Exhibit 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
2001 Compared with 2000
Net sales for 2001 increased two percent from $698.9 million in 2000 to $711.5
million in 2001. Net sales by segment were as follows:
Percent
(Dollars in thousands) 2001 2000 Change
- ------------------------------------------------------------------
Surfactants $558,927 $537,006 +4
Polymers 127,722 140,786 -9
Specialty Products 24,868 21,145 +18
-------- --------
Total $711,517 $698,937 +2
======== ========
Surfactants are a principal ingredient in consumer and industrial
cleaning products such as detergents, shampoos, lotions, toothpastes and
cosmetics. Other applications include lubricating ingredients and emulsifiers
for agricultural products, and plastics and composites.
Surfactants net sales, representing 79 percent of the company's
revenue, increased $21.9 million, or four percent, due to a four percent rise in
sales volume. Foreign operations accounted for the overall improvement,
reporting a $32.5 million, or 27 percent, rise in net sales due to a 28 percent
increase in sales volume. Approximately $14.7 million of the foreign improvement
was attributable to the fourth quarter acquisition of Stepan UK Limited
(formerly Manro Performance Chemicals) located in Stalybridge, UK. In addition,
all other foreign subsidiaries reported increased net sales, primarily due to
higher sales volumes. European operations, excluding the United Kingdom, posted
a net increase of $8.6 million. Net sales for South American operations grew
$4.5 million, while net sales for Mexico and Canada increased $2.6 million and
$2.1 million, respectively. Domestic operations, which accounted for 73 percent
of total surfactant revenues, reported a $10.6 million, or three percent,
decline in net sales from $417.2 million in 2000 to $406.6 million in 2001. The
decrease was due to a one percent drop in sales volume and a one percent decline
in average selling prices. Lower demand for laundry and cleaning products and
increased market competition led to the decline. The economic slowdown adversely
impacted sales volume of higher margin industrial surfactants.
The polymers product group includes phthalic anhydride (PA),
polyurethane systems and polyurethane polyols. PA is used in polyester alkyd
resins and plasticizers for applications in construction materials and
components of automotive, boating and other consumer products. Polyurethane
systems provide thermal insulation and are sold to the construction, industrial
and appliance markets. Polyurethane polyols are used in
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the manufacture of laminate board for the construction industry. Polyurethane
polyols are also sold to the appliance, coatings, adhesives, sealants and
elastomers markets.
Polymer net sales, accounting for 18 percent of the company's revenue,
decreased $13.1 million, or nine percent, from $140.8 million in 2000 to $127.7
million in 2001. The decline was due to a 13 percent drop in sales volume,
driven primarily by a slowdown in the U.S. economy. PA's net sales decreased 21
percent to $32.8 million for 2001 from $41.4 million in 2000. A 24 percent
decline in sales volume accounted for the decrease. Polyurethane systems net
sales fell 15 percent to $19.4 million for 2001 from $22.7 million in 2000. A
drop in sales volume accounted for the decline and more than offset an increase
in average selling prices. Globally, polyurethane polyols net sales decreased
$1.1 million, or one percent, between years from $76.7 million in 2000 to $75.5
million in 2001. Domestic net sales fell less than one percent due to a five
percent decrease in sales volume, partially offset by an increase in average
selling prices. European operations reported a decline in revenue due to an 11
percent drop in average selling prices, which offset a two percent gain in sales
volume. Continued market pressures led to the average selling price drop.
Specialty products include flavors, emulsifiers and solubilizers used
in the food and pharmaceutical industries. Net sales for the year were $24.9
million, a rise of $3.7 million, or 18 percent, over 2000. Higher average
selling prices coupled with a slightly higher sales volume led to the growth in
revenue.
Gross profit decreased to $107.2 million in 2001 from $112.0 million in
2000. Surfactants gross profit was down $4.8 million, or six percent, from $79.3
million in 2000 to $74.5 million in 2001. Domestic operations reported an $8.9
million decline in gross profit due primarily to a drop in average margins.
Lower sales volume also contributed. The decrease in average margins was mainly
due to weaker sales mix and higher energy costs. Higher margin industrial
surfactants sales volume declined as the economy slowed down through the end of
2001. Gross profit for foreign surfactants increased $4.1 million, or 29
percent, from year-to-year. A 28 percent improvement in sales volume caused the
increase in gross profit. The newly acquired United Kingdom subsidiary
contributed $1.9 million of the foreign increase. European operations, excluding
United Kingdom, and South American operations contributed $1.0 million and $0.7
million, respectively, of the gross profit gain. Polymers gross profit declined
$4.1 million, or 15 percent, from $27.9 million in 2000 to $23.8 million in
2001. Gross profit for PA declined 51 percent to $3.2 million in 2001 from $6.4
million in 2000. Lower sales volume and lower average margins accounted for the
drop. Higher unit overhead costs resulting from decreased production volume
coupled with some price reductions resulting from competitive situations led to
the declined average margins. Global polyurethane polyols gross profit fell $0.3
million, or two percent, between years. Domestic operations reported an increase
of $0.2 million, or one percent, in gross profit due to improved average margins
that more than offset lower sales volume. Foreign operations gross profit fell
$0.6 million on reduced average margins that more than offset higher sales
volume. Polyurethane systems gross profit declined eight percent on lower sales
volume. Improved average margins due to an average selling price increase and
favorable sales mix partially offset the impact of lower sales volume.
Specialty products reported an increase of $4.1 million in gross profit from
year-to-year. The improvement was due to higher sales volume of higher margin
products.
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Operating income was $31.2 million, a $0.8 million, or three percent,
decrease in comparison with 2000. Operating expenses, consisting of marketing,
administrative and research and development expenses, decreased five percent
between years. Administrative expenses declined $3.9 million, or 12 percent,
from those reported in the prior year. A $7.5 million decline in legal and
environmental expense, partially offset by $4.7 million of 2001 expense for the
implementation of an enterprise resource planning system, accounted for most of
the decrease between years. The drop in legal and environmental expense was
primarily due to $6.1 million of prior year expense related to the company's
Maywood, New Jersey, site that was non-recurring in 2001. In addition, current
year expense was reduced by insurance recoveries received of $2.0 million,
somewhat offset by a $0.5 million year-to-year increase in general legal
expenses. Marketing expenses declined one percent between years and research and
development expenses remained almost unchanged.
Interest expenses declined 14 percent from year-to-year due to lower
overall borrowing rates coupled with lower average debt levels.
Philippine joint venture equity income rose $1.2 million between years. The
improvement was largely due to reduced foreign exchange losses resulting from a
devaluation of the Philippine peso in 2000.
Pretax income increased $1.5 million, or six percent, to $25.9 million in
2001 from $24.4 million in 2000.
The effective tax rate was 37.7 percent in 2001 compared to 38.5 percent in
2000. The lower effective tax rate was primarily attributable to Philippine tax
benefits realized during 2001 (see Note 6 of the Notes to the Consolidated
Financial Statements for a reconciliation of the statutory rate to the effective
tax rate).
Net income for the year was $16.2 million, or $1.59 per share diluted,
compared with $15.0 million, or $1.47 per share diluted, a year ago. The
acquisition of Stepan UK Limited added $0.4 million to net income, or $0.03 per
share diluted.
2000 Compared with 1999
Net sales for 2000 increased one percent from $694.7 million in 1999 to $698.9
million in 2000 (prior year data has been reclassified to conform to 2000
presentation). The increase was due to a three percent rise in sales volume. Net
sales by segment were as follows:
Percent
(Dollars in thousands) 2000 1999 Change
----------------------------------------------------------------------
Surfactants $537,006 $547,359 -2
Polymers 140,786 126,774 +11
Specialty Products 21,145 20,526 +3
-------- --------
Total $698,937 $694,659 +1
======== ========
Surfactants net sales, representing 77 percent of the company's revenue,
decreased $10.4 million, or two percent, from $547.4 million in 1999 to $537.0
million in
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2000. Foreign operations' net sales decreased $13.2 million, or 10 percent, from
$133.0 million in 1999 to $119.8 million in 2000, which accounted for the
overall net sales decline. The decrease was mainly due to a decline in revenue
reported by the company's Mexican and European subsidiaries. Mexican operations
reported lower revenue due to decreased sales volume. Despite a volume gain
between years, European operations' net sales decreased. Weaker selling prices
and lower exchange rates contributed to the overall decline. Domestic sales
increased $2.8 million, or one percent, from $414.4 million in 1999 to $417.2
million in 2000. A six percent rise in sales volume offset a five percent drop
in average selling prices. Average selling prices declined largely due to sales
mix, increased market competition and the non-recurring favorable impact in 1999
of the settlement of a contract cancellation. Sales volume grew six percent due
to higher demand for the company's laundry and cleaning products and rising
export sales to Asia.
Polymer net sales, accounting for 20 percent of the company's revenue,
increased 11 percent, from $126.8 million in 1999 to $140.8 million in 2000. The
increase was due to a five percent rise in sales volume coupled with increased
average selling prices. Globally, polyurethane polyols' net sales rose $6.7
million, or ten percent, from $70.0 million in 1999 to $76.7 million in 2000.
