UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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, 2001
( ) 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
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, 2001
- ------------------------------------- -------------------------------------
Common Stock, $1 par value 9,230,548 Shares
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2001 and December 31, 2000
Unaudited
(Dollars in thousands) 9/30/01 12/31/00
------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 3,218 $ 3,536
Receivables, net 111,774 98,488
Inventories (Note 2) 61,160 60,132
Deferred income taxes 10,866 10,866
Other current assets 4,633 4,191
--------- ---------
Total current assets 191,651 177,213
--------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 658,979 619,296
Less: Accumulated depreciation 446,219 420,149
--------- ---------
Property, plant and equipment, net 212,760 199,147
--------- ---------
OTHER ASSETS 39,989 38,689
--------- ---------
Total assets $ 444,400 $ 415,049
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 10,547 $ 9,586
Accounts payable 60,163 57,255
Accrued liabilities 42,725 39,121
--------- ---------
Total current liabilities 113,435 105,962
--------- ---------
DEFERRED INCOME TAXES 37,150 39,170
--------- ---------
LONG-TERM DEBT, less current maturities 111,548 96,466
--------- ---------
OTHER NON-CURRENT LIABILITIES 21,827 19,275
--------- ---------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 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 9,595,463
shares in 2001 and 9,411,106 shares in 2000 9,595 9,411
Additional paid-in capital 16,147 13,343
Accumulated other comprehensive loss (13,682) (12,402)
Retained earnings (approximately $50,588 unrestricted in 2001 and $46,125 in 2000) 142,126 133,308
--------- ---------
Less: Treasury stock, at cost 8,327 4,071
--------- ---------
Stockholders' equity 160,440 154,176
--------- ---------
Total liabilities and stockholders' equity $ 444,400 $ 415,049
========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME For
the Three and Nine Months Ended September 30, 2001 and 2000
Unaudited
(In thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
NET SALES $ 173,829 $ 176,608 $ 533,453 $ 529,493
Cost of Sales 147,346 147,583 451,368 442,705
--------- --------- --------- ---------
Gross Profit 26,483 29,025 82,085 86,788
--------- --------- --------- ---------
Operating Expenses:
Marketing 6,498 5,968 18,744 18,364
Administrative 5,843 5,933 18,594 18,011
Research, Development and Technical Services 5,517 5,238 16,941 16,696
--------- --------- --------- ---------
17,858 17,139 54,279 53,071
--------- --------- --------- ---------
Operating Income 8,625 11,886 27,806 33,717
Other Income (Expense):
Interest, Net (1,819) (2,099) (5,580) (6,336)
Income from Equity Joint Venture 529 202 1,149 470
--------- --------- --------- ---------
(1,290) (1,897) (4,431) (5,866)
--------- --------- --------- ---------
Income Before Income Taxes 7,335 9,989 23,375 27,851
Provision for Income Taxes 2,854 3,756 9,093 10,722
--------- --------- --------- ---------
NET INCOME $ 4,481 $ 6,233 $ 14,282 $ 17,129
========= ========= ========= =========
Net Income Per Common Share (Note 4):
Basic $ 0.46 $ 0.65 $ 1.48 $ 1.76
========= ========= ========= =========
Diluted $ 0.44 $ 0.61 $ 1.41 $ 1.67
========= ========= ========= =========
Shares used to compute Net Income Per
Common Share (Note 4):
Basic 9,260 9,282 9,255 9,390
========= ========= ========= =========
Diluted 10,132 10,152 10,149 10,282
========= ========= ========= =========
Dividends per Common Share $ 0.1750 $ 0.1625 $ 0.5250 $ 0.4875
========= ========= ========= =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2001 and 2000
Unaudited
(Dollars in thousands) 9/30/01 9/30/00
------- -------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 14,282 $ 17,129
Depreciation and amortization 29,758 30,782
Deferred revenue recognition (355) (1,635)
Deferred income taxes (2,016) (230)
Environmental and legal liabilities 744 (47)
Other non-cash items 1,193 (1,085)
Changes in Working Capital:
Receivables, net (1,505) (4,853)
Inventories 1,122 (5,975)
Accounts payable and accrued liabilities (2,172) (1,209)
Other (442) (427)
-------- --------
