UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO __________
1-4462
----------------------------------
Commission File Number
STEPAN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36 1823834
- ------------------------------------------- ---------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Edens and Winnetka Road, Northfield, Illinois 60093
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (847) 446-7500
----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 2002
- ------------------------------ -------------------------------------
Common Stock, $1 par value 8,878,852 Shares
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
(Dollars in thousands) Unaudited
ASSETS 2001
- ------
2002 As Restated*
---- ------------
CURRENT ASSETS:
Cash and cash equivalents $ 2,904 $ 4,224
Receivables, net 116,390 103,190
Inventories (Note 3) 64,323 59,330
Deferred income taxes 8,203 8,810
Other current assets 6,340 5,233
----------- -----------
Total current assets 198,160 180,787
----------- -----------
PROPERTY, PLANT AND EQUIPMENT:
Cost 692,217 666,117
Less: Accumulated depreciation (485,209) (454,684)
----------- -----------
Property, plant and equipment, net 207,008 211,433
----------- -----------
LONG TERM INVESTMENTS 6,256 7,674
----------- -----------
GOODWILL, NET (Note 8) 6,233 6,100
----------- -----------
OTHER INTANGIBLE ASSETS, NET (Note 8) 12,245 13,293
----------- -----------
OTHER NON-CURRENT ASSETS 20,393 19,468
----------- -----------
Total assets $ 450,295 $ 438,755
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 10) $ 9,201 $ 10,745
Accounts payable 59,433 62,410
Accrued liabilities 38,522 35,004
----------- -----------
Total current liabilities 107,156 108,159
----------- -----------
DEFERRED INCOME TAXES 30,570 28,603
----------- -----------
LONG-TERM DEBT, less current maturities (Note 10) 108,237 109,588
----------- -----------
DEFERRED COMPENSATION (Note 2) 16,981 16,653
----------- -----------
OTHER NON-CURRENT LIABILITIES 20,739 21,401
----------- -----------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 583,012 shares in 2002 and 14,575 14,581
583,252 shares in 2001
Common stock, $1 par value; authorized 30,000,000 shares;
issued 9,740,328 shares in 2002 and 9,604,003 shares in 2001 9,740 9,604
Additional paid-in capital 18,971 16,531
Accumulated other comprehensive loss (Note 6) (16,404) (15,870)
Retained earnings (approximately $37,948 unrestricted in 2002 and
$48,987 in 2001) 156,906 144,658
Less: Treasury stock shares, of 861,476 in 2002 and 782,232 shares (17,176) (15,153)
in 2001, at cost
----------- -----------
Stockholders' equity 166,612 154,351
----------- -----------
Total liabilities and stockholders' equity $ 450,295 $ 438,755
=========== ===========
* See Note 2 for explanation of restatement.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Nine Months Ended September 30, 2002 and 2001
Unaudited
Three Months Ended Nine Months Ended
(In thousands, except per share amounts) September 30 September 30
------------------------------ -----------------------------
2002 2001 2002 2001
---- ----
As Restated* As Restated*
----------- -----------
NET SALES $ 193,344 $ 173,829 $ 563,295 $ 533,453
Cost of Sales 162,279 147,346 468,028 451,368
------------ ------------ ------------ ------------
Gross Profit 31,065 26,483 95,267 82,085
------------ ------------ ------------ ------------
Operating Expenses:
Marketing 7,427 6,498 20,304 18,744
Administrative 7,985 2,079 26,555 16,015
Research, development and technical services 6,407 5,517 18,379 16,941
------------ ------------ ------------ ------------
21,819 14,094 65,238 51,700
------------ ------------ ------------ ------------
Operating Income 9,246 12,389 30,029 30,385
Other Income (Expense):
Interest, net (1,743) (1,713) (5,240) (5,375)
Income from equity joint venture 790 529 2,444 1,149
------------ ------------ ------------ ------------
(953) (1,184) (2,796) (4,226)
------------ ------------ ------------ ------------
Income Before Income Taxes 8,293 11,205 27,233 26,159
Provision for Income Taxes 2,618 4,359 9,531 10,176
------------ ------------ ------------ ------------
NET INCOME $ 5,675 $ 6,846 $ 17,702 $ 15,983
============ ============ ============ ============
Net Income Per Common Share (Note 5):
Basic $ 0.62 $ 0.75 $ 1.93 $ 1.74
============ ============ ============ ============
Diluted $ 0.58 $ 0.70 $ 1.81 $ 1.64
============ ============ ============ ============
Shares used to compute Net Income Per
Common Share (Note 5):
Basic 8,871 8,848 8,855 8,842
============ ============ ============ ============
Diluted 9,830 9,720 9,791 9,736
============ ============ ============ ============
Dividends per Common Share $ 0.1825 $ 0.1750 $ 0.5475 $ 0.5250
============ ============ ============ ============
* See Note 2 for explanation of restatement.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2002 and 2001
Unaudited
(In thousands) 2001
2002 As Restated*
---- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 17,702 $ 15,983
Depreciation and amortization 30,655 29,758
Deferred revenue (615) (355)
Deferred income taxes 2,751 (933)
Environmental and legal liabilities (270) 744
Other non-cash items (524) (1,833)
Changes in working capital:
Receivables, net (13,200) (1,505)
Inventories (4,993) 959
Accounts payable and accrued liabilities 541 (1,947)
Other current assets (1,107) (442)
----------- -----------
Net Cash Provided by Operating Activities 30,940 40,429
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (24,634) (24,375)
Business acquisitions 0 (24,623)
Other non-current assets 2,812 71
----------- -----------
Net Cash Used for Investing Activities (21,822) (48,927)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving debt and notes payable to banks, net (35,200) 24,000
Other debt borrowings 41,142 1,152
Other debt repayments (8,837) (9,109)
Purchase of treasury stock, net (2,023) (4,271)
Dividends paid (5,454) (5,245)
Stock option exercises 2,570 2,986
----------- -----------
Net Cash Provided by/Used for Financing Activities (7,802) 9,513
----------- -----------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (2,636) (1,333)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,320) (318)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,224 3,536
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,904 $ 3,218
=========== ===========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,653 $ 4,829
Income taxes $ 5,765 $ 5,944
* See Note 2 for explanation of restatement.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2002
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the Stepan Company (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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. In the opinion of management all normal recurring
adjustments necessary to present fairly the condensed consolidated
financial position of the Company as of September 30, 2002, and the
condensed consolidated results of operations for the three and nine months
then ended and cash flows for the nine months then ended, have been
included.