The increase was entirely due to a nine percent rise in sales volume. Both
domestic and foreign operations sales increased between years. PA's net sales
increased 14 percent from $36.3 million in 1999 to $41.4 million in 2000. The
improvement was entirely due to a 14 percent rise in average selling prices. The
higher prices were due to increased raw material costs, which were passed on to
customers. Sales volume was flat between years. Polyurethane systems reported a
$2.2 million, or 11 percent, increase in net sales. A nine percent rise in sales
volume coupled with a two percent increase in average selling prices caused an
overall improvement.
Specialty products net sales for the year 2000 were $21.1 million, a
rise of $0.6 million, or three percent over 1999. Higher average selling prices
led to the growth.
Gross profit decreased to $112.0 million in 2000 from $120.9 million in
1999. Surfactants gross profit was down $8.3 million, or nine percent, from
$87.6 million in 1999 to $79.3 million in 2000. Domestic operations reported a
$6.6 million, or nine percent, decrease due to lower average margins.
Termination of the previously mentioned supply contract coupled with lower
pricing in the higher volume product lines led to the margin decline. Gross
profit for foreign operations decreased $1.7 million, or 11 percent, between
years. Decreased sales volume for Mexican operations coupled with lower margins
reported by the company's French subsidiary led to the overall decline. Weaker
exchange rates in Europe and strong competition contributed to the decrease.
Polymers' gross profit increased slightly between years to $27.9 million in 2000
from $27.8 million in 1999. Lower margins offset the impact of increased sales
volume. Globally, polyurethane polyols gross profit was down $2.6 million, or 12
percent, between years. Decreased domestic and European margins, due to higher
raw material costs, caused the drop in gross profit. PA's gross profit was up
$1.9 million, or 42 percent, between years, despite a $0.9 million write-off of
damaged catalyst. Improved margins accounted for the increase. A rise in margins
and sales volume also led to a $0.7 million, or 17 percent, increase in
polyurethane systems gross profit. Specialty products gross profit decreased by
$0.7 million, or 13 percent, between years mainly due to lower sales of higher
margin products.
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Operating income was $32.0 million in 2000, a $9.8 million, or 23
percent, decrease from 1999. Operating expenses, consisting of marketing,
administrative and research and development expenses, increased one percent
between years. Marketing expenses rose $1.4 million, or six percent, primarily
due to increased bad debt provision. Administrative expenses decreased just $0.6
million, or two percent, despite unusually high 1999 expenses that resulted from
a $10.2 million legal settlement charge. 2000 administrative expenses included
$6.1 million of legal and environmental-related charges, most of which related
to potential future remediation costs at the company's Maywood, New Jersey,
plant (see Environmental and Legal Matters section of this discussion for
additional information). General legal expense was also up $1.4 million between
years.
Philippine joint venture equity income fell $0.7 million, or 51
percent, between years. An $0.8 million unfavorable swing in foreign currency
exchange losses, due to a weaker Philippine peso, caused the decline. The impact
from foreign exchange fluctuations excluding the joint venture was immaterial to
the results of the company's operations.
Pretax income declined $10.4 million, or 30 percent, to $24.4 million
in 2000 from $34.8 million in 1999.
The effective tax rate was 38.5 percent in 2000 compared to 36.5
percent in 1999. The higher effective tax rate was primarily attributable to the
inability to tax benefit losses in Germany and Mexico. A lower tax benefit
realized on Philippine income during 2000 also contributed to the higher
effective tax rate (see Note 6 of the Notes to the Consolidated Financial
Statements for a reconciliation of the statutory rate to the effective tax
rate).
Net income for the year 2000 was $15.0 million, or $1.47 per share
diluted, compared with $22.1 million, or $2.08 per share diluted, for 1999.
Fourth Quarter 2001 Compared with 2000
For the quarter ended December 31, 2001, the company reported net income of $1.9
million, or a $0.18 per share diluted, compared to a net loss of $2.1 million,
or a $0.25 loss per share diluted, in the fourth quarter of 2000. The newly
acquired United Kingdom subsidiary contributed $0.4 million of 2001 fourth
quarter net income, or $0.04 per share diluted. Net sales for the quarter grew
five percent to $178.1 million from $169.4 million a year ago. Net sales for
surfactants increased $12.6 million (10 percent), due to the acquisition of the
United Kingdom subsidiary and to increased foreign sales volume. Domestic
revenues and volumes declined between quarters. Polymer sales fell $3.9 million
(12 percent) on a seven percent decline in sales volumes. Gross profit of $25.1
million was just shy of the $25.2 million reported in the fourth quarter of
2000. Surfactants gross profit increased $1.2 million, or seven percent, due to
a $3.6 million increase recorded by foreign operations. The acquisition of the
United Kingdom subsidiary contributed $1.9 million of the increased gross
profit. Gross profit for polymers declined $1.9 million, or 25 percent, between
quarters due to reduced sales volume coupled with lower margins. All polymer
businesses reported decreased quarterly earnings. Gross profit for specialty
products was up $0.6 million between quarters. Higher sales volume of higher
margin products led to the growth. Operating expenses declined $5.2 million, or
19 percent, in comparison with the fourth quarter of 2000. Administrative
expenses
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dropped $4.5 million, or 32 percent, between quarters. Legal and environmental
expense decreased $6.4 million from quarter to quarter due to $6.1 million of
prior year Maywood-related charges that did not recur in the fourth quarter of
2001. Most of these changes were related to potential future remediation costs
at the company's Maywood, New Jersey plant. Non-recurring fourth quarter 2000
acquisition investigation expenses of $0.6 million also contributed to the
decline. The decline was partially offset by $2.7 million in expense incurred in
2001 related to the implementation of an enterprise resource planning system and
$0.8 million in expenses incurred by the new United Kingdom subsidiary.
Marketing expenses decreased $0.7 million, or 10 percent, between quarters due
mostly to a $1.2 million decrease in domestic bad debt expense resulting from
improved collectibility estimates for certain accounts receivable. The decline
was somewhat offset by $0.3 million in marketing expense reported by the United
Kingdom. Research and development expenses were flat between quarters.
Philippine joint venture equity income increased $0.5 million between quarters.
Foreign currency exchange losses in 2000 resulting from a weaker Philippine
peso, accounted for most of the improvement.
Interest expenses declined 20 percent between quarters. The decrease
was due to lower overall borrowing rates, partially offset by an increased level
of debt.
Liquidity and Financial Condition
Net cash from operations for 2001 totaled $53.6 million compared to $53.5
million for the prior year. Working capital required the use of $0.6 million for
the current year, compared to a cash source of $1.4 million during 2000. From
year to year accounts receivable decreased by $6.1 million, while accounts
payable and other accrued liabilities decreased by an equivalent and offsetting
amount. Inventories decreased by $0.4 million during 2001 while other working
capital items, mainly prepaid expenses, absorbed $1.0 million.
Capital expenditures, excluding acquisitions, totaled $34.0 million for
the current year compared to $28.4 million during 2000. Current year capital
spending included $6.6 million for an enterprise resource planning (ERP) system,
which is expected to be completed in 2002. It is anticipated that total 2002
capital spending will rise modestly over 2001 levels, due mostly to higher
non-ERP spending.
During September 2001 the company completed the acquisition of Manro
Performance Chemicals Limited, located in Stalybridge, UK. This acquisition was
made for cash totaling $24.6 million and was funded through the company's
committed lines of credit.
Consolidated debt increased by $14.3 million during 2001 to $120.3
million mainly in order to fund the Manro Performance Chemicals Limited
acquisition. As of December 31, 2001, the ratio of long-term debt to long-term
debt plus shareholders' equity was 40.7 percent compared to 38.5 percent one
year earlier.
The company maintains contractual relationships with its domestic banks
that provide for revolving credit of up to $60 million, which may be drawn upon,
through January 8, 2003, as needed for general corporate purposes. The company
plans to renegotiate and extend this revolving credit agreement during the first
quarter of 2002. The company also meets short-term liquidity requirements
through uncommitted
6
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.
The 50 percent owned Philippine joint venture, which is accounted for
under the equity method, has $5.1 million of debt, which is not consolidated
with or guaranteed by Stepan Company.
Market Risk Analysis
FOREIGN CURRENCY EXCHANGE RISK
Because the company operates in the global marketplace, its cash flows and
operating results are exposed to foreign currency fluctuations. The company
manufactures and sells products in many foreign locations and, therefore,
believes its currency exchange risk is well diversified. Except as noted below,
substantially all the company's foreign subsidiaries' financial instruments are
denominated in their respective functional currencies. As such, exposure to
exchange rate risk on foreign currency financial instruments is insignificant.
In addition, the foreign subsidiaries periodically use short- term forward
exchange contracts to limit the exposure of certain foreign currency
transactions and balances to fluctuating exchange rates. At December 31, 2001,
the balance of such contracts was not significant.
The company's 50 percent owned Philippine joint venture has U.S.
dollar-denominated debt with the potential for future translation gains or
losses. A 10 percent change in this exchange rate would not have a material
effect on the company's operating results or cash flow.