Net Cash Provided by Operating Activities 40,609 32,450
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (24,375) (19,213)
Investment in acquisitions (24,623) --
Other non-current assets (627) (222)
-------- --------
Net Cash Used for Investing Activities (49,625) (19,435)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 24,000 6,200
Other debt borrowings 1,152 --
Other debt repayments (9,109) (8,008)
Purchase of treasury stock, net (4,257) (7,317)
Dividends paid (5,464) (5,188)
Stock option exercises 2,986 1,041
Other non-cash items (610) (1,318)
-------- --------
Net Cash Provided by/(Used for) Financing and Other Related Activities 8,698 (14,590)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (318) (1,575)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,536 3,969
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,218 $ 2,394
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,829 $ 5,390
Income taxes $ 5,944 $ 9,956
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2001 and December 31, 2000
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 (although the
balance sheet at 12/31/00 is condensed from the audited balance sheet
at that date). 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, 2000. 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, 2001, and the
consolidated results of operations for the three and nine months then
ended and cash flows for the nine months then ended, have been
included.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in thousands) 9/30/01 12/31/00
-------- --------
Inventories valued primarily on LIFO basis -
Finished products $ 39,019 $ 40,515
Raw materials 22,141 19,617
-------- --------
Total inventories $ 61,160 $ 60,132
======== ========
If the first-in, first-out (FIFO) inventory valuation method had been
used for all inventories, inventory balances would have been
approximately $8.8 million and $8.9 million higher than reported at
September 30, 2001, and December 31, 2000, respectively.
3. CONTINGENCIES
-------------
There are a variety of legal proceedings pending 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, has 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 $7.4 million to
$35.0 million at September 30, 2001. At September 30, 2001, the
company's reserve was $17.4 million for legal and environmental
matters compared to $16.6 million at December 31, 2000.
For certain sites, estimates of the total costs of compliance, or the
company's share of such costs are subject to significant change due to
inherited uncertainties of these estimates; 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 2000 Form 10-K Annual Report, Item 1, Legal
Proceedings, in this Form 10-Q, and in other filings of the company
with the Securities and Exchange Commission, which are available upon
request from the company.
Following are summaries of the environmental proceedings related to
the company's Maywood, New Jersey, and Ewan and D'Imperio
environmental sites:
Maywood, New Jersey, Site:
--------------------------
As reported previously, 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 Liabilities Act (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 the USEPA to the company for property
currently owned by the company, the company completed a Remedial
Investigation Feasibility Study (RI/FS) in 1994. In addition, the
company submitted an FS Addendum to USEPA in October 2000. The company
received comments from USEPA on the FS Addendum in June 2001, and
submitted its response to these comments in September 2001. The
company has been awaiting the issuance of a Record of Decision (ROD)
from USEPA, which would relate to both the currently owned and
formerly owned company property and would recommend the type of
remediation required on each property. The final ROD will be issued
sometime after the public comment periods.
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.
Ewan and D'Imperio Site:
-----------------------
As reported previously, 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'Imperio Superfund 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 2002. 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.
4. EARNINGS PER SHARE
------------------
Below is the computation of basic and diluted earnings per share for
the three and nine months ended September 30, 2001 and 2000.
