UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
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1-4462
----------------------
Commission File Number
STEPAN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36 1823834
------------------------------ ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Edens and Winnetka Road, Northfield, Illinois 60093
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(Address of principal executive offices)
Registrant's telephone number (847) 446-7500
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 2002
- -------------------------- -----------------------------
Common Stock, $1 par value 9,286,634
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 2002 and December 31, 2001
(Dollars in thousands) Unaudited
3/31/02 12/31/01
-------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,735 $ 4,224
Receivables, net 109,383 103,190
Inventories (Note 2) 57,014 61,863
Deferred income taxes 10,570 10,684
Other current assets 7,300 5,233
-------- --------
Total current assets 187,002 185,194
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Cost 671,978 667,117
Less: Accumulated depreciation 464,333 454,684
-------- --------
207,645 212,433
-------- --------
GOODWILL, NET (Note 7) 6,058 6,100
-------- --------
OTHER INTANGIBLE ASSETS, NET (Note 7) 12,910 13,293
-------- --------
OTHER NON-CURRENT ASSETS 19,949 18,468
-------- --------
Total assets $433,564 $435,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,840 $ 10,745
Accounts payable 55,186 62,410
Accrued liabilities 33,766 36,575
-------- --------
Total current liabilities 98,792 109,730
-------- --------
DEFERRED INCOME TAXES 34,734 35,040
-------- --------
LONG-TERM DEBT, less current maturities 117,180 109,588
-------- --------
OTHER NON-CURRENT LIABILITIES 21,239 21,401
-------- --------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 583,252 shares in 2002
and 2001 14,581 14,581
Common stock, $1 par value; authorized 30,000,000 shares;
issued 9,690,559 shares in 2002 and 9,604,003 shares in 2001 9,691 9,604
Additional paid-in capital 18,375 16,893
Accumulated other comprehensive loss (Note 5) (15,971) (14,800)
Retained earnings (approximately $50,346 unrestricted in 2002 and $49,138 in 2001) 144,796 142,110
-------- --------
Less: Treasury stock, at cost 9,853 8,659
-------- --------
Stockholders' equity 161,619 159,729
-------- --------
Total liabilities and stockholders' equity $433,564 $435,488
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 2002 and 2001
Unaudited
(In thousands, except per share amounts) Three Months
Ended March 31
-------------------
2002 2001
-------- --------
NET SALES $181,156 $176,857
Cost of Sales 152,187 150,956
-------- --------
Gross Profit 28,969 25,901
-------- --------
Operating Expenses:
Marketing 6,131 6,241
Administrative 8,130 6,200
Research, Development and Technical Services 5,986 5,631
-------- --------
20,247 18,072
-------- --------
Operating Income 8,722 7,829
Other Income (Expense):
Interest, Net (1,827) (1,956)
Income from Equity Joint Venture 488 127
-------- --------
(1,339) (1,829)
-------- --------
Income Before Income Taxes 7,383 6,000
Provision for Income Taxes 2,806 2,372
-------- --------
NET INCOME 4,577 $ 3,628
======== ========
Net Income Per Common Share (Note 4):
Basic $ 0.47 $ 0.37
======== ========
Diluted $ 0.45 $ 0.36
======== ========
Shares Used to Compute Net Income Per Common Share (Note 4):
Basic 9,250 9,241
======== ========
Diluted 10,153 10,154
======== ========
Dividends per Common Share $ 0.1825 $ 0.1750
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2002 and 2001
Unaudited
(Dollars in thousands) 3/31/02 3/31/01
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 4,577 $ 3,628
Depreciation and amortization 10,251 10,099
Deferred revenue recognition (115) (126)
Deferred income taxes (229) (1,042)
Environmental and legal liabilities (113) 156
Other non-cash items (299) 2,068
Changes in Working Capital:
Receivables, net (6,193) (10,069)
Inventories 4,849 7,453
Accounts payable and accrued liabilities (10,033) (11,864)
Other (2,067) (908)
-------- --------
Net Cash Provided by (Used for) Operating Activities 628 (605)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (6,490) (5,184)
Other non-current assets (327) 54
-------- --------
Net Cash Used for Investing Activities (6,817) (5,130)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net (3,200) 7,300
Other debt borrowings 9,997 1,241
Other debt repayments (110) --
Purchases of treasury stock, net (1,194) (618)
Dividends paid (1,891) (1,820)
Stock option exercises 1,566 762
Other non-cash items (468) (764)
-------- --------
Net Cash Provided by Financing and Other Related Activities 4,700 6,101
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,489) 366
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 4,224 3,536
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,735 $ 3,902
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 800 $ 726