INTEREST RATES
The company's debt was composed of fixed-rate and variable-rate borrowings
totaling $83.3 million and $37.0 million, respectively, as of December 31, 2001.
For 2002, it is projected that interest on variable-rate borrowings will
comprise about 27 percent of the company's total interest expense. A 10 percent
increase or decrease to short-term interest rates would be immaterial to the
company's operating results or cash flow.
The fair value of the company's fixed-rate debt, including current maturities,
was estimated to be $87.1 million as of December 31, 2001, which was
approximately $3.8 million above the carrying value. Market risk was estimated
as the potential increase to the fair value that would result from a
hypothetical 10 percent decrease in the company's weighted average long-term
borrowing rates at December 31, 2001, or $2.0 million. Such a rate decrease
would be immaterial to future operating results or cash flow.
7
COMMODITY PRICE RISK
Certain raw materials used in the manufacture of the company's products are
subject to price volatility caused by weather, petroleum prices and other
unpredictable factors. In many cases, the company has the ability to pass on raw
material price increases to customers. Therefore, commodity financial
instruments are generally not used for raw material purchases. Periodically,
firm purchase commitments are entered into which fix the price of a specific
commodity that will be delivered at a future time. Such commitments usually
cover only a portion of the company's anticipated requirements. Commodity future
and forward contracts are used to a limited extent, most often to aid in
managing the company's utility costs. As of December 31, 2001, unrealized gains
and losses related to such contracts were not material. A hypothetical 10
percent fluctuation in the price of commodities covered by firm commitments and
forward contracts would have an immaterial effect on the company's financial
position, results of operations and cash flow.
Outlook
The prospect for earnings improvement in 2002 is dependent upon an economic
recovery. Both polymers and surfactants, particularly those used in higher
margin industrial applications, will need a lift from the economy. The
enterprise resource planning system implementation is scheduled for completion
in 2002 with additional charges projected to approximate $0.20 to $0.25 per
share (diluted). European earnings are expected to benefit from the Manro
(United Kingdom) acquisition by a projected $0.20 to $0.25 per share (diluted).
In addition, the future impact of customer consolidations will be closely
monitored, as the potential exists for such customers to bring surfactant
production in house - a situation which could lead to a loss of customers and
sales volumes.
Environmental and Legal Matters
The company is subject to extensive federal, state and local
environmental laws and regulations. Although the company's environmental
policies and practices are designed to ensure compliance with these laws and
regulations, future developments and increasingly stringent environmental
regulation could require the company to make additional unforeseen environmental
expenditures. The company will continue to invest in the equipment and
facilities necessary to comply with existing and future regulations. During
2001, the company's expenditures for capital projects related to the environment
were $1.1 million. These projects are capitalized and depreciated over their
estimated useful lives, which is typically 10 years. Recurring costs associated
with the operation and maintenance of facilities for waste treatment and
disposal and managing environmental compliance in ongoing operations at our
manufacturing locations were approximately $7.9 million for 2001 and 2000. While
difficult to project, it is not anticipated that these recurring expenses will
increase significantly in the future.
The company has been named by the government as a potentially
responsible party at 16 waste disposal sites where cleanup costs have been or
may be incurred under the federal Comprehensive Environmental Response,
Compensation and Liability Act
8
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 the
sites. It is the company's accounting policy to record liabilities when
environmental assessments and/or remedial efforts are probable and the cost or
range of possible costs can be reasonably estimated. When no amount within the
range is a better estimate than any other amount, at least the minimum is
accrued. Some of the factors on which the company basis its estimates include
information provided by feasibility studies, potentially responsible party
negotiations and the development of remedial action plans. Because reported
liabilities are recorded based on estimates, actual amounts could differ from
those estimates. After partial remediation payments at certain sites, the
company has estimated a range of possible environmental and legal losses from
$7.4 million to $35.0 million at December 31, 2001, compared to $7.5 million to
$35.0 million at December 31, 2000. At December 31, 2001, the company's reserve
was $17.0 million for legal and environmental matters compared to $16.6 million
at December 31, 2000. During 2001, non-capital expenditures related to legal and
environmental matters approximated $2.6 million compared to $2.5 million, net of
insurance recoveries, expended in 2000. While it is difficult to forecast the
timing of the expenditures, the company believes that $3.0 million of the $17.0
million reserve is likely to be paid out in 2002. The timing of future payments
is uncertain.
For certain sites, estimates cannot be made of the total costs of
compliance or the company's share of such costs; accordingly, the company is
unable to predict the effect thereof on future results of operations. In the
event of one or more adverse determinations in any annual or interim period, the
impact on results of operations for those periods could be material. However,
based upon the company's present belief as to its relative involvement at these
sites, other viable entities' responsibilities for cleanup and the extended
period over which any costs would be incurred, the company believes that these
matters will not have a material effect on the company's financial position.
Certain of these matters are discussed in Item 3, Legal Proceedings, in the 2001
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
also Footnote 12, Contingencies, in the Notes to Consolidated Financial
Statements 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. SFAS No. 141 requires the use of the purchase method of accounting for all
transactions initiated after June 30, 2001. SFAS No. 142 addresses financial
accounting and reporting for goodwill and other intangible assets subsequent to
their acquisition. The new standard establishes that goodwill is no longer to be
amortized. Instead, goodwill will be tested for
9
impairment by applying a fair-value-based test each year, and more frequently,
if circumstances indicate a possible impairment. If the carrying amount exceeds
the implied fair value of that goodwill, an impairment loss shall be recognized.
Equity-method goodwill is not, however, subject to the new impairment rules; the
impairment guidance in existing rules for equity-method investments continues to
apply. The standard also establishes new accounting guidelines for intangible
assets that are determined to have an indefinite useful life. These assets are
no longer subject to amortization, but shall be tested for impairment annually
or more frequently if events or changes in circumstances indicate that the asset
might be impaired. If the carrying amount of an intangible asset exceeds the
fair value, an impairment loss shall be recognized in an amount equal to that
excess. Any impairment as a result of initial adoption of SFAS No. 142 will be
recorded as a cumulative effect of 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 Stalybridge, UK (see
Footnote 2, 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 goodwill or 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.
10
Report of Management on Financial Statements
The financial statements of Stepan Company and subsidiaries were prepared by and
are the responsibility of management. The statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and include some amounts that are based on management's best
estimates and judgments. The Board of Directors, through its Audit Committee,
assumes an oversight role with respect to the preparation of the financial
statements.
In meeting its responsibility for the reliability of the financial
statements, the company depends on its system of internal accounting control.
The system is designed to provide reasonable assurance that assets are
safeguarded and that transactions are executed as authorized and are properly
recorded. The system is augmented by written policies and procedures and an
internal audit department.
The Audit Committee of the Board of Directors, composed solely of
directors who are not officers or employees of the company, meets regularly with
management, with the company's internal auditors and with its independent
certified public accountants to discuss its evaluation of internal accounting
controls and the quality of financial reporting. The independent auditors and
the internal auditors have free access to the Audit Committee, without
management's presence.