2. RESTATEMENT
Subsequent to the issuance of its financial statements for the three-month
period ended March 31, 2002, management of the Company determined that the
accounting treatment that had previously been afforded to the deferred
compensation arrangements entered into with its managers and directors was
not in accordance with the requirements of the consensus reached by the
Emerging Issues Task Force of the Financial Accounting Standards Board in
issue No. 97-14, Accounting for Deferred Compensation Arrangements Where
Amounts Earned Are Held in a Rabbi Trust and Invested. This consensus
requires that assets and liabilities of the deferred compensation plan be
presented separately on the balance sheet; that fluctuations in asset
values should result in compensation expense or income; and that, based on
the categories of assets underlying the plan, investment income and expense
should be recorded in the income statement and unrealized market
appreciation should be reported as a component of other comprehensive
income and included in stockholders' equity. Historically, the Company had
recorded the assets and liabilities related to the plans on a net basis
when the awards were made and did not recognize changes in asset value in
income.
A summary of the significant effects of the restatement is as follows:
As of December 31, 2001:
(In thousands) As
Previously
Reported Adjustments As Restated
-------- ----------- -----------
Assets
Long term investments - $ 7,674 $ 7,674
Deferred income taxes $ 10,684 (1,874) 8,810
Liabilities
Deferred income taxes $ 35,040 $ (6,437) $ 28,603
Deferred compensation - current & long-term - 17,615 17,615
Stockholders' Equity
Additional paid-in capital 16,893 (362) 16,531
Accumulated other comprehensive loss (14,800) (1,070) (15,870)
Retained earnings 142,110 2,548 144,658
Treasury stock (8,659) (6,494) (15,153)
For the three and nine month periods ended September 30, 2001:
Three Months Ended Nine Months Ended
September 30, 2001 September 30, 2001
---------------------------------------- ------------------------------------------
(Dollars in thousands, except As As
per share amounts) Previously As Previously As
Reported Adjustments Restated Reported Adjustments Restated
-------- ----------- -------- -------- ----------- --------
Net income $ 4,481 $ 2,365 $ 6,846 $ 14,282 $ 1,701 $ 15,983
Earnings per share:
Basic $ 0.46 $ 0.29 $ 0.75 $ 1.48 $ 0.26 $ 1.74
Diluted $ 0.44 $ 0.26 $ 0.70 $ 1.41 $ 0.23 $ 1.64
Shares used to compute net
income per common share:
Basic 9,260 (412) 8,848 9,255 (413) 8,842
Diluted 10,132 (412) 9,720 10,149 (413) 9,736
Other comprehensive income $ (274) $ (580) $ (854) $ (1,280) $ (723) $ (2,003)
Certain other amounts in the restated 2001 financial statements have been
reclassified to conform to the 2002 presentation.
The Annual Report on Form 10-K covering the 2001, 2000 and 1999
financial statements, as well as SEC Form 10-Q for the first two
quarters of 2002 will be amended and refiled with the SEC upon
completion of an audit of the annual financial statements. The
Company's loan agreements require audited financial statements
and pending completion of the reaudit, the lenders have provided
a 120 day waiver of compliance with this debt covenant.
After filing SEC Form 10-Q for the three and six month periods ended
June 30, 2002, the Company determined that it had not recorded
approximately $3,429,000 of deferred tax assets related to the
deferred compensation plan. This adjustment is reflected in the
balance sheet restatement effect, noted above, in this footnote.
3. INVENTORIES
Inventories consist of following amounts:
(In thousands)
September 30, 2002 December 31, 2001
------------------ -----------------
Inventories valued primarily on LIFO basis -
Finished products $ 41,131 $ 33,932
Raw materials 23,192 25,398
--------------- ---------------
Total inventories $ 64,323 $ 59,330
=============== ===============
If the first-in, first-out (FIFO) inventory valuation method had been
used for all inventories, inventory balances would have been
approximately $6.7 million and $7.5 million higher than reported at
September 30, 2002, and December 31, 2001, respectively.