Income taxes $ (345) $ (52)
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2002 and December 31, 2001
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated financial statements included herein have been
prepared by the company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission (although the balance
sheet at 12/31/01 is condensed from the audited balance sheet at that
date). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules
and regulations, although management believes that the disclosures are
adequate and make the information presented not misleading. It is suggested
that these condensed consolidated financial statements be read in
conjunction with the financial statements and the notes thereto included in
the company's latest Annual Report to Stockholders and the Annual Report to
the Securities and Exchange Commission on Form 10-K for the year ended
December 31, 2001. In the opinion of management all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the
consolidated financial position of Stepan Company as of March 31, 2002, and
the consolidated results of operations and cash flows for the three months
then ended, have been included.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in thousands) 3/31/02 12/31/01
------- --------
Inventories valued primarily on LIFO basis -
Finished products $36,319 $ 36,319
Raw materials 20,695 25,544
------- --------
Total inventories $57,014 $ 61,863
======= ========
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately $6.5
million and $7.5 million higher than reported at March 31, 2002, and
December 31, 2001, respectively.
3. CONTINGENCIES
-------------
There are a variety of legal proceedings pending or threatened against the
company. Some of these proceedings may result in fines, penalties,
judgments or costs being assessed against the company at some future time.
The company's operations are subject to extensive local, state and federal
regulations, including the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (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. The
company has estimated a range of possible environmental and legal losses
from $7.2 million to $34.3 million at March 31, 2002. At March 31, 2002,
the company's reserve was $17.2 million for legal and environmental matters
compared to $17.0 million at December 31, 2001.
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.
Following are summaries of the environmental proceedings related to the
company's Maywood, New Jersey, and Ewan and D'Imperio environmental sites:
Maywood, New Jersey, Site
As reported previously, the company's site in Maywood, New Jersey, and
property formerly owned by the company adjacent to its current site, were
listed on the National Priorities List in September 1993 pursuant to the
provisions of the Comprehensive Environmental Response Compensation and
Liabilities Act (CERCLA) because of certain alleged chemical contamination.
Pursuant to an Administrative Order on Consent entered into between the
United States Environmental Protection Agency (USEPA) and the company for
property formerly owned by the company, and the issuance of an order by
USEPA to the company for property currently owned by the company, the
company completed a Remedial Investigation Feasibility Study (RI/FS) in
1994. The company has also submitted additional information regarding the
remediation, most recently in February 2002. Discussions between USEPA and
the company are continuing. 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 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.
4. EARNINGS PER SHARE
------------------
Below is the computation of basic and diluted earnings per share for the
three months ended March 31, 2002 and 2001.
(In thousands, except per share amounts) Three Months
Ended March 31
-----------------
2002 2001
------- -------
Computation of Basic Earnings per Share
---------------------------------------
Net income $ 4,577 $ 3,628
Deduct dividends on preferred stock 200 201
------- -------
Income applicable to common stock $ 4,377 $ 3,427
======= =======
Weighted-average number of shares outstanding 9,250 9,241
Basic earnings per share $ 0.47 $ 0.37
======= =======
Computation of Diluted Earnings per Share
-----------------------------------------
Net income $ 4,577 $ 3,628
Weighted-average number of shares outstanding 9,250 9,241
Add net shares issuable from assumed exercise of options
(under treasury stock method) 237 247
Add weighted-average shares issuable from assumed conversion of
convertible preferred stock 666 666
------- -------
Shares applicable to diluted earnings 10,153 10,154
======= =======
Diluted earnings per share $ 0.45 $ 0.36
======= =======
5. COMPREHENSIVE INCOME
--------------------
Comprehensive income includes net income and all other non-owner changes in
equity that are not reported in net income. Below is the company's
comprehensive income for the three months ended March 31, 2002 and 2001.