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
F. Quinn Stepan, Jr.
President and Chief Operating Officer
Walter J. Klein
Vice President - Finance
February 11, 2002
11
Report of Independent Public Accountants
To the Stockholders of Stepan Company:
We have audited the accompanying consolidated balance sheets of Stepan Company
(a Delaware corporation) and Subsidiaries as of December 31, 2001 and 2000, and
the related consolidated statements of income, cash flows and stockholders'
equity, for each of the three years in the period ended December 31, 2001. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stepan
Company and Subsidiaries as of December 31, 2001 and 2000, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Chicago, Illinois
February 11, 2002
12
Consolidated Balance Sheets
December 31, 2001 and 2000
(Dollars in thousands) 2001 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 4,224 $ 3,536
Receivables, less allowances of $2,272 in 2001 and $3,154 in 2000 103,190 98,488
Inventories (Note 3) 61,863 60,132
Deferred income taxes (Note 6) 10,684 10,866
Other current assets 5,233 4,191
------------- -------------
Total current assets 185,194 177,213
============= =============
Property, Plant and Equipment:
Land 6,156 5,786
Buildings and improvements 75,720 69,654
Machinery and equipment 565,150 530,564
Construction in progress 20,091 13,292
------------- -------------
667,117 619,296
Less: Accumulated depreciation 454,684 420,149
------------- -------------
Property, plant and equipment, net 212,433 199,147
------------- -------------
Other Assets 37,861 38,689
------------- -------------
Total assets $ 435,488 $ 415,049
============= =============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 10,745 $ 9,586
Accounts payable 62,410 57,255
Accrued liabilities (Note 10) 36,575 39,121
------------- -------------
Total current liabilities 109,730 105,962
------------- -------------
Deferred Income Taxes (Note 6) 35,040 39,170
------------- -------------
Long-term Debt, less current maturities (Note 4) 109,588 96,466
------------- -------------
Other Non-current Liabilities (Note 11) 21,401 19,275
------------- -------------
Stockholders' Equity (Note 7):
5 1/2 percent 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
9,604,003 shares in 2001 and 9,411,106 shares in 2000 9,604 9,411
Additional paid-in capital 16,893 13,343
Accumulated other comprehensive loss (Note 1) (14,800) (12,402)
Retained earnings 142,110 133,308
------------- -------------
168,388 158,247
Less: Treasury stock, at cost 8,659 4,071
------------- -------------
Stockholders' equity 159,729 154,176
------------- -------------
Total liabilities and stockholders' equity $ 435,488 $ 415,049
============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
13
Consolidated Statements of Income
For the years ended December 31, 2001, 2000 and 1999
(In thousands, except per share amounts) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Net Sales (Note 1) $ 711,517 $ 698,937 $ 694,659
------------- ------------- -------------
Cost of Sales 604,288 586,911 573,714
------------- ------------- -------------
Gross Profit 107,229 112,026 120,945
------------- ------------- -------------
Operating Expenses:
Marketing 24,884 25,166 23,799
Administrative 28,251 32,152 32,775
Research, development and technical services (Note 1) 22,869 22,680 22,593
------------- ------------- -------------
76,004 79,998 79,167
------------- ------------- -------------
Operating Income 31,225 32,028 41,778
Other Income (Expenses):
Interest, net (Note 4) (7,168) (8,328) (8,376)
Income from equity joint venture (Note 1) 1,869 703 1,427
------------- ------------- -------------
(5,299) (7,625) (6,949)
------------- ------------- -------------
Income Before Provision for Income Taxes 25,926 24,403 34,829
Provision for Income Taxes (Note 6) 9,774 9,395 12,700
------------- ------------- -------------
Net Income $ 16,152 $ 15,008 $ 22,129
============= ============= =============
Net Income Per Common Share (Note 14):
Basic $ 1.66 $ 1.52 $ 2.22
============= ============= =============
Diluted $ 1.59 $ 1.47 $ 2.08
============= ============= =============
Shares Used to Compute Net Income
Per Common Share (Note 14):
Basic 9,249 9,355 9,592
============= ============= =============
Diluted 10,133 10,236 10,632
============= ============= =============
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
14
Combined Sales
(Dollars in thousands)
Specialty Consolidated
Surfactants Polymers Products Total
1997 475,585 110,753 19,236 605,574
1998 493,930 122,148 19,678 635,756
1999 547,359 126,774 20,526 694,659
2000 537,006 140,786 21,145 698,937
2001 558,927 127,722 24,868 711,517
2001 Sales Dollar Distribution
(Dollars in thousands)
Material $428,506 60.2%
Other Expenses 113,864 16.0%
Payroll and Fringes 103,249 14.5%
Depreciation and Amortization 39,972 5.6%
Income Taxes 9,774 1.4%
Net Income 16,152 2.3%
15
Consolidated Statements of Cash Flows
For the years ended December 31, 2001, 2000 and 1999
(Dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Net Cash Flows from Operating Activities
Net income $ 16,152 $ 15,008 $ 22,129
Depreciation and amortization 39,972 39,277 39,452
Deferred revenue recognition (470) (1,761) (5,165)
Deferred income taxes (2,383) (3,905) 3,745
Environmental and legal liabilities 331 5,069 (4,999)
Other non-cash items 610 (1,565) (98)
Changes in Working Capital:
Receivables, net 6,062 (1,399) (15,199)
Inventories 419 (8,283) 647
Accounts payable and accrued liabilities (6,075) 10,890 10,676
Other (1,042) 201 (575)
-----------------------------------------
Net Cash Provided by Operating Activities 53,576 53,532 50,613
-----------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (34,014) (28,442) (32,697)
Investment in acquisitions (24,640) -- (450)
Other non-current assets 1,560 (1,122) (594)
-----------------------------------------
Net Cash Used for Investing Activities (57,094) (29,564) (33,741)
-----------------------------------------
Cash Flows from Financing
and Other Related Activities
Revolving debt and notes payable to banks, net 22,200 (1,500) 11,400
Other debt borrowings 1,188 -- --
Other debt repayments (9,107) (7,531) (10,832)
Purchases of treasury stock, net (4,588) (8,732) (8,255)
Dividends paid (7,350) (7,004) (6,727)
Stock option exercises 3,151 1,397 1,088
Other non-cash items (1,288) (1,031) (560)
-----------------------------------------
Net Cash Provided by (Used for) Financing
and Other Related Activities 4,206 (24,401) (13,886)
-----------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 688 (433) 2,986
Cash and Cash Equivalents at Beginning of Year 3,536 3,969 983
-----------------------------------------
Cash and Cash Equivalents at End of Year $ 4,224 $ 3,536 $ 3,969
========================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 11,652 $ 13,262 $ 10,564
Cash payments of interest $ 7,862 $ 8,775 $ 8,780
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
16
Capital Expenditures
(Dollars in thousands)
1996 44,923
1997 35,589
1998 44,056
1999 32,697
2000 28,442
2001 34,014
Compound Annual Growth
Five Years -5%
Equity Per Share
(Dollars)
1996 12.24
1997 13.01
1998 14.18
1999 15.20
2000 15.57
2001 16.14
Compound Annual Growth
Five Years +6%
17
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2001, 2000 and 1999
Accumulated
Other
Convertible Additional Comprehensive
Preferred Common Paid-in Treasury Income Retained Comprehensive
(Dollars in thousands) Stock Stock Capital Stock (Loss) Earnings Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1999 $ 19,611 $ 9,998 $ 10,962 $ (11,015) $ (9,050) $ 127,478 --
Sale of 85,250 shares
under stock option plan -- 85 1,003 -- -- -- --
Purchase of 317,048 shares of common
and 38,646 shares of preferred treasury
stock, net of sales -- -- 4 (8,255) -- -- --
Retirement of 400,000 shares of common
treasury stock -- (400) (516) 9,572 -- (8,656) --
Conversion of preferred stock
to common stock (36) 2 34 -- -- -- --
Net income -- -- -- -- -- 22,129 $ 22,129
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,581) -- (1,581)
---------
Comprehensive income -- -- -- -- -- -- $ 20,548
=========
Cash dividends paid: -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (858) --
Common stock (61.25(cent)per share) -- -- -- -- -- (5,869) --
Non-qualified stock option tax benefit -- -- 422 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 19,575 9,685 11,909 (9,698) (10,631) 134,224 --
Sale of 113,950 shares
under stock option plan -- 114 1,283 -- -- -- --
Purchase of 386,709 shares of common and
16,015 shares of preferred treasury
stock, net of sales -- -- (260) (8,732) -- -- --
Retirement of shares of treasury stock:
400,000 shares of common stock -- (400) (565) 8,975 -- (8,010) --
188,535 shares of preferred stock (4,713) -- 239 5,384 -- (910) --
Conversion of preferred stock
to common stock (275) 12 262 -- -- -- --
Net income -- -- -- -- -- 15,008 $ 15,008
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,771) -- (1,771)
---------
Comprehensive income -- -- -- -- -- -- $ 13,237
=========
Cash dividends paid: -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (815) --
Common stock (66.25(cent)per share) -- -- -- -- -- (6,189) --
Non-qualified stock option tax benefit -- -- 475 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 14,587 9,411 13,343 (4,071) (12,402) 133,308 --
Sale of 192,650 shares
under stock option plan -- 193 2,958 -- -- -- --
Purchase of 189,214 shares of common stock,
net of sales -- -- (18) (4,588) -- -- --
Conversion of preferred stock
to common stock (6) -- 6 -- -- -- --
Net income -- -- -- -- -- 16,152 $ 16,152
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,414) -- (1,414)
Minimum pension liability adjustment
(net of tax of $595) -- -- -- -- (984) -- (984)
---------
Comprehensive income -- -- -- -- -- -- $ 13,754
=========
Cash dividends paid: -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (802) --
Common stock (70.75(cent)per share) -- -- -- -- -- (6,548) --
Non-qualified stock option tax benefit -- -- 604 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 14,581 $ 9,604 $ 16,893 $ (8,659) $ (14,800) $ 142,110 --
===================================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an
integral part of these statements.
18
Notes to Consolidated Financial Statements
For the years ended December 31, 2001, 2000 and 1999
1. Summary of Significant Accounting Policies
Nature of Operations
The company's operations consist predominantly of the production and sale of
specialty and intermediate chemicals, which are sold to other manufacturers for
use in a variety of end products. Principal markets for all products are
manufacturers of cleaning and washing compounds (including detergents, shampoos,
toothpastes and household cleaners), paints, cosmetics, food and beverages,
agricultural products, plastics, furniture, automotive equipment, insulation and
refrigeration.
Principles of Consolidation
The consolidated financial statements include the accounts of Stepan Company and
its wholly owned foreign subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The investment in the 50
percent owned joint venture in the Philippines is accounted for on the equity
method and is included in the "Other Assets" caption on the Consolidated Balance
Sheet. The company's share of the net earnings of the investment is included in
consolidated net income.
Cash and Cash Equivalents
The company considers all highly liquid investments with original maturities of
six months or less from the date of purchase to be cash equivalents.