4. CONTINGENCIES
There are a variety of legal proceedings pending or threatened against
the Company. Some of these proceedings may result in fines, penalties,
judgments or costs being assessed against the Company at some future
time. The Company's operations are subject to extensive local, state
and federal regulations, including the federal Comprehensive
Environmental Response, Compensation and Liability Act of 1980
("Superfund") and the Superfund amendments of 1986. The Company, and
others, have been named as potentially responsible parties at affected
geographic sites. 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 September 30, 2002. At
September 30, 2002 and December 31, 2001, the Company's best estimates
of reserves for such losses were $17.1 million and $17.0 million,
respectively, for legal and environmental matters.
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.
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:
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 Liability
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 submitted the Draft
Final FS for Soil and Source Areas (Operable Unit 1) in September
2002. In addition, the Company has also submitted additional
information regarding the remediation, most recently in October 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:
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 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.
Lightman Drum Site:
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.
Liquid Dynamics Site:
The Company received a General Notice of Potential Liability letter
from the USEPA dated October 18, 2002, regarding the Liquid Dynamics
Site located in Chicago, Illinois. The Company submitted a response to
USEPA on November 5, 2002, stating that it is interested in negotiating
a resolution of its potential responsibility at this site. Based on the
fact that the Company believes it is a de minimis PRP at this site, the
Company
believes that a resolution of its liability at this site will not have
a material impact on the financial condition of the Company.
Wilmington Site:
As reported previously in the Company's Quarterly Report Form 10-Q for
the quarter ended September 30, 1994 and various subsequent reports,
the Company received a Request for Information from the Commonwealth of
Massachusetts Department of Environmental Protection relating to the
Company's formerly-owned site at 51 Eames Street, Wilmington,
Massachusetts. The Company received a copy of another Request for
Information regarding this site dated October 18, 2002. The Company's
response to this request is due on November 29, 2002. The Company is
currently investigating this matter and therefore, cannot predict what
its liability, if any, will be for this site.
5. EARNINGS PER SHARE
Below is the computation of basic and diluted earnings per share for
the three and nine months ended September 30, 2002 and 2001.
(Dollars in thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30
------------------------- ---------------------------
2002 2001 2002 2001
---- ---- ---- ----
Computation of Basic Earnings per Share
Net income $ 5,675 $ 6,846 $ 17,702 $ 15,983
Deduct dividends on preferred stock (199) (200) (601) (602)
-------- -------- -------- --------
Income applicable to common stock $ 5,476 $ 6,646 $ 17,101 $ 15,381
======== ======== ======== ========
Weighted-average number of common
shares outstanding 8,871 8,848 8,855 8,842
Basic earnings per share $ 0.62 $ 0.75 $ 1.93 $ 1.74
======== ======== ======== ========
Computation of Diluted Earnings per Share
-----------------------------------------
Net income $ 5,675 $ 6,846 $ 17,702 $ 15,983
Weighted-average number of common
shares outstanding 8,871 8,848 8,855 8,842
Add net shares issuable from assumed exercise
of options (under treasury stock method) 293 206 270 228
Add weighted-average shares issuable from
assumed conversion of convertible preferred
stock 666 666 666 666
-------- -------- -------- --------
Shares applicable to diluted earnings 9,830 9,720 9,791 9,736
======== ======== ======== ========
Diluted earnings per share $ 0.58 $ 0.70 $ 1.81 $ 1.64
======== ======== ======== ========
6. 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 and nine months ended
September 30, 2002 and 2001.
(In thousands) Three Months Ended Nine Months Ended
September 30 September 30
------------------------ -----------------------
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 5,675 $ 6,846 $ 17,702 $ 15,983
Other comprehensive income (loss):
Foreign currency translation adjustments 298 (274) 283 (1,280)
Unrealized loss on securities (557) (580) (817) (723)
-------- -------- -------- --------
Comprehensive income $ 5,416 $ 5,992 $ 17,168 $ 13,980
======== ======== ======== ========
At September 30, 2002, the total accumulated other comprehensive loss of
$16,404,000 was comprised of $13,533,000 of foreign currency translation
adjustments, $1,887,000 of unrealized losses on securities and $984,000 of
minimum pension liability adjustments. At December 31, 2001, the total
accumulated other comprehensive loss of $15,870,000 included $13,816,000
of foreign currency translation adjustments, $1,070,000 of unrealized
losses on securities and $984,000 of minimum pension liability
adjustments.
7. SEGMENT REPORTING
The Company has three reportable segments: surfactants, polymers and
specialty products. Financial results of the Company's operating segments
for the three and nine months ended September 30, 2002 and 2001, are
summarized below:
(In thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------------------------------------ ------------------------------------------------
2002 2001 2002 2001
---------------------- ---------------------- ---------------------- ----------------------
Operating Operating Operating Operating
Net Sales Income Net Sales Income Net Sales Income Net Sales Income
--------- ------ --------- ------ --------- ------ --------- ------
Surfactants $152,103 $ 9,403 $134,379 $ 7,938 $449,799 $36,382 $415,165 $28,289
Polymers 33,952 5,931 31,906 3,915 94,002 14,325 98,643 13,607
Specialty
Products 7,289 2,342 7,544 3,190 19,494 6,662 19,645 6,373
Segment
Totals $193,344 $17,676 $173,829 $15,043 $563,295 $57,369 $533,453 $48,269
Below are reconciliations of segment operating income to consolidated
income before income taxes:
(In thousands) Three Months Ended Nine Months Ended
September 30 September 30
----------------------- --------------------
2002 2001 2002 2001
---- ---- ---- ----
Operating income segment totals $ 17,676 $ 15,043 $ 57,369 $ 48,269
Unallocated corporate expenses (a) (8,430) (2,654) (27,340) (17,884)
Interest expense (1,743) (1,713) (5,240) (5,375)
Income from equity joint venture 790 529 2,444 1,149
-------- -------- -------- --------
Consolidated income before income taxes $ 8,293 $ 11,205 $ 27,233 $ 26,159
======== ======== ======== ========
(a) Includes corporate administrative and corporate manufacturing
expenses, which are not included in segment operating income and not
used to evaluate segment performance.