(Dollars in thousands) Three Months Ended
March 31
------------------
2002 2001
------- -------
Net income $ 4,577 $ 3,628
Other comprehensive loss:
Foreign currency translation adjustments (1,171) (1,511)
------- -------
Comprehensive income $ 3,406 $ 2,117
======= =======
At March 31, 2002, the total accumulated other comprehensive loss of
$15,971,000 was comprised of $14,987,000 of foreign currency translation
adjustments and $984,000 of minimum pension liability adjustments (net of
tax of $595,000). At December 31, 2001, the total accumulated other
comprehensive loss of $14,800,000 included $13,816,000 of foreign currency
translation adjustments and $984,000 of minimum pension liability
adjustments (net of tax of $595,000).
6. SEGMENT REPORTING
-----------------
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Financial results of Stepan Company's operating
segments for the quarters ended March 31, 2002 and 2001, are summarized
below:
(Dollars in thousands) Specialty Segment
Surfactants Polymers Products Totals
----------- -------- --------- --------
For the quarter ended March 31, 2002
------------------------------------
Net Sales $146,816 $28,867 $5,473 $181,156
Operating income 12,289 4,153 1,112 17,554
For the quarter ended March 31, 2001
------------------------------------
Net Sales $140,378 $30,833 $5,646 $176,857
Operating income 9,916 3,922 980 14,818
Below are reconciliations of segment operating income to consolidated
income before income taxes:
(Dollars in thousands) Three Months Ended March 31
---------------------------
2002 2001
------- -------
Operating income segment totals $17,554 $14,818
Unallocated corporate expenses /(a)/ (8,832) (6,989)
Interest expense (1,827) (1,956)
Income from equity in joint venture 488 127
------- -------
Consolidated income before income taxes $ 7,383 $ 6,000
======= =======
/(a)/ Includes corporate administrative and corporate manufacturing
expenses, which are not included in segment operating income and not
used to evaluate segment performance.
7. GOODWILL AND OTHER INTANGIBLE ASSETS
------------------------------------
On January 1, 2002, the company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," effective
for fiscal years beginning after December 15, 2001. In part, SFAS No. 142
requires that acquired goodwill cease being amortized. The following is a
reconciliation of the company's reported first quarters 2002 and 2001 net
income, basic earnings per share and diluted earnings per share to the
amounts that would have been reported had the new accounting rules been in
effect at January 1, 2001:
Three Months Ended March 31
---------------------------
(In thousands, except per share data) 2002 2001
------ ------
Reported net income $4,577 $3,628
Goodwill amortization -- 111
------ ------
Adjusted net income $4,577 $3,739
====== ======
Basic earnings per share:
Reported basic earnings per share $ 0.47 $ 0.37
Goodwill amortization -- 0.01
------ ------
Adjusted basic earnings per share $ 0.47 $ 0.38
====== ======
Diluted earnings per share:
Reported diluted earnings per share $ 0.45 $ 0.36
Goodwill amortization -- 0.01
------ ------
Adjusted diluted earnings per share $ 0.45 $ 0.37
====== ======
The company's net carrying values of goodwill were $6,058,000 and
$6,100,000 as of March 31, 2002 and December 31, 2001, respectively. The
entire amount of goodwill relates to the surfactants' reporting unit. The
company is in the process of testing goodwill for impairment at the
reporting unit level. Presently, no determination has been made regarding
goodwill impairment, if any.
SFAS No. 142 also requires that previously recognized intangible assets,
other than goodwill, be evaluated to determine if they have finite or
indefinite useful lives. Intangible assets determined to have finite lives
are amortized over those lives and intangible assets that have indefinite
useful lives are not amortized. In accordance with criteria established in
SFAS No. 142, the company evaluated its intangible assets and determined
that all such assets had finite lives and that the previously assigned
useful lives remained appropriate for future amortization. The following
table reflects the components of intangible assets as of March 31, 2002 and
December 31, 2001.
