and promotional expenses.
Research and development expenses increased six percent due primarily to higher
payroll expenses as well as outside contracting service
expenses.
Interest expense for the first nine monthsquarter decreased 11six percent primarily as a result of
an increased amount of interest being capitalized for long term
construction projects.decreased debt levels.
1997 OUTLOOK
- ------------
The higher income tax provision and effective tax rateoutlook for the remainder of 1997 for both surfactants and polymers is good.
Although the first nine
monthsquarter earnings were precipitated by a higher effective Mexican tax rate, asbelow those of the prior year's first
quarter, the company still believes that the full year included loss carryforward benefits.result will set an
earnings record. Recent surfactant price adjustments appear to have been
successful and may compensate for the past increase in raw material prices. The
inability to tax benefit lossescompany has also completed its previously announced acquisition of the West
Coast surfactant business of Lonza, Inc. This acquisition, as well as other
indications of consolidation in Germany and the Philippines also contributed to a higher effective tax rate.surfactant industry, leaves the company
strategically well positioned for growth in the core surfactant business. In
addition, continued growth, particularly in global sales of polyurethane
polyols, is expected for the polymer group.
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 the first nine monthsquarter of 1996,1997,
company expenditures for capital projects related to the environment were $4.6$2.0
million and should approximate $6.5$6 million to $7 million for the full year 1996.1997.
These projects are capitalized and typically depreciated over 10 years. Capital
spending on such projects is likely to be somewhat lower in future years as
1996 includes some larger projects.
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 $5.7$2.0 million for the first ninethree
months of 1996.1997. While difficult 12 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 1715 waste disposal sites where cleanup costs have been or may be incurred
under the federal Comprehensive Environmental Response, Compensation and
Liability Act 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. The company has estimated a range of possible
environmental and legal losses from $4.1 million to $31.5$26.2 million at September 30, 1996.March 31,
1997. At September 30, 1996,March 31, 1997, the company's reserve was $13.1$20.5 million for legal and
environmental matters compared to $8.7$21.0 million at December 31, 1995.1996. During the
first ninethree months of 1996,1997, expenditures related to legal and environmental
matters approximated $6.1$.7 million. At certain of the 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 Part II, Item 1, Legal Proceedings, of this
filing, in Item 3,
Legal Proceedings, in the 19951996 Form 10-K Annual Report and in other filings of
the company with the Securities and Exchange Commission, which filings are available
upon request from the company.
ACCOUNTING STANDARD
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 - Earnings Per Share ("SFAS No. 128").
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
SFAS 128 supersedes APB Opinion 15 - Earnings Per Share and replaces primary
earnings per share with basic earnings per share. Fully diluted earnings per
share is still required but will be titled diluted earnings per share. Had SFAS
128 been adopted in the first quarter of 1997, there would have been no impact
on current and prior year quarterly earnings per share. At this time, the
company is not able to determine whether SFAS 128 will have a material impact on
earnings per share upon adoption in the fourth quarter of 1997.
OTHER
- -----
Except for the historical information contained herein, the matters discussed in
this document are forward looking statements that involve risks and
uncertainties. The results achieved this quarter are not necessarily an
indication of future prospects for the company. Actual results in future
quarters 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, outcome of environmental contingencies,
availability of raw materials, and the general economic conditions.
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
Reference is madeOn April 30, 1997, the company received from the U.S. Environmental Protection
Agency, Region VIII, Denver, Colorado, a Notice of Request for Information
Pursuant to the company's Report Form 10-KSection 104(e) of CERCLA for the year ended December
31, 1995, and the company's Report Form 10-Q for the quarter ended March 31,
1996, and the discussion relating to an alleged OSHA violation at the company's
Maywood, New Jersey plant. As indicated previously, the
13
company contested the findings and after hearings and consultations with the
Department of Labor, the company entered into a stipulated settlementTwins Inn Site in the
amount of $115,000 for alleged violations.