8. 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," which is
effective for fiscal years beginning after December 15, 2001. This standard
establishes new accounting and reporting requirements for goodwill and
intangible assets including no amortization of goodwill, separate
identification of certain identifiable intangible assets, and an annual
assessment for impairment of all goodwill and intangible assets. The
following is a reconciliation of the Company's reported 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 Nine Months Ended
(In thousands, except per share data) September 30 September 30
------------------------ -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Reported net income $ 5,675 $ 6,846 $ 17,702 $ 15,983
Add back: Goodwill amortization 0 97 0 323
--------- --------- ---------- ----------
Adjusted net income $ 5,675 $ 6,943 $ 17,702 $ 16,306
========= ========= ========== ==========
Basic earnings per share:
Reported basic earnings per share $ 0.62 $ 0.75 $ 1.93 $ 1.74
Add back: Goodwill amortization 0.00 0.01 0.00 0.04
--------- --------- ---------- ----------
Adjusted basic earnings per share $ 0.62 $ 0.76 $ 1.93 $ 1.78
========= ========= ========== ==========
Diluted earnings per share:
Reported diluted earnings per share $ 0.58 $ 0.70 $ 1.81 $ 1.64
Add back: Goodwill amortization 0.00 0.01 0.00 0.03
--------- --------- ---------- ----------
Adjusted diluted earnings per share $ 0.58 $ 0.71 $ 1.81 $ 1.67
========= ========= ========== ==========
The Company's net carrying values of goodwill were $6,233,000 and
$6,100,000 as of September 30, 2002 and December 31, 2001,
respectively. The entire amount of goodwill relates to the surfactants'
reporting unit.
SFAS No. 142 required the Company to complete a transition goodwill
impairment test by comparing the fair value of the reporting unit with
its net carrying value, including goodwill. The Company has completed
this test and the results of that test indicated that goodwill was not
impaired at January 1, 2002.
The following table reflects the components of all other intangible
assets, which have finite lives, as of September 30, 2002 and December
31, 2001.
(In thousands) Gross Carrying Amount Accumulated Amortization
-------------------------------- -------------------------------
Sept. 30, 2002 Dec. 31, 2001 Sept. 30, 2002 Dec. 31, 2001
-------------- ------------- -------------- -------------
Other Intangible Assets:
Patents $ 2,000 $ 2,000 $ 567 $ 466
Trademarks, customer lists, know-how 17,095 17,095 6,283 5,386
Non-compete Agreements 1,000 1,000 1,000 950
------------ ------------ ------------ -----------
Total $ 20,095 $ 20,095 $ 7,850 $ 6,802
============ ============ ============ ===========
Aggregate amortization expenses for the three and nine months ended
September 30, 2002, were $333,000 and $1,048,000, respectively.
Aggregated amortization expenses for the three and nine months ended
September 30, 2001, were $400,000 and $1,205,000, respectively.
Amortization expense is recorded based on useful lives ranging from 5
to 15 years. 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
9. RECENT ACCOUNTING PRONOUNCEMENTS
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 provisions of SFAS No. 141 to the September 2001
acquisition of Manro Performance Chemicals Limited. No acquisitions
took place during the first nine months 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 was effective for the Company
beginning January 1, 2002. The Company's accounting policies were
already consistent with the guidance provided in this EITF. Therefore,
adoption of this standard did not have an impact on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143, which is effective for fiscal
years beginning after June 15, 2002, supersedes previous guidance for
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset
retirement costs. The statement applies to legal obligations
associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation
of a long-lived asset. Based on the information currently available,
adoption of this standard is not expected to have an impact on the
Company's financial position or results of operations.
In August 2001, 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." SFAS No. 144 was effective January 1, 2002. Adoption of
this standard did not have an impact on the Company's financial
position or results of operations.
In June 2002, The Financial Accounting Standards Board issued SFAS No.
146, "Accounting for Costs Associated with Exit or Disposal
Activities." The standard requires companies to recognize costs
associated with exit or disposal activities when they are incurred
rather than at the date of a commitment to an exit or disposal plan.
SFAS No. 146 is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002. Based on the information
currently available, adoption of this standard is not expected to have
an impact on the Company's financial position or results of operations.
10. NEW LOAN AGREEMENT
During September 2002, the Company completed a new $30 million
private placement loan with its existing insurance company lenders.
The proceeds of the loan were used to repay existing bank debt that
had been classified as long-term. The new loan is unsecured and will
bear interest at 6.86 percent through the stated maturity date of
September 1, 2015.
11. RECLASSIFICATIONS
Certain amounts in the restated 2001 financial statements have been
reclassified to conform to the 2002 presentation.
Item 2 - Management's Discussion and Analysis of Financial Conditions 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.
As discussed in Note 2 to the unaudited, condensed, consolidated financial
statements, the Company has restated its financial statements for the three and
nine month periods ended September 30, 2001 and for the year ended December 31,
2001. The accompanying Management's Discussion and Analysis gives effect to the
restatement.