Concentration of Credit Risks
The company grants credit to its customers who are widely distributed across the
Americas, Europe, Asia and the Pacific. The company does not have any one single
customer whose business represents more than 10 percent of the company's
consolidated revenue. There is no material concentration of credit risk.
Inventories
Inventories are valued at cost, which is not in excess of market value, and
include material, labor and plant overhead costs. The last-in, first-out (LIFO)
method is used to determine the cost of most company inventories. The first-in,
first-out (FIFO) method is used for all other inventories. Inventories priced at
LIFO as of December 31, 2001 and 2000, amounted to 83 and 86 percent of total
inventories, respectively.
19
Property, Plant and Equipment
Depreciation of physical properties is provided on a straight-line basis over
the estimated useful lives of various assets. Lives used for calculating
depreciation are 30 years for buildings, 15 years for building improvements and
from three to 15 years for machinery and equipment. Major renewals and
betterments are capitalized in the property accounts, while maintenance and
repairs ($19,366,000, $18,472,000, and $17,815,000 in 2001, 2000 and 1999,
respectively), which do not renew or extend the life of the respective assets,
are charged to operations currently. The cost of property retired or sold and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income.
Included in property, plant and equipment are costs related to the
acquisition and development of internal-use software. Capitalized costs include
external direct costs of materials and services consumed in obtaining and
developing the software. For development projects where major internal resources
are committed, payroll and payroll-related costs incurred during the application
development phase of the project are also capitalized. The capitalized costs are
amortized over the useful life of the software, which is generally three to ten
years. Costs incurred in the preliminary project phase are expensed. At December
31, 2001, the consolidated "Construction in progress" amount included $6,012,000
of capitalized costs related to the company's enterprise resource planning
system implementation project.
Interest charges on borrowings applicable to major construction
projects are capitalized and subsequently amortized over the lives of the
related assets.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers. The company records
shipping and handling billed to a customer in a sales transaction as revenue.
Costs incurred for shipping and handling are recorded in cost of sales. Also,
the company recognizes, when incurred, certain volume rebate offers delivered
subsequent to the related transactions in which they are earned and reports them
as a reduction of revenue in the statement of income.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the cost or range of
possible costs can be reasonably estimated. When no amount within the range is a
better estimate than any other amount, at least the minimum is accrued. Some of
the factors on which the company bases its estimates include information
provided by feasibility studies, potentially responsible party negotiations and
the development of remedial action plans. Because reported liabilities are
recorded based on estimates, actual amounts could differ from those estimates.
Legal costs related to environmental matters are expensed as incurred.
Expenditures that mitigate or prevent environmental contamination and that
20
benefit future operations are capitalized. Capitalized expenditures are
depreciated generally utilizing a 10 year life. See Note 12 for contingency
information.
Intangible Assets
Included in other assets are intangible assets consisting of patents, agreements
not to compete, trademarks, customer lists and goodwill, all of which were
acquired as part of business acquisitions. These assets are presented net of
amortization provided on a straight-line basis over their estimated useful lives
generally ranging from five to 15 years.
In June 2001, the Financial Accounting Standards Board 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 2 for
acquisition information).
Research and Development Costs
The company's research and development costs are expensed as incurred. These
expenses are aimed at discovery and commercialization of new knowledge with the
intent that such effort will be useful in developing a new product or in
bringing about a significant improvement to an existing product or process.
Total expenses were $13,729,000, $13,383,000 and $13,113,000 in 2001, 2000 and
1999, respectively. The balance of expenses reflected on the Consolidated
Statements of Income relates to technical services, which include routine
product testing, quality control and sales support service.
Income Taxes
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
Deferred tax assets or liabilities are computed based on the difference between
the financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. Deferred income tax expenses or credits are based on
the changes in the asset or liability from period to period.
Translation of Foreign Currencies
Assets and liabilities of consolidated foreign subsidiaries are translated into
U.S. dollars at exchange rates in effect at year end. The resulting translation
adjustments are included in stockholders' equity. Revenues and expenses are
translated at average
21
exchange rates prevailing during the year. Gains or losses on foreign currency
transactions and the related tax effects are reflected in net income.
Long-Lived Assets
Operating assets and associated goodwill are written down to fair value whenever
an impairment review indicates that the carrying value cannot be recovered on an
undiscounted cash flow basis. No impairment loss has needed to be recognized for
applicable assets of continuing operations.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. See Note 8 for stock
option plan information.
Per Share Data
Basic earnings per share amounts are computed based on the weighted-average
number of common shares outstanding. Net income used in computing basic earnings
per share has been reduced by dividends paid to preferred stockholders. Diluted
earnings per share amounts are based on the increased number of common shares
that would be outstanding assuming the exercise of certain outstanding stock
options (under the treasury stock method) and the conversion of the convertible
preferred stock, when such conversion would have the effect of reducing earnings
per share. See Note 14 for the computation of earnings per share.
Comprehensive Income
Comprehensive income includes net income and all other nonowner changes in
equity that are not reported in net income. For the twelve months ended December
31, 2001, the company's comprehensive income included net income, foreign
currency translation gains and losses and a minimum pension liability
adjustment. For the twelve months ended December 31, 2000 and 1999, the
company's comprehensive income included net income and foreign currency
translation gains and losses. Comprehensive income is disclosed in the
Consolidated Statements of Stockholders' Equity. At December 31, 2001, the total
accumulated other comprehensive loss of $14,800,000 was comprised of $13,816,000
of foreign currency translation adjustments and $984,000 of minimum pension
liability adjustments (net of tax of $595,000). At December 31, 2000, the
accumulated other comprehensive loss included foreign currency translation
adjustment of $12,402,000.
22
Segment Reporting
The company reports financial and descriptive information about its reportable
operating segments. Operating segments are components of the company that have
separate financial information that is regularly evaluated by the chief
operating decision maker to assess segment performance and allocate resources.
The company discloses segment revenue, operating income, assets, capital
expenditures and depreciation and amortization expenses. Enterprise-wide
financial information about the revenues derived from the company's products,
the geographic locations in which the company earns revenues and holds assets is
also disclosed. See Note 13 for segment reporting information.
Derivative Instruments
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.
The company has limited transactions that fall under the accounting rules
of SFAS No. 133. Company policy prohibits the use of financial instruments for
trading or speculative purposes. Periodically, the company enters into forward
contracts to minimize exposure related to changing natural gas prices for a
portion of the natural gas requirements used in its production facilities. In
addition, the company's foreign subsidiaries make limited use of short-term
forward exchange contracts to minimize the exposure of certain foreign currency
transactions and balances to fluctuating exchange rates. As of December 31,
2001, the effects of the forward commodity and exchange contracts were not
material to the company's consolidated financial statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
23
Reclassifications
Certain amounts in the 2000 and 1999 financial statements have been reclassified
to conform to the 2001 presentation.
2. Acquisitions
On September 13, 2001, the company acquired the stock of Manro Performance
Chemicals Limited based in Stalybridge, UK, and changed its name to Stepan UK
Limited. Manro Performance Chemicals Limited manufactures surfactants for a wide
range of customers, and specializes in anionic surfactants, hydrotropes and acid
catalysts. This acquisition gives the company greater 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 is preliminary and subject to change, mainly due to finalization of
fixed assets and pension valuations. The purchase price allocation will be
finalized in the first half of 2002. This acquisition was funded through the
company's committed lines of credit. The following table summarizes the
estimated fair values of the assets acquired and liabilities assumed at the date
of the acquisition.
At September 13, 2001
--------------------------------------------------------------------
(In thousands)
Current assets $ 13,937
Property, plant and equipment 17,950
Goodwill 1,211
------------
Total assets acquired $ 33,098
============
Current liabilities $ 8,458
Total liabilities assumed 8,458
------------
Net assets acquired $ 24,640
============
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 4.63 percent in 2001 and 6.97 percent in 2000.
24
PRO FORMA FINANCIAL RESULTS
(In thousands, except per share amounts) Twelve Months Ended
December 31
-----------------------------------------
2001 2000
---- ----
Net Sales $ 743,369 $ 741,097
Income Before Income Taxes $ 27,401 $ 23,082
Net Income $ 17,074 $ 14,195
Net Income Per Common Share:
Basic $ 1.76 $ 1.43
============== ==============
Diluted $ 1.68 $ 1.39
============== ==============
Shares used to compute Earnings
Per Common Share:
Basic 9,249 9,355
=============== ================
Diluted 10,133 10,236
=============== ================
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 actual
results may differ from the Pro Forma results.
3. Inventories
The composition of inventories was as follows:
December 31
(Dollars in thousands) 2001 2000
--------------------------------------------------------------------------
Finished products $ 36,319 $ 40,515
Raw materials 25,544 19,617
----------- -----------
Total inventories $ 61,863 $ 60,132
============ ============
If the first-in, first-out (FIFO) inventory valuation method had been
used, inventories would have been approximately $7,500,000 and $8,900,000 higher
than reported at December 31, 2001 and 2000, respectively.
