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 JUNE 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO
__________
1-4462
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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 July 31, 2000
- -------------------------------------- --------------------------------------
Common Stock, $1 par value 9,290,194 Shares
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2000 and December 31, 1999
Unaudited
(Dollars in thousands) 6/30/00 12/31/99
-------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 1,170 $ 3,969
Receivables, net 104,160 97,089
Inventories (Note 2) 55,481 51,849
Deferred income taxes 9,361 9,361
Other current assets 4,691 4,392
-------- --------
Total current assets 174,863 166,660
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Cost 606,575 596,904
Less: Accumulated depreciation 405,045 387,423
-------- --------
Property, plant and equipment, net 201,530 209,481
-------- --------
OTHER ASSETS 37,155 38,435
-------- --------
Total assets $413,548 $414,576
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,130 $ 7,663
Accounts payable 52,581 48,676
Accrued liabilities 33,619 41,706
-------- --------
Total current liabilities 95,330 98,045
-------- --------
DEFERRED INCOME TAXES 42,626 41,975
-------- --------
LONG-TERM DEBT, less current maturities 110,137 107,420
-------- --------
OTHER NON-CURRENT LIABILITIES 10,108 12,072
-------- --------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 772,704 shares in 2000 and 783,003
shares in 1999 19,318 19,575
Common stock, $1 par value; authorized 30,000,000 shares;
issued 9,765,357 shares in 2000 and 9,684,600 shares in 1999 9,765 9,685
Additional paid-in capital 12,534 11,909
Accumulated other comprehensive loss (12,101) (10,631)
Retained earnings (approximately $48,225 unrestricted in 2000 and $48,329 in 1999) 141,643 134,224
-------- --------
Less: Treasury stock, at cost 15,812 9,698
-------- --------
Stockholders' equity 155,347 155,064
-------- --------
Total liabilities and stockholders' equity $413,548 $414,576
======== ========
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 Six Months Ended June 30, 2000 and 1999
Unaudited
Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30 June 30
----------------------- -----------------------
2000 1999 2000 1999
-------- -------- -------- --------
NET SALES $169,883 $166,759 $337,259 $330,720
Cost of Sales 139,203 134,368 279,496 269,410
-------- -------- -------- --------
Gross Profit 30,680 32,391 57,763 61,310
-------- -------- -------- --------
Operating Expenses:
Marketing 6,220 6,144 12,396 11,826
Administrative 5,929 6,025 12,078 11,545
Research, Development and Technical Services 5,700 5,295 11,458 10,787
-------- -------- -------- --------
17,849 17,464 35,932 34,158
-------- -------- -------- --------
Operating Income 12,831 14,927 21,831 27,152
Other Income (Expense):
Interest, Net (2,186) (2,158) (4,237) (4,268)
Income from Equity Joint Ventures 214 194 268 227
-------- -------- -------- --------
(1,972) (1,964) (3,969) (4,041)
-------- -------- -------- --------
Income Before Income Taxes 10,859 12,963 17,862 23,111
Provision for Income Taxes 4,234 5,007 6,966 9,013
-------- -------- -------- --------
NET INCOME $ 6,625 $ 7,956 $ 10,896 $ 14,098
======== ======== ======== ========
Net Income Per Common Share (Note 4):
Basic $ 0.68 $ 0.81 $ 1.11 $ 1.42
======== ======== ======== ========
Diluted $ 0.64 $ 0.75 $ 1.05 $ 1.32
======== ======== ======== ========
Shares used to compute Net Income Per
Common Share (Note 4):
Basic 9,388 9,616 9,445 9,648
======== ======== ======== ========
Diluted 10,279 10,670 10,348 10,714
======== ======== ======== ========
Dividends per Common Share $ 0.1625 $ 0.1500 $ 0.3250 $ 0.3000
======== ======== ======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000 and 1999
Unaudited
(Dollars in thousands) 6/30/00 6/30/99
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 10,896 $ 14,098
Depreciation and amortization 20,483 20,411
Deferred revenue recognition (1,510) (3,656)
Deferred income taxes 573 2,072
Environmental and legal liabilities (456) (761)
Other non-cash items (103) 397
Changes in Working Capital:
Receivables, net (7,071) (13,189)
Inventories (3,632) 2,848
Accounts payable and accrued liabilities (4,181) 142
Other (299) 330
-------- --------
Net Cash Provided by Operating Activities 14,700 22,692
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (12,028) (17,133)
Other non-current assets 67 109
-------- --------
Net Cash Used for Investing Activities (11,961) (17,024)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 10,400 10,300