CRITICAL ACCOUNTING POLICIES
Estimates
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America. Preparing our financial
statements in accordance with generally accepted accounting principles requires
us 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. Critical areas where estimates are required are
noted below:
Environmental Liabilities:
It is the Company's accounting policy to record environmental 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, 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.
Reserves for Doubtful Accounts:
Accounts receivable are reported net of reserves for doubtful accounts. The
Company determines the reserve requirement based upon the estimated
collectibility of specific delinquent accounts, the Company's historical loss
experience and the level of non-delinquent accounts receivable.
Reserves for Obsolete and Slow Moving Inventories:
The Company provides reserves for obsolete and slow moving inventory items. The
reserve requirement is estimated based upon a review of specific inventory items
that are identified as slow moving and consideration of potential salvage value
and disposal costs.
Because the foregoing liabilities and reserves are recorded based on estimates,
actual amounts could differ from these estimates.
Initial Adoption of an Accounting Policy
As discussed in Note 2 to the condensed Consolidated Financial Statements, the
Company adopted the requirements of the consensus reached by the Emerging Issues
Task Force of the Financial Accounting Standards Board in issue No. 97-14,
"Accounting for Deferred Compensation Arrangements Where Amounts Earned are Held
in a Rabbi Trust and Invested". A description of the Company's deferred
compensation accounting policy follows:
The Company maintains deferred compensation plans. These plans allow management
to defer receipt of their bonuses and directors to defer receipt of director
fees until retirement or departure from the Company. The plans allow the
participant to choose to invest in either Stepan common stock or a narrow
variety of mutual funds. These assets are owned by the Company and subject to
the claims of general creditors of the Company. The liability to the
participants is recorded after the underlying compensation is earned, recorded
as expense and a deferral election is made resulting in the deferred
compensation liability. The purchase of Stepan common shares for the plans is
recorded as a regular treasury stock purchase. The purchase of mutual funds is
recorded as long term investments.
Fluctuations in the value of these assets are recorded as compensation income or
expense in administrative expense. The dividends, interest and capital gains
from the mutual fund assets are recorded as investment income and reported under
Other Income as interest expense, net of investment income. Unrealized market
fluctuations of the mutual funds are recorded as other comprehensive income or
expense in stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the first nine months of 2002 totaled
$30.9 million, a decrease of $9.5 million compared to $40.4 million for the same
period in 2001. A $1.7 million increase in net income during the period was
offset by increased working capital. For the first three quarters of 2002,
seasonal working capital growth required $18.8 million compared to $2.9 million
for the same period last year. For the prior year period, seasonal working
capital requirements were lower after the events of September 11, 2001. Working
capital changes for the current year period include: accounts receivable up by
$13.2 million, inventories up by $5.0 million, prepaid expenses up by $1.1
million and accounts payable and accrued liabilities up by $0.5 million.
Capital expenditures totaled $24.6 million for the first three quarters of 2002,
compared to $24.4 million for the same period in 2001. The pace of capital
spending is expected to increase during the fourth quarter of 2002 and total
year expenditures for property, plant and equipment are expected to be somewhat
higher from year to year.
Total company debt decreased by $2.9 million during the first nine months of
2002, from $120.3 million to $117.4 million. As of September 30, 2002, the ratio
of long-term debt to long-term debt plus stockholders' equity was 39.4 percent,
compared to 41.5 percent at December 31, 2001.
The Company's announced change in accounting for deferred compensation plans
will require financial restatement and independent audit for 1999, 2000, and
2001 and the first quarter of 2002. While the company is presently not in
compliance with domestic loan agreements, because they require audited financial
statements, the company's banks and insurance company lenders have waived those
particular debt covenants until November 22, 2002, pending completion of the
audit process.
During September 2002, the Company completed a new $30 million private placement
loan with its existing insurance company lenders. The proceeds of the loan were
used to repay existing bank debt that had been classified as long-term. The new
loan is unsecured and will bear interest at 6.86 percent through the stated
maturity date of September 1, 2015.
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 revolving
credit agreement. 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. During March
2002, the company's Stepan Europe subsidiary completed a (euro)13.4 million bank
term loan as long-term financing for a portion of the Manro acquisition. This
loan will mature in 7 years and bears interest at rates set quarterly, based on
90-day EURIBOR plus the contractual spread. The U.S. parent company does not
guaranty this loan.
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 September 30, 2002 and 2001
Net income for the third quarter ended September 30, 2002, decreased to $5.7
million, or $0.58 per share (diluted), from $6.8 million, or $0.70 per share
(diluted), in 2001. Net sales increased 11 percent to $193.3 million in the
third quarter of 2002 from $173.8 million a year ago. Net sales by segment were:
(Dollars in thousands) Three Months
Ended September 30
----------------------------------------
2002 2001 % Change
---- ---- --------
Net Sales:
Surfactants $ 152,103 $ 134,379 +13
Polymers 33,952 31,906 +6
Specialty Products 7,289 7,544 -3
------------ ------------
Total $ 193,344 $ 173,829 +11
============ ============
Surfactants net sales increased from $134.4 million in the third quarter of 2001
to $152.1 million in the third quarter of 2002. Foreign operations accounted for
most of the improvement, reporting a $13.0 million, or 38 percent, increase
between quarters. Approximately $12.1 million of the increased net sales were
attributable to the fourth quarter 2001 acquisition of Stepan UK. European
operations, excluding Stepan UK, reported higher net sales based on improved
sales volume and a stronger euro. Latin American operations posted weaker net
sales due to decreased sales volume and lower average selling prices.