Reference is made to the company's Report Form 10-K for the year ended December
31, 1992, and the Report Form 10-Q for the quarter ended September 30, 1995,
and Report Form 10-K for the year ended December 31, 1995, and Report Form 10-Q
for the quarter ended June 30, 1996, relating to the insurance recovery case
brought by the company against various insurers to recover the cost of
remediation at various sites (Stepan v. Admiral et.al.).Arvada, Jefferson
County. The company has reached an agreementresponded to this request for settlement of its claim against three additional
insurers in this action. In addition, on August 13th,information and based upon
the date the case was
scheduled to go to trial, the presiding judge in the Chancery Court removed the
caseinformation available to the Law Division of Cook County. A new trial judge was assigned. The
company cannot at this time estimate the new trial date for this action, if
any. In addition, certain sites were excluded from the case filed in the State
of Illinois. The company has filed an action in New Jersey against the
remaining insurers in this case for sites that were excluded in Illinois but
for which the company believes proper venue and jurisdiction lies in New
Jersey.
Reference is made to the company's Report Form 10-Q for the quarters ended
September 30, 1993, September 30, 1994, September 30, 1995, and Report Form
10-K for the year ended December 31, 1995, regarding the D'Imperio cases and
particularly U.S. v. Jerome Lightman (92 CV 4710)(JBS)). As reported
previously, the Government had indicated a willingness to settle this case and
settlement discussions were underway. In response to an offer made by the
Government, the company has rejected the offer and the government has withdrawn
its offer to settle. Other PRPs involved in this action may or may not wish to
settle with the Government and at this time, the company does not
believe it has any liability with regard to this site. The company has no opinion as to
whether or not the other parties will settle. In any event, becauserecord
of the
company's rejection of the Government's offer, this case is proceeding to
trial. The company cannot predict the outcome of this case but believes it has
defenses to all of the Government's allegations.
Reference is made to the company's Report Form 10-Q for the quarter ended
September 30, 1993, and Report Form 10-K for the year ended December 31, 1995,
relating to the Biddle Sawyer site located in Keyport, New Jersey (Biddle
Sawyer Corporation v. American Cyanamid Company, U.S. District Court of New
Jersey CA-93-1063). Certain defendant parties named in this action, including
two oil companies and the United States Government, have reached settlement
agreements with the plaintiff in this action and have filed motions with the
court to have their settlements approved. As to the company, the court has
recommended non binding mediation which is to take place sometime prior to the
end of 1996, the company believes. Trial on the merits could yet be necessary
after the non binding mediation. If necessary, the trial will occur sometime
in 1997. The company cannot predict what the outcome of the trial will be nor
the outcome of the mediation but the company believes it has defenses to all of
plaintiff's allegations.
Reference is made to the company's Report Form 10-K for the years ended
December 31, 1991, 1992, 1994 and 1995, and Report Form 10-Q for the quarters
ended September 30, 1993, and September 30, 1995, regarding the company's
Maywood site. No remediation has occurredbeing at this site although it did do business with the operator of the Twin
Inns Site, but at a geographically different site which is not part of the Twins
Inn investigation.
Item 4 - Submission of Matters to a Vote of Security Holders
(A) The company's 1996 Annual Meeting of Stockholders was held on May 6,
1997.
(B) Proxies were solicited by management pursuant to Regulation 14 under
the Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees as listed in the proxy statement,
and all such nominees were elected.
(C) A majority of the outstanding shares voted to ratify the appointment
of Arthur Andersen LLP as independent auditors for the company anticipates now that the Record of Decision will be issued sometime in 1997.
The company has undertaken to remove drums from adjacent property which drums
were accumulated in the process
14
of the remedial investigation feasibility stage pursuant to the terms and
conditions of an Administrative Order on Consent.
In 1991, pursuant to the United States Environmental Protection Agency TSCA
Section 8(e) Compliance Audit Program (CAP) relating to the necessity of
reporting of toxicological studies concerning various chemicals, the
Environmental Protection Agency started a program known as CAP, the purpose of
which was to grant amnesty to companies who thought they should have filed
toxicological reports under TSCA 8(e) but which did not for
whatever reason. By
joining the CAP program, a company was granted amnesty for filing reports in
exchange for the imposition of a fine of $6,000 per report up to a maximum of
$1,000,000. The company took advantage of this program in 1991 and in the
third quarter of 1996, was assessed an administrative penalty of $108,000
pursuant to this CAP program.1997
9,882,856 For
19,523 Against
26,533 Abstentions
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(11) Statement re computation of Per Share Earnings
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
15
SIGNATURES
Pursuant to the requirements 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
/s/ Walter J. Klein
Walter J. Klein
Vice President - Finance
Principal Financial and Accounting Officer
Date: November 8, 1996May 9, 1997