Other debt borrowings -- 66
Other debt repayments (6,216) (6,727)
Purchase of treasury stock, net (6,113) (4,732)
Dividends paid (3,477) (3,329)
Other non-cash items (132) 349
-------- --------
Net Cash Used for Financing and Other Related Activities (5,538) (4,073)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (2,799) 1,595
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,969 983
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,170 $ 2,578
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,435 $ 4,433
Income taxes $ 5,235 $ 7,162
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2000 and December 31, 1999
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, 1999. 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 June 30, 2000, and the consolidated
results of operations for the three and six months then ended and cash
flows for the six months then ended, have been included.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in thousands) 6/30/00 12/31/99
------- --------
Inventories valued primarily on LIFO basis -
Finished products $34,074 $32,729
Raw materials 21,407 19,120
------- -------
Total inventories $55,481 $51,849
======= =======
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$9,600,000 and $10,600,000 higher than reported at June 30, 2000, and
December 31, 1999, respectively.
3. 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 $4.0 million to $24.5 million at June 30, 2000. At June
30, 2000, the company's reserve was $11.1 million for legal and
environmental matters compared to $11.6 million at December 31, 1999.
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 1999 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 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 has
completed a Remedial Investigation Feasibility Study in 1994. The company
has been awaiting the issuance of a Record of Decision (ROD) from the 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 company does not know when the ROD will be issued by the
USEPA.
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 took title to
radiological contaminated materials and was to remediate, at its expense,
all radiological (byproduct material and source material) waste on the
company's property in Maywood, New Jersey. The Maywood property (and
portions of the surrounding area) were remediated by the Department of
Energy 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 Cooperative
Agreement.
By letter dated July 28, 2000, the Department of Justice advised the
company that the USACE and the 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 Department of Energy 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 refers to both radiological and non-radiological hazardous waste
at the Maywood Site and states that the United States has incurred
unreimbursed response costs to date of $138.0 million. In the letter the
Justice Department invites the company to discuss settlement of the matter
in order to avoid the need for litigation. The company has previously
included potential claims for response costs associated with non-
radiological waste at the Maywood Site in its estimated range of costs and
its establishment of reserves for potential claims at various sites where
it is a potentially responsible party under CERCLA and the company believes
such estimates and reserves are adequate to include claims associated with
non-radiological waste at the Maywood Site. The company has not reflected
in such estimates and such reserves any amount for costs associated with
radiological waste at the Maywood Site (which represent all but a small
portion of the amount referred to in the Justice Department letter and
could be expected to aggregate substantially in excess of that amount)
because of its belief that its liability, if any, for such costs has been
resolved by the aforesaid Cooperative Agreement. The company continues to
believe that it has no liability to the United States for such radiological
cleanup costs by reason of the aforesaid Cooperative Agreement and the
company intends to assert that position vigorously in discussions with the
Justice Department and, if necessary, in defense of any litigation
asserting such claims.
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)
(JBS) 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 be held in
calendar year 2000 or calendar year 2001. 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.
4. EARNINGS PER SHARE
Below is the computation of basic and diluted earnings per share for the
three and six months ended June 30, 2000 and 1999.
