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
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   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