(In thousands) Gross Carrying Accumulated
Amount Amortization
------------------ -----------------
3/31/02 12/31/01 3/31/02 12/31/01
------- -------- ------- -------
Amortized Intangible Assets:
Patents $ 2,000 $ 2,000 $ 500 $ 466
Trademarks, customer lists, know-how 17,095 17,095 5,685 5,386
Non-compete Agreements 1,000 1,000 1,000 950
------- -------- ------ ------
Total $20,095 $ 20,095 $7,185 $6,802
======= ======== ====== ======
Aggregate amortization expense for the first quarter ended March 31, 2002,
was $383,000. Estimated amortization expense for identifiable intangibles
assets, other than goodwill, for each of the succeeding fiscal years are as
follows:
(In thousands)
For year ended 12/31/03 $1,330
For year ended 12/31/04 $1,330
For year ended 12/31/05 $1,330
For year ended 12/31/06 $1,330
For year ended 12/31/07 $1,086
8. NEW ACCOUNTING STANDARDS
------------------------
In June 2001, the Financial Accounting Standards Board issued SFAS No. 141,
"Business Combinations," effective for fiscal years beginning after
December 15, 2001. It requires the use of the purchase method of accounting
for all transactions initiated after June 30, 2001. The company applied the
provision to the September 2001 acquisition of Manro Performance Chemicals
Limited. No acquisitions took place in the first quarter of 2002.
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 consistent with the guidance provided in
this EITF. Therefore, adoption of this standard did not have an impact on
the company's statements of income or financial position.
In August 2001, Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets," was
issued. This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and supersedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." FASB No. 144 is effective for fiscal years
beginning after December 15, 2001. Adoption of this standard did not have
an impact on financial position or results of operations of the company.
9. NEW CREDIT AGREEMENT
--------------------
Long-term debt as of March 31, 2002, included $32.0 million in domestic
bank debt. The company entered into a new, committed 5-year revolving
credit agreement with three U.S. banks on May 3, 2002. The company has the
ability and intent to refinance existing domestic bank debt under this
agreement.
10. RECLASSIFICATIONS
-----------------
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
STEPAN COMPANY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors, which have affected the company's financial condition, and results of
operations during the interim period included in the accompanying condensed
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
Net cash from operations for the first three months of 2002 totaled $0.6
million, an increase of $1.2 million compared to last year's first quarter cash
use of $0.6 million. For the current year quarter, working capital consumed
$13.4 million compared to a use of $15.4 million for the same quarter in 2001,
reflecting typical seasonality for both years. Working capital changes for the
current year quarter include: accounts receivable up by $6.2 million,
inventories down by $4.9 million, accounts payable and accrued liabilities down
by $10.0 million and prepaid expenses up by $2.1 million.
Capital spending totaled $6.5 million for the first quarter of 2002 compared to
$5.2 million for the same quarter in 2001.
Consolidated debt increased by $6.7 million during the first three months of
2002, from $120.3 million to $127.0 million. As of March 31, 2002, the ratio of
long-term debt to long-term debt plus shareholders' equity was 42.0 percent
compared to 40.7 percent at December 31, 2001.
The company maintains contractual relationships with its domestic banks that
provide for revolving credit of up to $60 million, which may be drawn upon as
needed for general corporate purposes through May 2, 2007 under a new revolving
credit agreement dated May 3, 2002. The company also meets short-term liquidity
requirements through uncommitted domestic bank lines of credit. The company's
foreign subsidiaries maintain committed and uncommitted bank lines of credit in
their respective countries to meet working capital requirements as well as to
fund capital expenditure programs and acquisitions.
On May 3, 2002 the company signed a new 5-year revolving credit agreement with
three U.S. banks, including Bank One, N.A, Harris Trust and Savings Bank and
Bank of America, N.A. This new facility replaces the previous revolving credit
agreement and provides committed, unsecured funding of up to $60 million for
working capital, capital expenditures, acquisitions and other corporate
purposes. The new agreement contains provisions substantially equivalent to the
previous agreement, including limitations on additional debt, investments and
payment of dividends.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
There have been no material changes in the company's market risks since December
31, 2001.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 2002 and 2001
- ------------------------------------------
Net income for the first quarter ended March 31, 2002, was $4.6 million, or
$0.45 per share diluted, up 26 percent from $3.6 million, or $0.36 per share
diluted, reported for the same quarter a year ago. Net sales increased two
percent to $181.2 million in the first quarter of 2002 from $176.9 million
reported for the first quarter of 2001. Net sales by segment were:
(Dollars in thousands) Three Months
Ended March 31
------------------------------
2002 2001 % Change
-------- -------- --------
Net Sales:
Surfactants $146,816 $140,378 +5
Polymers 28,867 30,833 -6
Specialty Products 5,473 5,646 -3
-------- --------
Total $181,156 $176,857 +2
======== ========
Surfactants net sales increased five percent between years. Foreign operations
accounted for the improvement, reporting a $9.4 million, or 29 percent, increase
in net sales due to a 39 percent rise in sales volume. Approximately $7.9
million of the foreign operations' increase in revenue was attributable to the
fourth quarter 2001 acquisition of Stepan UK. Net sales for Latin America
operations increased $2.1 million between quarters due to improved sales volume
and higher average selling prices. European operations, excluding Stepan UK,
reported a decrease of $0.9 million in net sales, primarily due to a decline in
average selling prices. Domestic operations, which accounted for 71 percent of
total surfactant revenues, reported a $3.0 million, or three percent, decline in
net sales from $107.7 million in the first quarter of 2001 to $104.7 million in
the same period in 2002. The decrease was based on a three percent drop in sales
volume. Volumes to laundry and cleaning, personal care and distribution
customers were all down from quarter to quarter.