(In thousands, except per share amounts) Three Months Ended Six Months Ended
------------------ ------------------
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
Computation of Basic Earnings per Share
- ---------------------------------------
Net income $ 6,625 $ 7,956 $10,896 $14,098
Deduct dividends on preferred stock 205 213 412 437
------- ------- ------- -------
Income applicable to common stock $ 6,420 $ 7,743 $10,484 $13,661
======= ======= ======= =======
Weighted-average number of shares outstanding 9,388 9,616 9,445 9,648
Basic earnings per share $ 0.68 $ 0.81 $ 1.11 $ 1.42
======= ======= ======= =======
Computation of Diluted Earnings per Share
- -----------------------------------------
Net Income $ 6,625 $ 7,956 $10,896 $14,098
Weighted-average number of shares outstanding 9,388 9,616 9,445 9,648
Add net shares issuable from assumed exercise of
options (under treasury stock method) 210 333 217 334
Add weighted-average shares issuable from assumed
conversion of convertible preferred stock 681 721 686 732
------- ------- ------- -------
Shares applicable to diluted earnings 10,279 10,670 10,348 10,714
======= ======= ======= =======
Diluted earnings per share $ 0.64 $ 0.75 $ 1.05 $ 1.32
======= ======= ======= =======
5. COMPREHENSIVE INCOME
Below is the company's comprehensive income for the three and six months
ended June 30, 2000 and 1999:
(Dollars in thousands) Three Months Ended Six Months Ended
------------------ ------------------
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
Net income $ 6,625 $ 7,956 $10,896 $14,098
Other comprehensive loss:
Foreign currency translation adjustments (824) (287) (1,470) (1,215)
------- ------- ------- -------
Comprehensive income $ 5,801 $ 7,669 $ 9,426 $12,883
======= ======= ======= =======
6. SEGMENT REPORTING
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Financial results of Stepan Company's operating
segments for the quarters ended June 30, 2000 and 1999, are summarized
below:
(Dollars in thousands) Specialty Segment
Surfactants Polymers Products Totals
----------- -------- -------- ------
For the quarter ended June 30, 2000
- -----------------------------------
Net sales $128,456 $36,343 $5,084 $169,883
Operating income 12,394 5,863 888 19,145
For the quarter ended June 30, 1999
- -----------------------------------
Net sales $130,857 $31,619 $4,283 $166,759
Operating income 14,320 6,546 528 21,394
For six months ended June 30, 2000
- ----------------------------------
Net sales $261,252 $66,726 $9,281 $337,259
Operating income 24,180 10,278 690 35,148
For six months ended June 30, 1999
- ----------------------------------
Net sales $262,606 $59,381 $8,733 $330,720
Operating income 27,925 11,402 1,154 40,481
Below are reconciliations of segment operating income to consolidated
income before income taxes:
(Dollars in thousands) Three Months Ended Six Months Ended
------------------ -------------------
June 30 June 30
------- -------
2000 1999 2000 1999
---- ---- ---- ----
Operating income segment totals $19,145 $21,394 $ 35,148 $ 40,481
Unallocated corporate expenses/(a)/ (6,314) (6,467) (13,317) (13,329)
Interest expense (2,186) (2,158) (4,237) (4,268)
Income from equity in joint ventures 214 194 268 227
------- ------- -------- --------
Consolidated income before income taxes $10,859 $12,963 $ 17,862 $ 23,111
======= ======= ======== ========
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to
evaluate segment performance.
There have been no changes in the basis of segmentation or the measurement
of segment profit or loss and no material change in segment assets from
those disclosed in the annual report for the year ended December 31, 1999.
The company has certain customers included within the surfactants business
that are under long-term contracts. These contracts range from a period of
2 to 5 years. Certain of these contracts are up for renewal beginning in
2001.
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. The standard establishes accounting and
reporting requirements for derivative instruments. In June 1999, the FASB
issued SFAS No. 137, which deferred the effective date to fiscal years
beginning after June 15, 2000. The company believes that the adoption of
SFAS No. 133 in 2001 will not have a material effect on its consolidated
results of operations or financial position.
In July 2000, the Emerging Issues Task Force reached a final consensus on
the classification of shipping and handling fees (Issue No. 00-10,
Accounting for Shipping and Handling Fees and Costs). This consensus states
that all amounts billed to a customer in a sale transaction related to
shipping and handling, if any, represent revenue to the vendor and should
be classified as revenue. The implementation date of this standard is
fourth quarter 2000. The company does not believe this consensus will have
any impact on financial position or net income. The company has yet to
assess the impact of this consensus, if any, on the presentation of results
of operations.
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 six months ended June 30, 2000, net cash from operations totaled $14.7
million compared to $22.7 million for the same period in 1999. Working capital
totaled to a net use of $15.2 million. Accounts receivables were up by $7.1
million, inventories increased by $3.6 million and accounts payable and accrued
liabilities decreased by $4.2 million.