25
4. Debt
Debt was composed of the following:
December 31
(Dollars in thousands) Maturity Dates 2001 2000
- ----------------------------------------------------------------------------------------------------------
Unsecured promissory notes
6.59% 2003-2013 $ 30,000 $ 30,000
7.77% 2002-2010 24,545 27,272
7.22% 2002-2007 18,000 21,000
7.69% 2002-2005 8,000 10,000
9.70% 2002-2003 1,667 2,667
Unsecured bank debt 2003 35,200 13,000
Debt of foreign subsidiaries
payable in foreign currency 2002-2006 2,921 2,113
--------------- ------------
Total debt 120,333 106,052
Less current maturities 10,745 9,586
--------------- ------------
Long-term debt $ 109,588 $ 96,466
=============== ============
Unsecured bank debt at December 31, 2001, consisted of borrowings under
a committed $60,000,000 revolving credit agreement with interest at varying
rates averaging 3.88 percent during the year. The agreement requires a
commitment fee to be paid on the unused portion of the commitment, which
averaged 0.13 percent during the year. Periodically, the company also had other
borrowings under notes payable to banks under which there were no outstanding
balances at December 31, 2001 and 2000.
The various loan agreements contain provisions, which, among others,
require maintenance of certain financial ratios and place limitations on
additional debt, investments and payment of dividends. Unrestricted retained
earnings were $49,138,000 and $46,126,000 at December 31, 2001 and 2000,
respectively. The company is in compliance with all debt covenants.
Debt at December 31, 2001, matures as follows: $10,745,000 in 2002;
$46,579,000 in 2003; $10,709,000 in 2004; $10,709,000 in 2005; $8,582,000 in
2006 and $33,009,000 after 2006.
The fair value of the company's fixed-rate debt, including current
maturities, was estimated to be $87.1 million compared to a carrying value of
$83.3 million as of December 31, 2001.
Net interest expense for the years ended December 31 was composed of
the following:
(Dollars in thousands) 2001 2000 1999
- --------------------------------------------------------------------------------------------------------
Interest expense $ 7,858 $ 8,724 $ 8,661
Interest income (229) (124) (211)
------------ ------------ ------------
7,629 8,600 8,450
Capitalized interest (461) (272) (74)
------------ ------------ ------------
Interest, net $ 7,168 $ 8,328 $ 8,376
============ ============ ============
26
5. Leased Properties
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $4,174,000, $4,242,000 and $3,661,000 in 2001, 2000 and 1999,
respectively.
Minimum future rental payments under operating leases with terms in
excess of one year as of December 31, 2001, are:
(Dollars in thousands) Year Amount
-----------------------------------------------------------------------------
2002 $ 2,591
2003 2,168
2004 1,742
2005 1,546
2006 1,259
Subsequent to 2006 6,947
----------
Total minimum future rental payments $ 16,253
==========
6. Income Taxes
The provision for taxes on income and the related income before taxes were as
follows:
(Dollars in thousands)
2001 2000 1999
- ------------------------------------------------------------------------------------------------------
Taxes on Income
Federal
Current $ 9,173 $ 10,479 $ 6,618
Deferred (2,693) (4,019) 2,280
State
Current 1,498 1,890 1,301
Deferred (441) (650) 506
Foreign
Current 1,681 2,104 1,983
Deferred 556 (409) 12
------------ ------------- ------------
Total $ 9,774 $ 9,395 $ 12,700
============ ============ ============
Income before Taxes
Domestic $ 21,405 $ 20,850 $ 29,163
Foreign 4,521 3,553 5,666
------------ ------------ ------------
Total $ 25,926 $ 24,403 $ 34,829
============ ============ ============
27
No federal income taxes have been provided on $34,534,000 of
undistributed earnings of the company's foreign subsidiaries. In general, the
company reinvests earnings of foreign subsidiaries in their operations
indefinitely. However, the company will repatriate earnings from a subsidiary
where excess cash has accumulated and it is advantageous for tax or foreign
exchange reasons. Because of the probable availability of foreign tax credits,
it is not practicable to estimate the amount, if any, of the deferred tax
liability on earnings reinvested indefinitely.
The variations between the effective and statutory federal income tax
rates are summarized as follows:
2001 2000 1999
(Dollars in thousands) Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------
Income tax provision at statutory tax rate $ 9,074 35.0 $ 8,541 35.0 $ 12,190 35.0
State taxes on income
less applicable federal tax benefit 687 2.6 806 3.3 1,175 3.4
Foreign income taxed at different rates 655 2.5 452 1.9 (42) -0.1
Effect of equity in foreign joint venture (654) -2.5 (198) -0.8 (499) -1.4
Other items 12 0.1 (206) -0.9 (124) -0.4
---------- ---- ---------- ----- ---------- -----
Total income tax provision $ 9,774 37.7 $ 9,395 38.5 $ 12,700 36.5
========== ==== ========== ===== ========== =====
The net deferred tax liability at December 31 was comprised of the
following:
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Current deferred income taxes
Assets $ 11,351 $ 11,530
Liabilities (667) (664)
-------------- -------------
Total net current deferred tax assets 10,684 10,866
Non-current deferred income taxes
Assets 12,324 9,326
Liabilities (47,364) (48,496)
-------------- -------------
Total net non-current deferred tax liabilities (35,040) (39,170)
-------------- -------------
Net deferred tax liability $ (24,356) $ (28,304)
============== =============
At December 31, the tax effect of significant temporary differences representing
deferred tax assets and liabilities was as follows:
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------------------------
Tax over book depreciation $ (41,003) $ (44,667)
Safe Harbor leases (2,038) (2,338)
SFAS No. 87 pension accounting (2,513) (3,146)
State income tax accrual 2,180 2,295
Deferred revenue 1,419 1,613
Book reserves deductible in other periods 16,156 16,758
Other, net 1,443 1,181
------------- -------------
Net deferred tax liability $ (24,356) $ (28,304)
============= =============
28
7. Stockholders' Equity
The company's preferred stock is convertible at the option of the holder at any
time (unless previously redeemed) into shares of common stock at a conversion of
1.14175 shares of common stock for each share of preferred stock. Dividends on
preferred stock accrue at a rate of $1.375 per share per annum, which are
cumulative from the date of original issue. The company may not declare and pay
any dividend or make any distribution of assets (other than dividends or other
distribution payable in shares of common stock) or redeem, purchase or otherwise
acquire, shares of common stock, unless all accumulated and unpaid preferred
dividends have been paid or are contemporaneously declared and paid. The
preferred stock is subject to optional redemption by the company, in whole or in
part, at any time on or after September 1, 1997. As of September 1, 2001, the
redemption price is $25.14 per share and will be reduced to the minimum
redemption price of $25 per share on September 1, 2002, plus accrued and unpaid
dividends thereon to the date fixed for redemption. Preferred stock is entitled
to 1.14175 votes per share on all matters submitted to stockholders for action
and votes together with the common stock as a single class, except as otherwise
provided by law or the Certificate of Incorporation of the company. There is no
mandatory redemption or sinking fund obligation with respect to the preferred
stock.
On November 3, 2000, 400,000 shares of common stock and 188,535 shares
of preferred stock held in treasury were retired in accordance with the Board of
Directors' authorization. At December 31, 2000, treasury stock consisted of no
shares of preferred stock and 183,573 shares of common stock. No retirement of
treasury stock took place during 2001. At December 31, 2001, treasury stock
consisted of no shares of preferred stock and 372,787 shares of common stock.
8. Stock Option Plans
The company has three fixed stock option plans: the 1982 Plan, the 1992 Plan and
the 2000 Plan. No further grants may be made under the 1982 Plan and no options
granted under the 1982 Plan remain outstanding at December 31, 2001. The 1992
Plan extends participation to directors who are not employees of the company. It
authorizes the award of up to 1,600,000 shares of the company's common stock for
stock options ("options") and stock appreciation rights ("SAR"). SARs entitle
the employee to receive an amount equal to the difference between the fair
market value of a share of stock at the time the SAR is exercised and the
exercise price specified at the time the SAR is granted. No further grants may
be made under the 1992 Plan after December 31, 2001. The 2000 Plan, which also
extends participation to non-employee directors, authorizes the award of
1,000,000 shares of the company's common stock for options, SAR and stock
awards. A stock award is a grant of shares of stock to an employee, the earnings
vesting or distribution of which is subject to certain conditions established by
the Compensation and Development Committee of the Board of Directors. Options
are granted at the market price on the date of grant. An option may not be
exercised within two years from the date of grant and no option will be
exercisable after 10 years from the date granted.