Surfactants gross profit increased 13 percent to $21.6 million in 2002 from
$19.2 million a year ago. Domestic operations reported a $1.7 million, or 12
percent, increase due to an improvement in average margins that more than offset
the three percent decline in sales volume. The improvement in average margins
was due to improved sales mix and lower cost of raw materials and utilities.
Gross profit for foreign operations rose $0.7 million, or 17 percent, between
years. The previously noted acquisition of Stepan UK contributed $1.2 million to
the increase, and Latin America operations generated higher gross profit due to
improved sales volume and higher average margins. Canadian and European
operations, excluding Stepan U.K., reported declines in gross profit due to
lower average margins. Weaker sales mix accounted for the decline.
Polymers net sales for the first quarter of 2002 decreased $1.9 million, or six
percent, from $30.8 million in 2001 to $28.9 million in 2002. Global
polyurethane polyols net sales fell 10 percent to $15.6 million for the first
quarter of 2002 from $17.2 million a year ago. A five percent drop in sales
volume coupled with a four percent decrease in average selling prices led to the
decline. Domestic operations accounted for most of the volume and price
declines. Polyurethane systems
net sales declined 35 percent to $3.4 million in the first quarter of 2002 from
$5.3 million for the first quarter of 2001. A 31 percent drop in sales volume
accounted for most of the decline. Phthalic anhydride (PA) net sales increased
18 percent from $8.3 million in 2001 to $9.9 million in 2002. A 24 percent rise
in sales volume led to the improvement and more than offset a four percent drop
in average selling prices. Lower raw material costs, which were passed on to
customers, led to the average selling price decline.
Polymers gross profit was $5.8 million, which was $0.3 million, or five percent,
higher than the $5.5 million reported in the first quarter of 2001. PA's gross
profit increased $0.6 million to $1.0 million in 2002 from $0.4 million in 2001.
Higher average margins and increased sales volume led to the improvement. Global
polyols gross profit rose $0.4 million, or eight percent, to $4.9 million in the
first quarter of 2002 from $4.5 million for the same period a year ago. Domestic
operations gross profit increased $0.2 million on higher average margins, which
more than offset the effect of lower sales volume. European gross profit rose
$0.2 million due to improved average margins and higher sales volume.
Polyurethane systems gross profit declined $0.6 million, or 45 percent, from
quarter to quarter. Lower sales volume and average margins led to the decrease.
Higher unit overhead costs resulting from lower production volumes contributed
to the decreased average margins.
Specialty products net sales dropped $0.2 million, or three percent, from year
to year. The decrease was primarily due to lower sales volume. Gross profit
increased $0.4 million, or 30 percent, from $1.2 million in the first quarter of
2001 to $1.6 million in the same period of 2002. The rise was primarily due to
higher sales volume into the pharmaceutical industry.
Operating expenses increased $2.1 million, or 12 percent, from $18.1 million in
the first quarter of 2001 to $20.2 million in the same period of 2002.
Administrative expenses rose $1.9 million, or 31 percent, between quarters. The
increase reflected $1.9 million of expense related to the implementation of an
enterprise resource planning system. The increase also reflected $0.4 million of
expense for Stepan U.K., which was first consolidated in the fourth quarter of
2001, and higher general legal expenses of $0.2 million. Salaries and related
payroll costs fell $0.7 million from quarter to quarter. Research and
development expenses increased six percent from $5.6 million in the first
quarter of 2001 to $6.0 million in the first quarter of 2002. Higher payroll
expenses caused the increase. Marketing expenses declined two percent between
years.