(In thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
2001 2000 2001 2000
---- ---- ---- ----
Computation of Basic Earnings per Share
---------------------------------------
Net income $ 4,481 $ 6,233 $14,282 $17,129
Deduct dividends on preferred stock 200 203 602 614
------- ------- ------- -------
Income applicable to common stock $ 4,281 $ 6,030 $13,680 $16,515
======= ======= ======= =======
Weighted-average number of shares outstanding 9,260 9,282 9,255 9,390
Basic earnings per share $ 0.46 $ 0.65 $ 1.48 $ 1.76
======= ======= ======= =======
Computation of Diluted Earnings per Share
-----------------------------------------
Net Income $ 4,481 $ 6,233 $14,282 $17,129
Weighted-average number of shares outstanding 9,260 9,282 9,255 9,390
Add net shares issuable from assumed exercise of
options (under treasury stock method) 206 197 228 210
Add weighted-average shares issuable from assumed
conversion of convertible preferred stock 666 673 666 682
------- ------- ------- -------
------- -------
Shares applicable to diluted earnings 10,132 10,152 10,149 10,282
======= ======= ======= =======
Diluted earnings per share $ 0.44 $ 0.61 $ 1.41 $ 1.67
======= ======= ======= =======
5. COMPREHENSIVE INCOME
--------------------
Below is the company's comprehensive income for the three and nine
months ended September 30, 2001 and 2000:
( Dollars in thousands) Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net income $ 4,481 $ 6,233 $14,282 $17,129
Other comprehensive loss:
Foreign currency translation adjustments (274) (933) (1,280) (2,403)
-------- ------- -------- --------
Comprehensive income $ 4,207 $ 5,300 $13,002 $14,726
======== ======= ======= =======
6. SEGMENT REPORTING
-----------------
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Financial results of Stepan Company's operating
segments for the three and nine months ended September 30, 2001 and
2000, are summarized below:
(Dollars in thousands) Specialty Segment
Surfactants Polymers Products Totals
----------- -------- -------- ------
For the quarter ended September 30, 2001
----------------------------------------------------
Net sales $ 134,379 $ 31,906 $ 7,544 $ 173,829
Operating income 7,938 3,915 3,190 15,043
For the quarter ended September 30, 2000
----------------------------------------------------
Net sales $ 131,605 $ 38,541 $ 6,462 $ 176,608
Operating income 10,906 5,313 2,045 18,264
For nine months ended September 30, 2001
----------------------------------------------------
Net sales $ 415,165 $ 98,643 $ 19,645 $ 533,453
Operating income 28,289 13,607 6,373 48,269
For nine months ended September 30, 2000
----------------------------------------------------
Net sales $ 405,852 $ 107,812 $ 15,829 $ 529,493
Operating income 35,086 15,591 2,735 53,412
Below are reconciliations of segment operating income to consolidated
income before income taxes:
Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- --------------------------
2001 2000 2001 2000
---- ---- ---- ----
Operating income segment totals $ 15,043 $ 18,264 $ 48,269 $ 53,412
Unallocated corporate expenses/(a)/ (6,418) (6,378) (20,463) (19,695)
Interest expense (1,819) (2,099) (5,580) (6,336)
Income from equity in joint venture 529 202 1,149 470
---------- ---------- ---------- ----------
Consolidated income before income taxes $ 7,335 $ 9,989 $ 23,375 $ 27,851
========== ========== ========== ==========
(a) Includes corporate administrative and corporate manufacturing
expenses, which are not included in segment operating income and
not used to evaluate segment performance.
7. NEW ACCOUNTING STANDARDS
------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133,
"Accounting for Derivative Instruments and Hedging Activities",
effective for fiscal years beginning after June 15, 1999. In June
1999, the FASB issued SFAS No. 137, which deferred the effective date
to fiscal years beginning after June 15, 2000. 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. At December 31, 2000, and September 30, 2001, the
company held no derivative instruments that fell under the accounting
rules of SFAS No. 133. Therefore, the adoption of SFAS No. 133 on
January 1, 2001, had no effect on the company's consolidated results
of operations or financial position.
In January 2001, the Emerging Issues Task Force (EITF), issued EITF
Issue No.00-22 "Accounting for `Points' and Certain Other Time-Based or
Volume-Based Sales Incentive Offers, and Offers for Free Products or
Services to Be Delivered in the Future." EITF Issue No. 00-22 provides
guidance regarding timing of recognition and income statement
classification of costs incurred in connection with offers of
volume-based sales incentives that are provided to customers at a
future date upon reaching certain volume purchase levels. This
guidance requires certain volume rebate offers delivered subsequent to
the related transactions in which they are earned, be recognized when
incurred and reported as a reduction of revenue in the statement of
operations. The effective date of EITF Issue No. 00-22 was the first
quarter ending after February 15, 2001. The adoption of the issue had
no impact on the company's statements of income or financial position.
In June 2001, the Financial Accounting Standards Board issued 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 completed after June 30, 2001, 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 Footnote 8 for acquisition information).