Net sales for domestic surfactant U.S. operations, which accounted for 69
percent of total surfactant revenues, increased $4.7 million, or five percent,
from $99.9 million in the third quarter of 2001 to $104.6 million in the third
quarter of 2002. A seven percent growth of sales volume more than offset a three
percent decline in average selling prices. Higher demand for personal care
products led to the increase in sales volume.
Surfactants gross profit increased 15 percent to $20.3 million in the third
quarter of 2002 from $17.6 million in the third quarter of 2001. Domestic
operations reported a $0.7 million, or five percent, increase in gross profit.
The increase was based on improved sales volume, which offset a two percent
decline in average margins. Raw material costs declined after several years of
increases allowing a partial recovery in margins. However, this was offset by a
weaker sales mix of higher value added products used in industrial applications,
which have been harder hit by the slow economy.
Foreign operations' gross profit increased $2.0 million, or 51 percent, between
quarters. Stepan Europe contributed $2.6 million to the improvement, of which
$2.2 million was attributable to the previously noted Stepan UK acquisition.
Latin American operations reported higher gross profit due to higher average
margins and Canadian operations showed an improvement based on increased sales
volume and higher average margins.
Polymers net sales increased $2.1 million, or six percent, to $34.0 million in
the third quarter of 2002 from $31.9 million in the third quarter of 2001. The
increase was based on an 18 percent growth in sales volume, which offset a ten
percent decline in average selling prices. Global polyurethane polyols net sales
increased $2.7 million, or 14 percent, between quarters. Domestic operations
reported a $1.4 million improvement based on an eight percent rise in sales
volume. European net sales rose $1.5 million between quarters due primarily to
improved sales volume. Phthalic anhydride (PA) net sales increased three percent
to $8.3 million in the third quarter 2002 from $8.1 million in the third quarter
of 2001. A 31 percent gain in sales volume led to the improvement and more than
offset a 22 percent drop in average selling prices. Lower raw material costs,
which were passed on to customers, and a change from selling a finished product
to toll processing of consigned raw materials, led to the average selling price
decline. Polyurethane systems reported a $0.8 million, or 17 percent, decline in
net sales. An 18 percent drop in sales volume, due primarily to lost business,
led to the decline.
Polymers third quarter gross profit increased $2.6 million, or 48 percent, from
$5.4 million in the third quarter of 2001 to $8.0 million in the third quarter
of 2002. Global polyurethane polyols' gross profit increased $1.4 million, or 33
percent, from quarter to quarter. Domestic operations gross profit rose $1.3
million, or 29 percent, based on higher sales volume and improved average
margins. Polyurethane systems gross profit declined $0.4 million, or 32 percent,
between quarters. Lower sales volume and average margins led to the decrease.
Higher unit overhead costs resulting from lower production volumes led to the
decrease in average margins. PA gross profit rose $1.4 million between quarters
due to improved sales volume and higher average margins.
Specialty products reported $7.3 million in net sales for the third quarter of
2002 compared to $7.5 million a year ago. The decline was due to lower average
selling prices. Gross profit declined $0.7 million, or 20 percent, to $2.8
million in the third quarter of 2002 from $3.5 million in the third quarter of
2001. Lower sales volume of higher margin products led to the decline.
Operating expenses for the third quarter of 2002 increased 55 percent from $14.1
million in 2001 to $21.8 million in 2002. Administrative expenses increased $5.9
million from quarter to quarter. The $2.7 million increase in deferred
compensation expense coupled with $1.4 million in reduced insurance recoveries
contributed to the higher domestic expense. The inclusion of $0.7 million of
expense related to Stepan UK, which was first consolidated in the fourth quarter
of 2001, also contributed to the increase. Marketing expense rose $0.9 million,
or 14 percent, between quarters. The addition of Stepan UK marketing expenses
coupled with higher payroll costs accounted for most of the increase. Research
and development expense increased 16 percent, mostly due to higher payroll
costs.
Net interest expense increased two percent between quarters. Interest expense
declined two percent due to lower overall borrowing rates and decreased debt
levels. The decline in interest expense was more than offset by lower investment
income from mutual funds.
Income from the Philippines equity joint venture increased to $0.8 million in
the third quarter of 2002 from $0.5 million in the third quarter of 2001. The
rise was due to royalty income and higher equity income based on improved sales
volume.
The effective tax rate was 31.6 percent for the third quarter ended September
30, 2002 compared to 38.9 percent for the third quarter ended September 30,
2001. The lower effective tax rate was primarily attributable to a revised
estimated annual effective rate of 35 percent. The lower annual rate is due to
favorable rates on European earnings and a higher U.S. tax benefit realized on
export sales. A decrease in the overall state apportionment factor also
contributed to the lower effective tax rate.
Nine Months Ended September 30, 2002 and 2001
Net income for the first nine months ended September 30, 2002, was $17.7
million, or $1.81 per share (diluted), up $1.7 million, or 11 percent, from
$16.0 million, or $1.64 per share (diluted), for the same period in 2001. Net
sales increased six percent to $563.3 million from $533.5 million reported last
year. Net sales by segment were:
(Dollars in thousands) Nine Months
Ended September 30
------------------------------------------
2002 2001 % Change
---- ---- --------
Net Sales:
Surfactants $ 449,799 $ 415,165 +8
Polymers 94,002 98,643 -5
Specialty Products 19,494 19,645 -1
------------ ------------
Total $ 563,295 $ 533,453 +6
============ ============
Surfactants net sales increased $34.6 million, or eight percent, to $449.8
million in 2002 from $415.2 million in 2001. Net sales for foreign operations
rose $34.2 million, or 33 percent, from $103.3 million in 2001 to $137.5 million
in 2002. A 47 percent increase in sales volume led to the net sales growth.