Capital expenditures have totaled $12.0 million for the first half of 2000
compared to $17.1 million for the same period in 1999. Second-half expenditures
are projected to exceed first-half expenditures. However, total 2000 capital
spending should fall below the $32.7 million expended in 1999.
Since December 31, 1999, total company debt has increased by $4.2 million, to
$119.3 million. As of June 30, 2000, the ratio of long-term debt to long-term
debt plus shareholders' equity was 41.5 percent compared to 40.9 percent last
year-end.
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, 1999.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended June 30, 2000 and 1999
- -----------------------------------------
Net income for the second quarter ended June 30, 2000, decreased 17 percent from
$8.0 million in 1999, or $0.75 per share diluted, to $6.6 million, or $0.64 per
share diluted, in 2000. Net sales rose two percent to $169.9 million from
$166.8 million a year ago. Net sales by segment were:
(Dollars in thousands) Three Months
Ended June 30
-----------------------------------
2000 1999 % Change
-------- -------- --------
Net Sales:
Surfactants $128,456 $130,857 -2%
Polymers 36,343 31,619 +15%
Specialty Products 5,084 4,283 +19%
-------- --------
Total $169,883 $166,759 +2%
======== ========
Surfactants net sales decreased two percent from $130.9 million in the second
quarter of 1999 to $128.5 million in the second quarter of 2000. The decline
was mainly due to lower results from foreign operations. Foreign operations'
net sales decreased $2.5 million, or eight percent, between quarters. A 12
percent drop in sales volume accounted for the decline. Mexican operations
reported a 49 percent decrease in sales volume, which constituted more than 89
percent of the overall foreign decline. Lower exchange rates in Europe
contributed to the foreign decrease in net sales. Domestic operations, which
accounted for 79 percent of total surfactant revenues, reported almost unchanged
net sales between years. The second quarter 1999 cancellation of a supply
contract and a decline in average selling prices more than offset a six percent
gain in sales volume. Sales volume increased due to improvement in the
company's laundry and cleaning business partially offset by lower sales volume
of personal care products. Strong export sales to Asia favorably affected net
sales results. Average selling prices fell due to sales mix and higher freight
costs.
Surfactants gross profit decreased six percent to $21.9 million in 2000 from
$23.2 million in 1999. Domestic operations reported a $1.1 million, or six
percent, decline. The previously noted 1999 supply contract cancellation
accounted for $2.5 million in decreased earnings. The rise in sales volume
partially offset the decline. Gross profit for foreign operations decreased
$0.3 million, or six percent. Lower sales volume, primarily for the Mexican
operation, led to the decline.
Polymers net sales increased $4.7 million, or 15 percent, to $36.3 million in
the second quarter of 2000 from $31.6 million in the second quarter of 1999. The
improvement was due to an eight percent increase in sales volume and a six
percent rise in average selling prices. Phthalic anhydride (PA) net sales
increased 31 percent from $8.7 million in 1999 to $11.4 million in 2000 and
accounted for more than half of the increase. The improvement was mainly due to
a 24 percent rise in average selling prices coupled with a six percent gain in
sales volume. The higher prices were due to increased raw material costs, which
were passed on to customers. Net sales for global polyurethane polyols
increased $1.1 million, or seven percent, due to an eight percent
rise in sales volume. Polyurethane systems reported a $0.9 million, or 16
percent, rise in net sales between quarters. A 19 percent increase in sales
volume more than offset a three percent decline in average selling prices.
Polymers gross profit declined $0.7 million, or nine percent, from $8.3 million
in 1999 to $7.6 million in 2000. Global polyurethane polyols' gross profit
decreased $1.8 million, or 29 percent, between quarters. Lower domestic and
foreign operations average margins caused the decline. Average margins declined
mainly due to higher raw material costs. Gross profit for PA increased 58
percent to $2.5 million in the second quarter of 2000 from $1.6 million in the
second quarter of 1999. The rise was due to higher sales volume and improved
average margins. Polyurethane systems gross profit improved to $1.4 million in
the second quarter of 2000 from $1.2 million in the second quarter of 1999.
Increased sales volume accounted for the improvement.