8. ACQUISITION
On September 13, 2001, the company acquired Manro Performance
Chemicals Limited based in Stalybridge, United Kingdom. The Manro
Performance Chemicals Limited manufactures surfactants for a wide
range of customers, and specializes in anionic surfactants,
hydrotropes and acid catalysts. This acquisition gives the company a
critical mass in Europe. It brings an important market share for
anionic surfactants in the United Kingdom and market share at some of
the company's strategic multinational customers.
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 based on preliminary
estimates of fair values of acquired net assets. Therefore, it may be
revised at a later date. Fourth quarter adjustments to the actual
purchase price are also anticipated. This acquisition was funded
through the company's committed lines of credit. Results of operations
of Manro Performance Chemicals Limited were immaterial to the company's
third quarter consolidated financial results.
Presented below are the 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 6.90 percent in
the first nine months of 2000 and 5.22 percent in 2001 and 7.23
percent in the third quarter of 2000 and 4.30 percent in the third
quarter of 2001.
PRO FORMA FINANCIAL RESULTS
Unaudited
(In thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30
--------------------------- ----------------------------
2001 2000 2001 2000
---- ---- ---- ----
Net Sales $ 184,233 $ 186,359 $ 565,305 $ 559,775
Income Before Income Taxes $ 7,631 $ 9,487 $ 25,032 $ 26,918
Net Income $ 4,663 $ 5,835 $ 15,295 $ 16,555
Net Income Per Common Share:
Basic $ 0.48 $ 0.61 $ 1.59 $ 1.70
========== ========== =========== ===========
Diluted $ 0.46 $ 0.57 $ 1.51 $ 1.61
========== ========== =========== ===========
Shares used to compute Earnings Per Common Share:
Basic 9,260 9,282 9,255 9,390
========== ========== =========== ===========
Diluted 10,132 10,152 10,149 10,282
========== ========== =========== ===========
These pro forma statements represent the company's preliminary
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 amounts reflected in the Pro Forma Financial Results
are subject to change, and the final amounts may differ.
9. RECLASSIFICATIONS
Certain amounts in the 2000 financial statements have been reclassified
to conform to the 2001 presentation.
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
- -------------------------------
Net cash from operations for the first three quarters of 2001 totaled $40.6
million compared to $32.5 million for the same period in 2000. Working capital
requirements have absorbed $3.0 million for the current year-to-date period,
compared to $12.5 million for the same period last year. Since December 31,
2000, accounts receivable and prepaid expenses have increased by $1.5 million
and $0.4 million, respectively. Over the same period, inventories have decreased
by $1.1 million while accounts payable and accrued liabilities decreased by $2.2
million.
Capital spending has totaled $24.4 million, excluding the acquisition, for the
nine months ended September 30, 2001, compared to $19.2 million for the same
period in 2000. For the full year 2001, capital expenditures are projected to be
higher than the $28.4 million recorded during 2000, due in part to capital
expended on the implementation of an enterprise resource planning system.
On September 13, 2001, the Company announced the acquisition of Manro
Performance Chemicals Limited, located in Stalybridge, UK. This acquisition was
made for cash totaling $24.6 million (including due diligence fees) and was
funded through the Company's committed lines of credit. Fourth quarter
adjustments to the purchase price are expected.
Consolidated debt has increased by $16.0 million, to $122.1 million, since last
year-end, mainly due to funding for Manro Performance Chemicals Limited
acquisition. As of September 30, 2001, the ratio of long-term debt to long-term
debt plus shareholders' equity was 41.0 percent compared to 38.5 percent at the
end of 2000.