Approximately $31.2 million of the increase was due to the fourth quarter 2001
acquisition of Stepan UK. European operations, excluding Stepan UK, and Canadian
operations reported higher net sales by $2.4 million and $1.6 million,
respectively, based on improved sales volume. Domestic U.S. operations, which
accounted for 69 percent of total surfactant revenues, reported net sales that
were relatively unchanged from year to year.
Surfactants gross profit increased $10.9 million, or 19 percent, to $67.6
million in the first nine months of 2002 from $56.7 million for the same period
of 2001. Domestic operations reported a $5.4 million, or 12 percent, increase in
gross profit due to a partial recovery in margins as raw material costs declined
after several years of increases. Gross profit for foreign operations rose $5.5
million, or 45 percent, to $17.8 million in 2002 from $12.3 million in 2001.
European operations contributed $5.7 million to the improvement, of which $5.1
million related to the previously noted Stepan UK acquisition. Latin America
operations reported increased gross profit due to higher average margins.
Polymers net sales decreased $4.6 million, or five percent, to $94.0 million in
2002 from $98.6 million in 2001. PA net sales increased 13 percent to $28.3
million in 2002 from $25.1 million in 2001. A 35 percent gain in sales volume
more than offset a 17 percent drop in average selling prices. Lower raw material
costs, coupled with the move to a consignment arrangement with a major customer
(i.e. the customer provides the Company with the raw material to produce the
customer's finished product), led to the average price decline. Global
polyurethane polyols net sales decreased seven percent to $54.2 million in 2002
from $58.1 million for the same period a year ago. Domestic operations accounted
for most of the net sales decrease contributing $5.2 million to the drop, based
on declined sales volume and lower average selling prices. Urethane systems net
sales fell 26 percent to $11.5 million for the first nine months of 2002 from
$15.5 million in 2001. A 25 percent drop in sales volume, which led to the
decrease, was due primarily to lost business.
Polymers gross profit was $20.0 million for the nine months of 2002, which was
$1.7 million, or nine percent, higher than a year ago. PA's gross profit
increased $2.0 million, or 79 percent, to $4.5 million in 2002 from $2.5 million
in 2001. A 35 percent improvement in sales volume, coupled with a 31 percent
increase in average margins, led to the rise. Global polyurethane polyols gross
profit increased $1.1 million, or eight percent, to $15.2 million in 2002 from
$14.1 million in 2001. Domestic polyurethane polyols gross profit increased $0.6
million, or four percent, from $14.4 million in 2001 to $15.0 million in 2002
based on higher average margins, partially offset by lower sales volume. Lower
raw material costs led to the average margin improvement. European gross profit
increased $0.8 million based on higher average margins and improved sales
volume, while Brazil's gross profit dropped $0.2 million due to lower sales
volume. Polyurethane systems gross profit decreased $1.4 million, or 39 percent,
from year to year. Lower sales volume and average margins led to the decrease.
Higher unit overhead costs resulting from decreased production volumes led to
the decline in average margins.
Specialty products net sales decreased $0.1 million, or one percent, from $19.6
million in 2001 to $19.5 million in 2002. The decrease was primarily due to
lower sales volume. Gross profit increased $0.6 million, or nine percent,
between years due to increased sales volume of higher margin products.
Operating expenses increased $13.5 million, or 26 percent, to $65.2 million in
the first nine months of 2002 from $51.7 million for the same period a year ago.
Administrative expenses rose $10.5 million, or 66 percent, between years. The
rise reflected $3.4 million increase in costs associated with the implementation
of an enterprise resource planning system and $3.2 million increased deferred
compensation expenses. The increase also reflected $1.6 million in expenses for
Stepan UK, which was first consolidated in the fourth quarter of 2001. Marketing
expenses increased $1.6 million, or eight percent, between years. Research and
development expenses increased $1.4 million, or eight percent, between years.
Interest expense decreased three percent from year to year due to lower overall
borrowing rates.
Income from the Philippines equity joint venture increased to $2.4 million in
2002 from $1.1 million a year ago. The rise was due to royalty income and to
increased equity income generated by higher sales volume.
The effective tax rate was 35.0 percent for the first nine months ended
September 30, 2002 compared to 38.9 percent for the first nine months ended
September 30, 2001. The lower effective tax rate was primarily attributable to a
decrease in the effective tax rate on European earnings and a higher U.S. tax
benefit realized on export sales. A decrease in the overall state apportionment
factor also contributed to the lower effective tax rate.
ENVIRONMENTAL AND LEGAL MATTERS
The Company is subject to extensive federal, state and local environmental laws
and regulations. Although the Company's environmental policies and practices are
designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent environmental regulation could require
the Company to make additional unforeseen environmental expenditures. The
Company will continue to invest in the equipment and facilities necessary to
comply with existing and future regulations. During the first nine months of
2002, Company expenditures for capital projects related to the environment were
$0.8 million and should approximate $1.2 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 $5.6 million for the first nine
months of 2002.