The company accounts for these plans under APB Opinion No. 25, under
which no compensation cost has been recognized. Had compensation cost for
options granted under these stock option plans been determined based on the fair
value at the
29
grant date for awards in 2001, 2000 and 1999 consistent with the provisions of
SFAS No. 123, the company's net income and earnings per share would have been
reduced to the following pro forma amounts:
(Dollars in thousands, except per share data) 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Net Income - as reported $ 16,152 $ 15,008 $ 22,129
Net Income - pro forma 15,227 14,008 21,272
Basic Earnings per share - as reported 1.66 1.52 2.22
Basic Earnings per share - pro forma 1.56 1.41 2.13
Diluted Earnings per share - as reported 1.59 1.47 2.08
Diluted Earnings per share - pro forma 1.51 1.37 2.01
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2001, 2000 and 1999: expected dividend yield of
2.75 percent in 2001, and 2.50 percent in 2000 and 1999. Expected volatility of
24.2 percent in 2001, 24.7 percent in 2000 and 26.7 percent in 1999; expected
lives of 7.5 years; and risk-free interest rate of 5.14 percent in 2001, 6.72
percent in 2000 and 5.21 percent in 1999.
A summary of the status of the company's stock option plans at December 31,
2001, 2000 and 1999, and changes during the years then ended is presented as
follows:
Weighted- Weighted- Weighted-
Average Average Average
2001 Exercise 2000 Exercise 1999 Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------------------
Options outstanding, 1,502,899 $20.49 1,222,363 $19.38 1,247,591 $18.76
beginning of year
Options exercised (192,650) 16.35 (113,950) 12.26 (85,250) 12.76
Options canceled (78,171) 24.48 (24,238) 25.43 (4,036) 30.97
Options granted 26,630 23.30 418,724 21.77 64,058 23.42
---------- ---------- -----------
Options outstanding,
end of year 1,258,708 20.93 1,502,899 20.49 1,222,363 19.38
---------- ---------- -----------
Option price range $ 14.000- $ 12.563- $ 9.438-
at end of year 30.969 30.969 30.969
Option price range $ 12.563- $ 9.438- $ 9.438-
for exercised shares 19.750 19.750 19.750
Options available for grant
at end of year 912,616 861,075 255,561
Weighted-average fair value
of options, granted during
the year $ 6.22 $ 6.94 $ 6.98
30
A summary of stock options outstanding at December 31, 2001, is as follows:
Options Outstanding Options Exercisable
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted Weighted
Number Remaining -Average Number -Average
Range of Outstanding at Contractual Exercise Exercisable at Exercise
Exercise Price 12/31/01 Life Price 12/31/01 Price
- ----------------------------------------------------------------------------------------------------------------------------------
$14.000 270,000 5.23 $ 14.00 270,000 $ 14.00
$18.219 - $30.969 988,708 9.17 22.83 876,858 20.52
--------- -----------
1,258,708 8.32 $ 20.93 1,146,858 $ 18.99
========= ===========
9. Pension Plans
The company has non-contributory defined benefit plans covering substantially
all employees. The benefits under these plans are based primarily on years of
service and compensation levels. The company funds the pension plan up to the
maximum amount deductible for income tax purposes. The plans' assets consist
principally of marketable equity securities and government and corporate debt
securities. The plans' assets at December 31, 2001 and 2000, included
$10,239,000 and $10,023,000, respectively, of the company's common stock.
Net 2001, 2000 and 1999 periodic pension cost for the plans consisted of the
following:
(Dollars in thousands) 2001 2000 1999
-------------------------------------------------------------------------------
Service cost $ 2,196 $ 2,047 $ 2,344
Interest cost on projected benefit obligation 4,207 3,970 3,629
Expected return on plan assets (6,233) (5,812) (5,156)
Amortization of unrecognized net transition
assets -- (567) (567)
Amortization of unrecognized prior service cost 347 312 287
Amortization of unrecognized net loss/(gain) (448) (517) 14
------- ------- -------
Net pension expense/(income) $ 69 $ (567) $ 551
======= ======= =======
Changes in benefit obligations for the years ending December 31, 2001 and 2000,
were as follows:
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------
Benefit obligation at beginning of year $ 56,654 $ 50,727
Service cost 2,196 2,047
Interest cost 4,207 3,970
Plan amendments 292 844
Actuarial loss 2,553 1,173
Benefits paid (2,136) (2,107)
-------- --------
Benefit obligation at end of year $ 63,766 $ 56,654
======== ========
31
Changes in the fair value of plan assets during years 2001 and 2000 were as
follows:
(Dollars in thousands) 2001 2000
-----------------------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $ 73,664 $ 76,249
Actual return on plan assets (8,319) (792)
Employer contributions 110 314
Benefits paid (2,136) (2,107)
-------- --------
Fair value of plan assets at end of the year $ 63,319 $ 73,664
======== ========
The reconciliation of the funded status of the plans at December 31 was as
follows:
(Dollars in thousands) 2001 2000
----------------------------------------------------------------------------------------------
Plan assets (less than) / in excess of $ (447) $ 17,010
projected benefit obligations
Unrecognized prior service cost 2,244 2,300
Unrecognized net (loss) / gain 5,608 (11,947)
-------- --------
Net amount recognized $ 7,405 $ 7,363
======== ========
The foregoing accumulated benefit obligation and fair value of plan assets
amounts include both overfunded and underfunded plans. At December 31, 2001, the
projected benefit obligation, the accumulated benefit obligation and fair value
of plan assets for the underfunded plans were $12,375,000, $12,375,000 and
$9,940,000, respectively.
The amounts recognized in the Consolidated Balance Sheets at December 31
consisted of the following:
(Dollars in thousands) 2001 2000
---------------------------------------------------------------------------------------------
Prepaid benefit cost $ 6,762 $ 7,363
Accrued benefit liability (2,435) --
Intangible asset 1,499 --
Accumulated other comprehensive loss 1,579 --
------- -------
Net amount recognized $ 7,405 $ 7,363
======= =======
The prepaid benefit cost, accrued benefit liability and intangible asset amounts
are included in the "Other Assets" caption of the Consolidated Balance Sheets.
The accumulated other comprehensive loss amount is included in the
"Shareholders' Equity" section of the Consolidated Balance Sheets.
32
The weighted-average assumptions as of December 31, 2001, 2000 and 1999, were as
follows:
2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Discount rate 7.25% 7.50% 7.75%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 4.00%-6.00% 4.00%-6.00% 4.25%-6.25%
The plans' net transitional assets are being amortized over a period of 15
years. The prior service costs are being amortized over an average of 12 years.
10. Accrued Liabilities
Accrued liabilities consisted of:
December 31
--------------------------
(Dollars in thousands) 2001 2000
- ------------------------------------------------------------------------------------------------
Accrued payroll and benefits $14,855 $13,929
Accrued customer discounts 8,669 9,800
Other accrued liabilities 13,051 15,392
------- -------
Total accrued liabilities $36,575 $39,121
======= =======
11. Other Non-Current Liabilities
Other non-current liabilities were comprised of the following:
December 31
--------------------------
(Dollars in thousands) 2001 2000
- -----------------------------------------------------------------------------------------------
Deferred revenue $ 2,568 $ 3,264
Environmental and legal matters (Note 12) 13,964 13,632
Other non-current liabilities 4,869 2,379
------- -------
Total other non-current liabilities $21,401 $19,275
======= =======
During and prior to 1998, the company received prepayments on certain multi-year
commitments for future shipments of products. As the commitments are fulfilled,
a proportionate share of the deferred revenue is recognized into income. In
2000, the term of a current contract was extended, and the recognition rate of
deferred revenue into income was revised to correspond to the extended term.
Related deferred revenue at December 31, 2001 and 2000, were $3,297,000 and
$3,767,200, respectively, of which the amount recognizable within one year is
included in the "Accrued Liabilities" caption in the Consolidated Balance
Sheets.
12. 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
33
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(CERCLA) and the Superfund amendments of 1986 ("Superfund"). 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, the company believes that it has made
adequate provisions for the costs it may incur with respect to these sites.
After partial remediation payments at certain sites, the company has
estimated a range of possible environmental and legal losses from $7.4 million
to $35.0 million at December 31, 2001, compared to $7.5 million to $35.0 million
at December 31, 2000. At December 31, 2001, the company's reserve was $17.0
million for legal and environmental matters compared to $16.6 million at
December 31, 2000. The company made payments of $2.6 million in 2001 and $2.5
million in 2000 related to legal costs, settlements and costs related to
remedial design studies at various sites.
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 2001
Form 10-K Annual Report and in other filings of the company with the Securities
and Exchange Commission, which filings are available upon request from the
company. 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
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 and its response to USEPA's
comments in September 2001. Discussions between USEPA and the company are
continuing and the company has submitted additional information regarding the
remediation. The company is awaiting the issuance of a Record of Decision (ROD)
from USEPA relating to the currently owned and formerly owned company property
and the proposed remediation. The final ROD will be issued sometime after the
public comment period.
In 1985, the company entered into a Cooperative Agreement with the
United States of America represented by the Department of Energy (Agreement).
Pursuant to this Agreement, the Department of Energy (DOE) took title to
radiological contaminated materials and was to remediate, at its expense, all
radiological waste on the company's
34
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 Sites
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 or 2003. The company
believes it has adequate defenses to the issue of liability. In the event of an
unfavorable outcome related to the issue of liability, the company believes it
has adequate reserves; however, the final cost related to Ewan and D'Imperio
sites could differ from the current estimates.