The company maintains contractual relationships with its domestic banks that
provide for revolving credit of up to $60 million, which may be drawn upon as
needed for general corporate purposes. The company also meets short-term
liquidity requirements through uncommitted domestic bank lines of credit. 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 and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
There have been no material changes in the company's market risks since December
31, 2000.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 2001 and 2000
- ----------------------------------------------
Net income for the third quarter ended September 30, 2001, decreased to $4.5
million, or $0.44 per share diluted, from $6.2 million, or $0.61 per share
diluted, for the same period in 2000. Net sales decreased two percent from
$176.6 million in the third quarter of 2000 to $173.8 million in 2001. Net sales
by segment were as follows:
(Dollars in thousands) Three Months
Ended September 30
----------------------------------------
2001 2000 % Change
---- ---- --------
Net Sales:
Surfactants $ 134,379 $ 131,605 +2%
Polymers 31,906 38,541 -17%
Specialty Products 7,544 6,462 +17%
------------ ------------
Total $ 173,829 $ 176,608 -2%
============ ============
Surfactants net sales increased two percent from $131.6 million in the third
quarter of 2000 to $134.4 million in the third quarter of 2001. Foreign
operations accounted for the net sales improvement, reporting a $5.4 million, or
19 percent, rise in revenue, due to a 13 percent increase in sales volume and a
five percent increase in average selling prices. European and Mexican operations
contributed most of the increase with sales volume gains of 14 percent and 59
percent, respectively. Domestic operations, which accounted for 74 percent of
total surfactant revenues, reported a $2.6 million, or a three percent, decline
in net sales from $102.5 million in 2000 to $99.9 million in 2001. The decrease
was due to a six percent drop in sales volume, which more than offset a four
percent rise in average selling price. Lower demand for laundry and cleaning
products accounted for most of the domestic volume decline.
Surfactants gross profit declined $2.1 million, or 10 percent, to $17.6 million
in the third quarter of 2001 from $19.7 million in the same period last year.
Domestic operations reported a $3.0 million, or 18 percent, drop in gross profit
due to declines in sales volume and average margins. The decline in average
margins was mainly due to weaker sales mix. The decrease in gross profit for
domestic operations was partially offset by a $0.9 million increase in gross
profit for foreign operations. Mexican and European operations contributed $0.4
million each to the rise in profit due to higher sales volume and improved
average margins.
Polymers net sales for the third quarter of 2001 were $31.9 million, down $6.6
million, or 17 percent, from the $38.5 million reported in the same period of
2000. The decline was due to a 19 percent drop in sales volume, driven primarily
by a slowdown in the economy. Global polyurethane polyols net sales fell 13
percent to $18.8 million for the third quarter of 2001 from $21.6 million for
the same period in 2000. The decline was due to a 15 percent decrease in sales
volume, which more than offset a rise in the average selling price. Domestic
operations accounted for most of the decline due to a 17 percent drop in sales
volume. European net sales fell six percent due to declines in sales volume and
average selling prices. Phthalic anhydride
(PA) net sales decreased 21 percent to $8.1 million for the third quarter of
2001 from $10.3 million for the third quarter of 2000. A 22 percent decline in
sales volume accounted for the decrease. Polyurethane systems net sales fell 26
percent to $5.0 million for the third quarter of 2001 from $6.7 million for the
third quarter of last year. A decrease in sales volume accounted for the
decline.
Polymers gross profit declined $1.6 million, or 23 percent, from $7.0 million
in the third quarter of 2000 to $5.4 million in the third quarter of 2001. PA's
gross profit fell $0.7 million, or 55 percent, to $0.6 million for the third
quarter of 2001 from $1.3 million for the same period a year ago. Lower sales
volume coupled with a decline in average margins accounted for the decrease in
gross profit. Global polyurethane polyols gross profit dropped $0.5 million, or
11 percent, to $4.4 million for the third quarter of 2001 from $4.9 million for
the same period of 2000. Domestic gross profit decreased $0.4 million due to
lower sales volume, partially offset by higher average margins. European gross
profit fell $0.1 million on reduced average margins and lower sales volume.
Market pressure and higher costs led to the decline in average margins.
Polyurethane systems gross profit decreased 12 percent to $1.2 million for the
third quarter of 2001 from $1.4 million a year ago. Lower sales volume,
partially offset by margin improvement, led to the decline.
Specialty products reported $7.5 million in net sales for the third quarter of
2001 compared to $6.5 million a year ago. The rise was due to improved sales
volume and higher average selling prices. Gross profit was $3.5 million in the
third quarter of 2001 compared to $2.4 million in the third quarter of 2000.
Increased sales of higher margin products accounted for the improvement.
Operating expenses for the third quarter of 2001 increased four percent from
$17.1 million in 2000 to $17.9 million in 2001. Marketing expenses rose nine
percent between quarters. Higher payroll costs and increased provision for bad
debts led to the increase. Administrative expenses declined two percent between
quarters. Administrative expenses included $1.4 million in costs related to the
implementation of an enterprise resource planning system offset by $1.4 million
in legal insurance recoveries. Research and development expenses increased five
percent.