Specialty products reported $5.1 million in net sales in the second quarter of
2000, compared to $4.3 million reported a year ago. The improvement was due to
increased sales volume and higher average selling prices. Gross profit
increased $0.4 million, or 45 percent, between quarters. The improvement was
mainly due to the rise in volume, which included a more profitable mix of food
ingredient products.
Operating expenses for the second quarter 2000 increased two percent, from $17.5
million in 1999 to $17.8 million in 2000. Research and development expenses
rose $0.4 million, or eight percent, between quarters. Higher outside technical
service and patent fees led to the increase.
Six Months Ended June 30, 2000 and 1999
- ---------------------------------------
Net income for the first six months ended June 30, 2000, was $10.9 million, or
$1.05 per share diluted, down $3.2 million from $14.1 million, or $1.32 per
share diluted, for the same period in 1999. Net sales increased two percent to
$337.3 million from $330.7 million reported last year. Net sales by segment
were:
(Dollars in thousands) Six Months
Ended June 30
---------------------------------------
2000 1999 % Change
-------- -------- --------
Net Sales:
Surfactants $261,252 $262,606 -1%
Polymers 66,726 59,381 +12%
Specialty Products 9,281 8,733 +6%
-------- --------
Total $337,259 $330,720 +2%
======== ========
Surfactants net sales decreased one percent from $262.6 million in 1999 to
$261.3 million in 2000. Domestic operations, which accounted for 78 percent of
total surfactant revenues, reported a $0.9 million decrease in net sales between
years. The second quarter 1999 cancellation of a supply contract and a decline
in average selling prices offset a three percent growth in sales volume and led
to the decrease. The increase in sales volume was due to improved sales of the
company's laundry and cleaning business. Increased sales volume to distributors
and higher
export sales volume to Asia also contributed. Lower sales of personal care
products partially offset the volume increase. Average selling prices decreased
due largely to sales mix and higher freight costs. Foreign operations reported a
$0.5 million, or one percent, decrease in net sales. A one percent decline in
average selling prices more than offset a one percent gain in sales volume.
Sales volumes for Europe and South America improved between years, but the
increase was largely offset by decreased sales volume for the company's Mexican
operation. In addition, lower exchange rates tempered the revenue from European
operations.
Surfactants gross profit decreased four percent between years from $45.0 million
in 1999 to $43.0 million in 2000. Domestic operations reported a $2.8 million,
or eight percent, drop despite a three percent gain in sales volume. The
previously noted supply contract cancellation contributed $3.6 million to the
decline. Gross profit for foreign operations improved $0.9 million, or 11
percent, between years. The company's Canadian operations contributed most of
the increase due to improved average margins. Despite strong sales volume,
European operations' gross profit declined, primarily due to lower margins
resulting from strong competition, product mix and lower exchange rates.
Polymers net sales increased $7.3 million, or 12 percent, to $66.7 million in
2000 from $59.4 million a year ago. Both sales volume and average selling
prices rose six percent between years. PA's net sales increased 29 percent from
$16.9 million in 1999 to $21.7 million in 2000 and accounted for most of the
increase. The improvement was mostly due to a 24 percent rise in average
selling prices which was attributable to the increased raw material costs passed
on to customers. PA sales volume increased four percent between years. Global
polyurethane polyols gained $2.2 million in net sales, or six percent, between
years. An eight percent rise in sales volume led to the increase. Net sales
for polyurethane systems increased $0.3 million, or two percent, on a four
percent rise in sales volume.
Polymers gross profit decreased eight percent from $14.7 million in 1999 to
$13.5 million in 2000. Gross profit for global polyurethane polyols dropped
$2.6 million, or 23 percent, between years. A decline in margins more than
offset the rise in sales volume. Higher raw material costs accounted for the
margin decline. Gross profit for PA rose $1.2 million, or 43 percent, due to
improved average margins and higher sales volume. Improved margins and volumes
also led to a $0.3 million, or 16 percent, increase in polyurethane systems
gross profit.
Specialty products recorded a six percent increase in net sales from $8.7
million in 1999 to $9.3 million in 2000. Gross profit declined 23 percent from
$1.7 million in 1999 to $1.3 million in 2000. Sales of higher margin products
were weak during the first quarter of 2000.