35
13. Segment Reporting
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Each segment provides distinct products and requires
separate management due to unique markets, technologies and production
processes. Surfactants are used in a variety of consumer and industrial cleaning
compounds as well as in agricultural products, lubricating ingredients and other
specialized applications. Polymers derive its revenues from the sale of phthalic
anhydride, polyurethane polyols and polyurethane systems used in plastics,
building materials and refrigeration systems. Specialty products sell chemicals
used in food, flavoring and pharmaceutical applications.
The company evaluates the performance of its segments and allocates
resources based on operating income before interest income/expense, other
income/expense items and income tax provisions. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. There is no intersegment revenue and all
intercompany transactions are eliminated from segments' revenue.
Segment data for the three years ended December 31, 2001, 2000 and 1999, was as
follows:
Specialty Segment
(Dollars in thousands) Surfactants Polymers Products Totals
------------------------------------------------------------------------------------------------------
2001
Net sales $558,927 $127,722 $24,868 $711,517
Operating income 35,168 17,264 7,807 60,239
Assets 337,880 43,427 17,724 399,031
Capital expenditures 22,408 2,529 1,689 26,626
Depreciation and amortization
expenses 30,472 5,656 1,290 37,418
2000
Net sales $537,006 $140,786 $21,145 $698,937
Operating income 41,718 21,001 3,130 65,849
Assets 310,820 53,314 18,121 382,255
Capital expenditures 23,333 3,427 986 27,746
Depreciation and amortization
expenses 30,276 5,981 1,334 37,591
1999
Net sales $547,359 $126,774 $20,526 $694,659
Operating income 51,123 21,453 4,454 77,030
Assets 315,580 52,434 18,760 386,774
Capital expenditures 24,423 4,846 807 30,076
Depreciation and amortization
expenses 31,091 5,856 1,128 38,075
36
Below are reconciliations of segment data to the accompanying consolidated
financial statements:
(Dollars in thousands) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------
Operating income - segment totals $ 60,239 $ 65,849 $ 77,030
Unallocated corporate expenses/(a)/ (29,014) (33,821) (35,252)
Interest expense (7,168) (8,328) (8,376)
Income from equity in joint venture 1,869 703 1,427
------------ ----------- ---------
Consolidated income before income taxes $ 25,926 $ 24,403 $ 34,829
============ =========== =========
Assets - segment totals $ 399,031 $ 382,255 $ 386,774
Unallocated corporate assets/(b)/ 36,457 32,794 27,802
------------ ----------- ---------
Consolidated assets $ 435,488 $ 415,049 $ 414,576
============ =========== =========
Capital expenditures - segment totals $ 26,626 $ 27,746 $ 30,076
Unallocated corporate expenditures 7,388 696 2,621
------------ ----------- ---------
Consolidated capital expenditures $ 34,014 $ 28,442 $ 32,697
============ =========== =========
Depreciation and amortization expenses -
segment totals $ 37,418 $ 37,591 $ 38,075
Unallocated corporate depreciation expenses 2,554 1,686 1,377
------------ ----------- ---------
Consolidated depreciation and
amortization expenses $ 39,972 $ 39,277 $ 39,452
============ =========== =========
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to
evaluate segment performance.
(b) Includes items such as deferred tax asset, prepaid pension asset,
joint venture investment, corporate fixed assets and LIFO inventory
reserve which are not allocated to segments.
Company-wide geographic data for the years ended December 31, 2001, 2000 and
1999, is as follows (net sales attributed to countries based on selling
location):
(Dollars in thousands) 2001 2000 1999
- ----------------------------------------------------------------------------
Net sales
United States $550,208 $569,357 $553,966
All foreign countries 161,309 129,580 140,693
-------- -------- --------
Total $711,517 $698,937 $694,659
======== ======== ========
Long-lived assets
United States $172,090 $180,369 $193,436
All foreign countries 40,343 18,778 16,045
-------- -------- --------
Total $212,433 $199,147 $209,481
======== ======== ========
37
14. Earnings Per Share
Below is the computation of basic and diluted earnings per share for the years
ended December 31, 2001, 2000 and 1999:
(In thousands, except per share amounts) 2001 2000 1999
- ------------------------------------------------------------------------------------------------
Computation of Basic Earnings per Share
Net income $ 16,152 $ 15,008 $ 22,129
Deduct dividends on preferred stock 802 815 858
----------- ---------- ----------
Income applicable to common stock $ 15,350 $ 14,193 $ 21,271
Weighted-average number of shares outstanding 9,249 9,355 9,592
----------- ---------- ----------
Basic earnings per share $ 1.66 $ 1.52 $ 2.22
=========== ========== ==========
Computation of Diluted Earnings per Share
Net income $ 16,152 $ 15,008 $ 22,129
Weighted-average number of shares outstanding 9,249 9,355 9,592
Add net shares from assumed exercise of options
(under treasury stock method) 218 203 324
Add weighted-average shares from assumed
conversion of convertible preferred stock 666 678 716
----------- ---------- ----------
Shares applicable to diluted earnings 10,133 10,236 10,632
----------- ---------- ----------
Diluted earnings per share $ 1.59 $ 1.47 $ 2.08
=========== ========== ==========
38
Five Year Summary
(In thousands, except per share and employee data)
For the Year 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
Net Sales $711,517 $698,937 $694,659 $635,756 $605,574
Operating Income 31,225 32,028 41,778 45,423 44,370
Percent of net sales 4.4% 4.6% 6.0% 7.1% 7.3%
Pre-tax Income 25,926 24,403 34,829 38,766 34,874
Percent of net sales 3.6% 3.5% 5.0% 6.1% 5.8%
Provision for Income Taxes 9,774 9,395 12,700 15,312 14,464
Net Income 16,152 15,008 22,129 23,454 20,410
Per share (Diluted)/(a)/ 1.59 1.47 2.08 2.12 1.86
Percent of net sales 2.3% 2.1% 3.2% 3.7% 3.4%
Percent to stockholders' equity/(b)/ 10.5% 9.7% 15.0% 17.0% 15.5%
Cash Dividends Paid 7,350 7,004 6,727 6,432 6,069
Per common share 0.7075 0.6625 0.6125 0.5625 0.5125
Depreciation and Amortization 39,972 39,277 39,452 37,347 35,281
Capital Expenditures 34,014 28,442 32,697 44,056 35,589
Weighted-average Common
Shares Outstanding 9,249 9,355 9,592 9,843 9,831
As of Year End
- --------------------------------------------------------------------------------------------------------------------------
Working Capital $ 75,464 $ 71,251 $ 68,615 $ 61,814 $ 63,789
Current Ratio 1.7 1.7 1.7 1.7 1.8
Property, Plant and Equipment, net 212,433 199,147 209,481 215,096 206,601
Total Assets 435,488 415,049 414,576 404,361 374,936
Long-term Debt, less current maturities 109,588 96,466 107,420 107,708 94,898
Stockholders' Equity 159,729 154,176 155,064 147,984 137,598
Per share/(c)/ 16.14 15.57 15.20 14.18 13.01
Number of Employees 1,491 1,387 1,365 1,372 1,292
/(a)/ Based on weighted-average number of common shares outstanding during the
year.
/(b)/ Based on equity at beginning of year.
/(c)/ Based on common shares and the assumed conversion of the convertible
preferred shares outstanding at year end.
39
Quarterly Stock Data (Unaudited)
Dividends Paid
Stock Price Range Per Common Share
---------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
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Quarter High Low High Low
- --------------------------------------------------------------------------------
First $24.75 $22.35 $23.19 $19.88 17.50(c) 16.25(c)
Second $26.20 $23.10 $23.25 $20.94 17.50(c) 16.25(c)
Third $26.38 $17.98 $25.00 $19.63 17.50(c) 16.25(c)
Fourth $24.40 $17.80 $24.00 $18.50 18.25(c) 17.50(c)
--------------------------------
Year $26.38 $17.80 $25.00 $18.50 70.75(c) 66.25(c)
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Quarterly Financial Data (Unaudited)
(Dollars in thousands, except per share data)
2001
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Quarter First Second Third Fourth Year
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Net Sales $ 176,857 $ 182,767 $ 173,829 $ 178,064 $ 711,517
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Gross Profit 25,901 29,701 26,483 25,144 107,229
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Interest, net (1,956) (1,805) (1,819) (1,588) (7,168)
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Pre-tax Income 6,000 10,040 7,335 2,551 25,926
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Net Income 3,628 6,173 4,481 1,870 16,152
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Net Income per Share (Diluted) 0.36 0.61 0.44 0.18 1.59
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2000
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Quarter First Second Third Fourth Year
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Net Sales $ 174,988 $ 177,897 $ 176,608 $ 169,444 $ 698,937
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Gross Profit 27,083 30,680 29,025 25,238 112,026
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Interest, net (2,051) (2,186) (2,099) (1,992) (8,328)
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Pre-tax Income / (Loss) 7,003 10,859 9,989 (3,448) 24,403
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Net Income / (Loss) 4,271 6,625 6,233 (2,121) 15,008
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Net Income/(Loss) per Share (Diluted) 0.41 0.64 0.61 (0.25) 1.47
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