Interest expenses declined 13 percent between quarters, due primarily to lower
overall borrowing rates.
Income from the Philippines joint venture increased to $0.5 million in the third
quarter of 2001 from $0.2 million a year ago. The increase was due to a foreign
exchange loss resulting from a devaluation of the Philippine peso in the third
quarter of 2000.
Nine Months Ended September 30, 2001 and 2000
- ---------------------------------------------
Net income for the first nine months ended September 30, 2001, was $14.3
million, or $1.41 per share diluted, compared to $17.1 million, or $1.67 per
share diluted, for the same period in 2000. Net sales increased one percent to
$533.5 million in 2001 from $529.5 million reported last year. Net sales by
segment were as follows:
(Dollars in thousands) Nine Months
Ended September 30
-----------------------------------------
2001 2000 % Change
---- ---- --------
Net Sales:
Surfactants $ 415,165 $ 405,852 +2%
Polymers 98,643 107,812 -9%
Specialty Products 19,645 15,829 +24%
--------- ---------
Total $ 533,453 $ 529,493 +1%
========= =========
Surfactants net sales increased $9.3 million, or two percent, from $405.9
million in 2000 to $415.2 million in 2001. Net sales for foreign surfactants
operations increased 14 percent from $90.3 million in 2000 to $103.3 million in
2001, primarily due to higher sales volume. All foreign subsidiaries reported
increased net sales. European and Colombian operations contributed most of the
improvement due to higher sales volume and increased average selling prices.
Domestic surfactants, which accounted for 75 percent of total surfactant
revenues, reported a $3.7 million, or one percent, decrease in revenue. A one
percent decline in average selling prices coupled with a flat sales volume led
to the decrease. Average selling prices declined due to product mix.
Surfactants gross profit decreased 10 percent between years from $62.7 million
in 2000 to $56.7 million in 2001. Domestic operations reported a $6.9 million
decline in earnings, due to a drop in average margins. The decrease in average
margins was mainly due to weaker sales mix and higher energy costs. Gross profit
for foreign surfactants increased $1.0 million, or eight percent, from $11.3
million in 2000 to $12.3 million in 2001. A 13 percent improvement in sales
volume more than offset a decline in average margins.
Polymers net sales decreased $9.2 million, or nine percent, from $107.8 million
in 2000 to $98.6 million in 2001. Phthalic anhydride (PA) net sales dropped 23
percent to $25.1 million in 2001 from $32.5 million a year ago. A 29 percent
decline in sales volume led to the drop in revenue and more than offset an eight
percent increase in average selling prices. The higher average selling prices
were attributable to increased raw material costs passed on to customers.
Polyurethane systems net sales fell 13 percent to $15.5 million for the current
year from $17.9 million a year ago. A 20 percent sales volume decline, partially
offset by higher average selling prices, led to the fall in net sales. Global
polyurethane polyols net sales rose one percent to $58.1 million for the nine
months in 2001 from $57.4 million for the same period a year ago. Domestic
operations accounted for the sales dollar increase. Higher average selling
prices more than offset the effect of a four percent sales volume decline.
European net sales decreased nine percent despite a sales volume increase of six
percent. The average selling price dropped 14 percent and more than offset the
impact of higher sales volume. Continued market pressures led to the drop in
selling prices.
Polymers gross profit declined 11 percent from $20.5 million in 2000 to $18.3
million in 2001. Gross profit for PA declined 50 percent to $2.5 million in the
first nine months of 2001 from $5.1 million a year ago. Lower sales volume and
average margins accounted for the drop in earnings. Higher unit overhead costs
resulting from decreased production volume led to the
the lower margins. Polyurethane systems gross profit decreased three percent due
to a 20 percent drop in sales volume, which was partially offset by improved
average margins. Global polyurethane polyols earnings increased $0.7 million, or
five percent, between years. Despite lower sales volume, domestic operations
reported a $1.2 million, or nine percent, increase in gross profit due to
improved average margins. European gross profit fell $0.6 million on reduced
average margins. Market pressure and higher costs led to the decrease in
margins.