Operating expenses rose five percent from $34.2 million in 1999 to $35.9 million
in 2000. Administrative and marketing expenses increased five percent between
years. Research and development expenses went up six percent.
ENVIRONMENTAL AND LEGAL MATTERS
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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 six months of 2000, company expenditures for capital projects related to
the environment were $0.5 million and should approximate $1.0 million to $1.4
million for the full year 2000. 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 $3.3 million for the first six months of 2000.
The company has been named by the government as a potentially responsible party
at 17 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 $4.0 million to $24.5 million at June 30,
2000. At June 30, 2000, the company's reserve was $11.1 million for legal and
environmental matters compared to $11.6 million at December 31, 1999. During
the first six months of 2000, expenditures related to legal and environmental
matters approximated $1.2 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 1999 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 STANDARD
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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. The standard establishes accounting and reporting requirements
for derivative instruments. In June 1999, the FASB issued SFAS No. 137, which
deferred the effective date to fiscal years beginning after June 15, 2000. The
company believes that the adoption of SFAS No. 133 in 2001 will not have a
material effect on its consolidated results of operations or financial position.
In July 2000, the Emerging Issues Task Force reached a final consensus on the
classification of shipping and handling fees (Issue No. 00-10, Accounting for
Shipping and Handling Fees and Costs). This consensus states that all amounts
billed to a customer in a sale transaction related to shipping and handling, if
any, represent revenue to the vendor and should be classified as revenue. The
implementation date of this standard is fourth quarter 2000. The company does
not believe this consensus will have any impact on financial position or net
income. The company has yet to assess the impact of this consensus, if any, on
the presentation of results of operations.
OTHER
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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 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 has completed a Remedial Investigation Feasibility
Study in 1994. The company has been awaiting the issuance of a Record of
Decision (ROD) from the 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 company does not know when the ROD will be issued
by the USEPA.
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 took title to radiological contaminated
materials and was to remediate, at its expense, all radiological (byproduct
material and source material) waste on the company's property in Maywood, New
Jersey. The Maywood property (and portions of the surrounding area) were
remediated by the Department of Energy 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 Cooperative Agreement.
By letter dated July 28, 2000, the Department of Justice advised the company
that the USACE and the 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 Department of Energy 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 refers to both
radiological and non-radiological hazardous waste at the Maywood Site and states
that the United States has incurred unreimbursed response costs to date of
$138.0 million. In the letter the Justice Department invites the company to
discuss settlement of the matter in order to avoid the need for litigation. The
company has previously included potential claims for response costs associated
with non-radiological waste at the Maywood Site in its estimated range of costs
and its establishment of reserves for potential claims at various sites where it
is a potentially responsible party under CERCLA and the company believes such
estimates and reserves are adequate to include claims associated with non-
radiological waste at the Maywood Site. The company has not reflected in such
estimates and such reserves any amount for costs associated with radiological
waste at the Maywood Site (which represent all but a small portion of the amount
referred to in the Justice Department letter and could be expected to aggregate
substantially in excess of that amount) because of its belief that its
liability, if any, for such costs has been resolved by the aforesaid Cooperative
Agreement. The company continues to believe that it has no liability to the
United States for such radiological cleanup costs by reason of the aforesaid
Cooperative Agreement and the company intends to assert that position vigorously
in discussions with the Justice Department and, if necessary, in defense of any
litigation asserting such claims.
As reported previously, the company has been named as a potentially responsible
party (PRP) in the case USEPA v. Jerome Lightman (92 CV 4710) (JBS) 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 be held in calendar year 2000 or calendar
year 2001. 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.
The company received a Section 104(e) Request for Information from the USEPA
dated March 21, 2000, regarding the Lightman Drum 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 is currently
investigating this matter and therefore, cannot predict what its liability, if
any, will be for this site.
Reference is made to the action entitled Pennsauken Solid Waste Management
Authority v. State of New Jersey, et al. It is anticipated that the company
will be dismissed from this action. Therefore, this matter should have no
material impact on the financial condition of the company.
Reference is made to the Administrative Complaint filed by Region 5 of the USEPA
(FIFRA-5-2000-011) alleging violations of the Federal Insecticide, Fungicide and
Rodenticide Act. The company has settled this matter with USEPA with no
material impact on the financial condition of the company.
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: August 14, 2000