Interest expense decreased seven percent from year to year due to lower overall
borrowing rates, partially offset by higher average debt levels.
Income from the Philippines equity joint venture increased to $0.5 million in
2002 from $0.1 million a year ago. Higher sales volume and more favorable sales
mix led to the improvement.
ENVIRONMENTAL AND LEGAL MATTERS
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The company is subject to extensive federal, state and local environmental laws
and regulations. Although the company's environmental policies and practices are
designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent environmental regulation could require
the company to make additional unforeseen environmental expenditures. The
company will continue to invest in the equipment and facilities necessary to
comply with existing and future regulations. During the first quarter of 2002,
company expenditures for capital projects related to the environment were $0.4
million and should approximate $1.3 million for the full year 2002. These
projects are capitalized and typically depreciated over 10 years. Recurring
costs associated with the operation and maintenance of facilities for waste
treatment and disposal and managing environmental compliance in ongoing
operations at our manufacturing locations were $1.8 million for the first three
months of 2002. 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 and similar state statutes. In addition, damages are being claimed
against the company in general liability actions for alleged personal injury or
property damage in the case of some disposal and plant sites. The company
believes that it has made adequate provisions for the costs it may incur with
respect to these sites. The company has estimated a range of possible
environmental and legal losses from $7.2 million to $34.3 million at March 31,
2002. The company's reserve at March 31, 2002 and December 31, 2001 were $17.2
and $17.0 million, respectively. During the first three months of 2002,
expenditures related to legal and environmental matters approximated $0.6
million. For certain sites, estimates cannot be made of the total costs of
compliance or the company's share of such costs; accordingly, the company is
unable to predict the effect thereof on future results of operations. In the
event of one or more adverse determinations in any annual or interim period, the
impact on results of operations for those periods could be material. However,
based upon the company's present belief as to its relative involvement at these
sites, other viable entities' responsibilities for cleanup and the extended
period over which any costs would be incurred, the company believes that these
matters will not have a material effect on the company's financial position.
Certain of these matters are discussed in Item 3, Legal Proceedings, in the 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
Footnote 3, Contingencies, in Notes to Condensed Consolidated Financial
Statements, and Item 1, Legal Proceedings, in this Form 10-Q for a summary of
the environmental proceedings related to the company's Maywood, New Jersey, and
Ewan and D'Imperio environmental sites.
OTHER
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Except for the historical information contained herein, the matters discussed in
this document are forward looking statements that involve risks and
uncertainties. The results achieved this quarter are not necessarily an
indication of future prospects for the company. Actual results in future
quarters may differ materially. Potential risks and uncertainties include, among
others,
fluctuations in the volume and timing of product orders, changes in demand for
the company's products, changes in technology, continued competitive pressures
in the marketplace, outcome of environmental contingencies, availability of raw
materials, foreign currency fluctuations and the general economic conditions.
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
As reported previously, the company's site in Maywood, New Jersey and property
formerly owned by the company adjacent to its current site, were listed on the
National Priorities List in September 1993 pursuant to the provisions of the
Comprehensive Environmental Response Compensation and Liabilities Act (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. The company has also submitted additional information regarding
the remediation, most recently in February 2002. Discussions between USEPA and
the company are continuing. 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 property in Maywood, New Jersey. The Maywood property
(and portions of the surrounding area) were remediated by the DOE under the
Formerly Utilized Sites Remedial Action Program, a federal program under which
the U.S. Government undertook to remediate properties which were used to process
radiological material for the U.S. Government. In 1997, responsibility for this
clean-up was transferred to the United States Army Corps of Engineers (USACE).
On January 29, 1999, the company received a copy of a USACE Report to Congress
dated January 1998 in which the USACE expressed their intention to evaluate,
with the USEPA, whether the company and/or other parties might be responsible
for cost recovery or contribution claims related to the Maywood site. Subsequent
to the issuance of that report, the USACE advised the company that it had
requested legal advice from the Department of Justice as to the impact of the
Agreement.