Specialty products reported $19.6 million in net sales for the nine months of
2001 compared to $15.8 million for the same period of 2000. The increase was due
to improved sales volume and higher average selling prices. Gross profit rose to
$7.1 million in 2001 from $3.7 million in 2000. The increase was due to higher
sales volume of higher margin products.
Operating expenses increased two percent between years. Administrative expenses
rose three percent, primarily due to $1.5 million costs associated with the
implementation of an enterprise resource planning system and a $0.9 million
increase in legal expense, partially offset by $2.0 million in legal insurance
recoveries. Marketing expenses increased two percent and research and
development expenses increased one percent.
Interest expenses declined 12 percent from year-to-year due to lower average
debt levels coupled with lower overall borrowing rates.
Income from the Philippines equity joint venture increased to $1.1 million in
2001 from $0.5 million a year ago. The increase was due to a foreign exchange
loss resulting from a devaluation of the Philippine peso in 2000.
OUTLOOK
- -------
The balance of 2001 will continue to present challenges. The recent acquisition
of Manro Performance Chemicals in Manchester, England, is expected to contribute
to fourth quarter net income. However, the economy's slowness coupled with
continued expenses related to the implementation of an enterprise resource
planning system will make the company's previous earnings estimate of $1.80 per
share (diluted) difficult to achieve.
LEGAL AND ENVIRONMENTAL 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 months of
2001, company expenditures for capital projects related to the environment were
$1.0 million and should approximate $1.5 million for the full year 2001. These
projects are capitalized and typically depreciated over 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 $5.7 million for the first nine
months of 2001.
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 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 $7.4 million to $35.0 million at September
30, 2001. At September 30, 2001, the company's reserve was $17.4 million for
legal and environmental matters compared to $16.6 million at December 31, 2000.
During the first nine months of 2001, expenditures related to legal and
environmental matters approximated $1.6 million. 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 2000 Form 10-K Annual Report, and
in other filings of the company with the Securities and Exchange Commission,
which are available upon request from the company. See Footnote 3,
Contingencies, in Notes to Condensed Consolidated Financial Statements, and Item
1, Legal Proceedings, in this Form 10-Q for a summary of the environmental
proceedings related to the company's Maywood, New Jersey, and Ewan and D'Imperio
environmental sites.
NEW ACCOUNTING STANDARDS
- ------------------------
In June 2001, the Financial Accounting Standards Board 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. The SFAS No. 142 addresses financial accounting and reporting for goodwill
and other intangible assets subsequent to their acquisition. The new standard
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 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 in the cumulative effect of
changes 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 Manchester, England (See Footnote 8, Acquisitions, in
Notes to Condensed Consolidated Financial Statements). The provisions of SFAS
No. 141 and SFAS No. 142 will be applied to acquisitions made prior to June 30,
2001, starting on January 1, 2002. The company estimates that approximately $0.4
million of goodwill amortization will stop being recorded. Presently, it is
unknown whether any intangible asset impairments will be recognized or whether
the amortization of any identifiable intangible assets will be reduced. The
company is currently assessing such matters.
In April 2001, the Emerging Issues Task Force (EITF) issued EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products". EITF 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 considered: (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. EITF 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 EITF. Therefore,
adoption of this standard is not expected to have an impact on the company's
statements of income or financial position.
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, foreign currency fluctuations and the general
economic conditions.
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
As reported previously, 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 Liabilities Act (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. In addition, the company submitted an FS Addendum to USEPA in
October 2000. The company received comments from USEPA on the FS Addendum in
June 2001, and submitted its response to these comments in September 2001. The
company has been awaiting the issuance of a Record of Decision (ROD) from USEPA,
which would relate to both the currently owned and formerly owned company
property and would recommend the type of remediation required on each property.
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.
As reported previously, 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'Imperio Superfund 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 2002. 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. 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 $434,405.53 and alleged natural resource damages
in the amount of $529,584.00 (as of November 3, 2000). The NJDEP has proposed
settling such claims, with the company being responsible for a portion of these
costs. The company is currently investigating its options with respect to both
of these potential actions but does not believe that such settlements, if any,
will have a material impact on the financial condition of the company.
As reported previously, 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.
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 12, 2001