The Company has been named by the government as a potentially responsible party
at 18 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 September
30, 2002. At September 30, 2002 and December 31, 2001, the Company's reserves
were $17.1 million and $17.0 million for legal and environmental matters. During
the first nine months of 2002, expenditures related to legal and environmental
matters approximated $2.2 million. For certain sites, estimates cannot be made
of the total costs of compliance or the Company's share of such costs;
accordingly, the Company is unable to predict the effect thereof on future
results of operations. In the event of one or more adverse determinations in any
annual or interim period, the impact on results of operations for those periods
could be material. However, based upon the Company's present belief as to its
relative involvement at these sites, other viable entities' responsibilities for
cleanup and the extended period over which any costs would be incurred, the
Company believes that these matters will not have a material effect on the
Company's financial position.
RECENT ACCOUNTING PRONOUNCEMENTS
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 provisions
of SFAS No. 141 to the September 2001 acquisition of Manro Performance Chemicals
Limited. No acquisitions took place during the first nine months 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 was effective for the Company
beginning January 1, 2002. The Company's accounting policies were already
consistent with the guidance provided in this EITF. Therefore, adoption of this
standard did not have an impact on the Company's financial position or results
of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143, which is effective for fiscal year beginning after
June 15, 2002, supersedes previous guidance for financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement applies to legal
obliations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset. Based on the information currently available, adoption of this
standard is not expected to have an impact on the Company's financial position
or results of operations.
In August 2001, 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." SFAS No. 144 was effective January 1,
2002. Adoption of this standard did not have an impact on the Company's
financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143, which is effective for fiscal years beginning after
June 15, 2002, supersedes previous guidance for financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset. Based on the information currently available, adoption of this
standard is not expected to have an impact on the Company's financial position
or results of operations.
In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities." The standard
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Based on the information
currently available, adoption of this standard is not expected to have an impact
on the Company's financial position or results of operations.
OTHER
Except for the historical information contained herein, the matters discussed in
this document are forward looking statements that involve risks and
uncertainties. The results achieved this quarter are not necessarily an
indication of future prospects for the Company. Actual results in future
quarters may differ materially. Potential risks and uncertainties include, among
others, fluctuations in the volume and timing of product orders, changes in
demand for the Company's products, changes in technology, continued competitive
pressures in the marketplace, outcome of
environmental contingencies, availability of raw materials, foreign currency
fluctuations and the general economic conditions.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
For information regarding our exposure to market risk, see the caption
entitled "Liquidity and Capital Resources" in "Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
Item 4 - Controls and Procedures
a. Evaluation of Disclosure Controls and Procedures
Based on their evaluation of our disclosure controls and
procedures conducted within 90 days of the date of filing
this report on Form 10-Q, our Chief Executive Officer and
our acting Chief Financial Officer have concluded that our
disclosure controls and procedures (as defined in Rules
13a-14(c) and 15d-14(c) promulgated under the Securities
Exchange Act of 1934) are effective.
b. Changes in Internal Controls
There were no significant changes in our internal controls or
in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
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 Liability 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 submitted the Draft Final FS for Soil and Source
Areas (Operable Unit 1) in September 2002. In addition, the Company has also
submitted additional information regarding the remediation, most recently in
October 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.
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 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 $434,406
and alleged natural resource damages in the amount of $529,584 (as of November
3, 2000). The NJDEP settled such claims against the alleged responsible parties,
resulting in the Company paying its portion of $83,061 in July 2002. This
payment is subject to reallocation after the allocation phase of the
above-identified trial, if any. The payment did not have a material impact on
the financial condition of the Company.
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.
The Company received a General Notice of Potential Liability letter from the
USEPA dated October 18, 2002, regarding the Liquid Dynamics Site located in
Chicago, Illinois. The Company submitted a response to USEPA on November 5,
2002, stating that it is interested in negotiating a resolution of its potential
responsibility at this site. Based on the fact that the Company believes it is a
de minimis PRP at this site, the Company believes that a resolution of its
liability at this site will not have a material impact on the financial
condition of the Company.
As reported previously in the Company's Quarterly Report Form 10-Q for the
quarter ended September 30, 1994 and various subsequent reports, the Company
received a Request for Information from the Commonwealth of Massachusetts
Department of Environmental Protection relating to the Company's formerly-owned
site at 51 Eames Street, Wilmington, Massachusetts. The Company received a copy
of another Request for Information regarding this site dated October 18, 2002.
The Company's response to this request is due on November 29, 2002. The Company
is currently investigating this matter and therefore, cannot predict what its
liability, if any, will be for this site.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 99.1--Certification pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002
Exhibit 99.2--Note Purchase Agreement dated as of September 1, 2002
Exhibit 99.3--Revolving Credit Agreement dated as of May 3, 2002
(b) Reports on Form 8-K
Form 8-K reporting the effects of a change in accounting for deferred
compensation plan as a correction of an error with restatement of the
Company's three prior year financial statements has been filed on
August 1, 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 and Corporate
Controller
Date: November 14, 2002
CERTIFICATIONS
I, F. Quinn Stepan, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stepan Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002
/s/ F. Quinn Stepan
------------------------------------------
Chairman and Chief Executive Officer
CERTIFICATIONS
I, James E. Hurlbutt, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Stepan Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 /s/ James E. Hurlbutt
-----------------------------------------
Vice President & Corporate Controller