By letter dated July 28, 2000, the Department of Justice advised the company
that the USACE and USEPA had referred to the Justice Department claims against
the company for response costs incurred or to be incurred by the USACE, USEPA
and the DOE in connection with the Maywood site and the Justice Department
stated that the United States is entitled to recovery of its response costs from
the company under CERCLA. The letter referred to both radiological and
non-radiological hazardous waste at the Maywood site and stated that the United
States has incurred unreimbursed response costs to date of $138 million. Costs
associated with radiological waste at the Maywood site, which the company
believes represent all but a small portion of the amount referred to in the
Justice Department letter, could be expected to aggregate substantially in
excess of that amount. In the letter, the Justice Department invited the company
to discuss settlement of the matter in order to avoid the need for litigation.
The company believes that its liability, if any, for such costs has been
resolved by the aforesaid Agreement. Despite the fact
that the company continues to believe that it has no liability to the United
States for such costs, discussions with the Justice Department are currently
ongoing to attempt to resolve this matter.
The company believes it has adequate reserves for claims associated with the
Maywood site. However, depending on the results of the ongoing discussions
regarding the Maywood site, the final cost of the remediation could differ from
the current estimates.
As reported previously, the company has been named as a potentially responsible
party (PRP) in the case USEPA v. Jerome Lightman (92 CV 4710 D. N. J.), which
involves the Ewan and D'Imperio Superfund Sites, located in New Jersey. Trial on
the issue of the company's liability at these sites was completed in March 2000.
The company is awaiting a decision from the court. If the company is found
liable at either site, a second trial as to the company's allocated share of
clean-up costs at these sites will likely be held in 2002 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. On a related matter, the company has filed an appeal to
the United States Third Circuit Court of Appeals objecting to the lodging of a
partial consent decree in favor of the United States Government in this action.
Under the partial consent decree, the government recovered past costs at the
site from all PRPs including the company. The company paid its assessed share
but by objecting to the partial consent decree, the company is seeking to
recover back the sums it paid.
Regarding the D'Imperio Superfund Site, USEPA has indicated it will seek penalty
claims against the company based on the company's alleged noncompliance with the
modified Unilateral Administrative Order. The company is currently negotiating
with USEPA to settle its proposed penalty against the company but does not
believe that a settlement, if any, will have a material impact on the financial
condition of the company. In addition, the company also received notice from the
New Jersey Department of Environmental Protection (NJDEP) dated March 21, 2001,
that NJDEP has indicated it will pursue cost recovery against the alleged
responsible parties, including the company. The NJDEP's claims include costs
related to remediation of the D'Imperio Superfund Site in the amount of
$434,405.53 and alleged natural resource damages in the amount of $529,584.00
(as of November 3, 2000). The NJDEP has proposed settling such claims, with the
company being responsible for a portion of these costs. Although the company has
negotiated a share of its costs and damages up to a maximum amount, any payments
made by the company are subject to reallocation after the allocation phase of
the above-identified trial, if any. The company does not believe that a
settlement, if any, will have a material impact on the financial condition of
the company.
As reported previously, the company received a Section 104(e) Request for
Information from USEPA dated March 21, 2000, regarding the Lightman Drum Company
Site located in Winslow Township, New Jersey. The company responded to this
request on May 18, 2000. In addition, the company received a Notice of Potential
Liability and Request to Perform RI/FS dated June 30, 2000, from USEPA. The
company has decided that it will participate in the performance of the RI/FS.
However, based on the current information known regarding this site, the company
is unable to predict what its liability, if any, will be for this site.
Item 4 - Submission of Matters to a Vote of Security Holders
(A) The company's 2002 Annual Meeting of Stockholders was held on April
30, 2002.
(B) At the annual meeting of the company's shareholders on April 30, 2002,
shareholders elected Thomas F. Grojean, James A. Hartlage and F. Quinn
Stepan, Jr. as Directors of the company, all for three-year terms.
For Withheld
--------- --------
Thomas F. Grojean 8,429,839 89,612
James A. Hartlage 8,299,442 22,009
F. Quinn Stepan, Jr. 8,302,024 217,427
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits (4)R
Copy of Revolving Credit Agreement dated May 3, 2002
(B) Reports on Form 8-K
Form 8-K regarding "Changes in Registrant's Certifying Accountant" has
been filed on April 30, 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEPAN COMPANY
/s/ James E. Hurlbutt
--------------------------------------
James E. Hurlbutt
Vice President & Corporate Controller
Date: May 13, 2002