MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
1993 COMPARED WITH 1992
Sales for 1993 grew one percent to a record $439 million. The increase was the
result of a one percent increase in sales volume. Sales by product group were:
Percent
(Dollars in Thousands) 1993 1992 Change
- ---------------------------------------------------------
Surfactants $324,809 $317,522 +2
Polymers 79,071 87,060 -9
Specialty products 34,945 31,182 +12
- ---------------------------------------------------------
Total $438,825 $435,764 +1
- ---------------------------------------------------------
Surfactants are a principal ingredient in consumer and industrial cleaning
products such as detergents, shampoos, lotions, toothpaste and cosmetics. Other
applications include lubricating ingredients and emulsifiers for spreading of
insecticides and herbicides. Surfactant sales volume rose two percent. Domestic
volume represented 87 percent of total surfactant sales volume and grew by two
percent over the prior year. Sales of foreign subsidiaries representing 13
percent of surfactant sales volume declined by two percent. Mexico's sales
decreased as a result of a 13 percent drop in volume which was largely offset by
increased sales volume in Canada. Europe's sales decreased two percent, despite
higher volume as a result of a six percent decline in the value of the French
franc and increased competitive pressure on prices. The weaker Canadian dollar
also negatively affected the foreign subsidiaries' revenue growth.
The polymer product group includes phthalic anhydride, polyurethane systems
and polyurethane polyols. Phthalic anhydride is used in polyester resins, alkyd
resins and plasticizers for applications in construction materials and
components of automotive, boating and other consumer products. Polyurethane
systems provide thermal insulation and are sold to the construction, industrial
and appliance markets. Polyurethane polyols are used in the manufacture of
laminate board for the construction industry. Polymer sales declined due to a
nine percent decrease in volume. Phthalic anhydride, which represents 54 percent
of polymer volume, experienced a 17 percent decrease in sales due primarily to
increased competition from imports which forced volumes and selling prices down.
Polyurethane polyols, which represent 35 percent of total polymer volume,
experienced an eight percent decline in volume due to lower export business.
Polyurethane systems sales increased seven percent as a result of higher volume
and improved selling prices.
Specialty products include flavors, lubricant additives, oil field chemicals
and emulsifiers and solubilizers used in the food and pharmaceutical industry.
Specialty products revenues grew 12 percent with most of the improvement coming
from higher volume. Average selling prices were essentially unchanged.
Gross profit in 1993 was $80.0 million, or 18.2 percent of net sales, a
decrease from $81.8 million, or 18.8 percent of net sales in 1992. Surfactants
gross profit was $63.0 million for 1993, a decrease of one percent from 1992.
Domestic surfactants were down $.3 million, or one percent, as a result of a
slight decrease in gross profit margins. Foreign operations were down $.2
million as Stepan Europe continued to face increased competitive pressure in a
recessionary European economy. Canada and Mexico both showed improvement over
1992. Polymers gross profit dropped by $4.7 million to $9.7 million for 1993
representing a 33 percent decrease from 1992. Phthalic anhydride accounted for
most of the decreased polymer gross profit showing significantly reduced gross
profit margins as a result of increased competition from imports in the
marketplace. Higher repair and maintenance expenses in the production of
phthalic anhydride also contributed to the lower margins. Polyurethane polyols
gross profit also decreased despite higher margins as a result of lower volumes.
Polyurethane systems gross profit increased on improved margins. Specialty
products gross profit grew by $3.4 million to $7.4 million for 1993
14
representing an 85 percent increase over 1992. Contributing to this performance
were higher selling prices for lubricant additives, higher volumes for oil field
chemicals and improved margins for food ingredients.
Raw material costs declined slightly during 1993 and are expected to remain
stable during 1994. Labor costs increased at a modest rate reflecting the recent
low levels of inflation which are expected to continue in the near term.
Depreciation expense increased to $25.7 million in 1993 from $22.4 million in
1992 as a result of bringing into service significant capacity expansion
projects in recent years, as well as continuing capital spending for plant
improvements, a trend that will continue as the Company reinvests in process
improvements and compliance with environmental standards.
Operating income, pre-tax income before net interest expense, was $27.3
million in 1993, a 13.8 percent increase from 1992. Operating income in 1992
included a $6.5 million charge relating to environmental expenses and the write
down of the Company's investment in Mexico. See Note 10 of the Notes to the
Consolidated Financial Statements. Excluding the environmental and restructuring
charge in last year, operating expenses for 1993 increased $1.5 million or three
percent. Administrative expenses decreased $1.7 million or nine percent
primarily due to decreased legal settlement costs and lower office space costs
as 1992 was unusually high due to the consolidating of personnel into a newly
leased corporate facility. Marketing expenses increased four percent largely due
to increased travel by sales personnel and a higher bad debt provision. Research
and development costs increased by 17 percent due to planned staffing increases
as well as greater travel requirements of research personnel. Cost containment
efforts undertaken in prior years have resulted in a moderate increase in
operating expenses in 1993 and are expected to continue in 1994.
The effective tax rate was 45 percent in 1993 compared to 40 percent in 1992
on income before the effects of accounting changes. The increase in the tax
provision was attributable to the higher corporate tax rate which resulted from
the Revenue Reconciliation Act of 1993. Previously deferred tax liabilities were
restated to reflect the higher tax rate resulting in an addition to the current
year provision. See Note 5 of the Notes to the Consolidated Financial Statements
for a reconciliation of the statutory to the effective tax rate.
Net income for 1993 increased three percent to $10.8 million, or $1.96 per
share, compared to 1992 net income of $10.4 million, or $1.91 per share before
accounting changes. The 1992 net income reflected the retroactive adoption of
Statement of Financial Accounting Standard No. 109, "Accounting for Income
Taxes" and a change from the deferred method to the flow-through method of
accounting for investment tax credits. The cumulative effect of these changes
was a favorable $5.4 million, or $1.02 per share in 1992. See Note 5 of the
Notes to the Consolidated Financial Statements for a further explanation of the
accounting changes. Net income for 1992 was $15.8 million, or $2.93 per share.
1992 COMPARED WITH 1991
Sales for 1992 increased five percent to a record $436 million. The increase
was the result of a four percent increase in sales volume and higher average
selling prices. Sales by product group were:
Percent
(Dollars in Thousands) 1992 1991 Change
- -------------------------------------------------------
Surfactants $317,522 $293,347 +8
Polymers 87,060 89,848 -3
Specialty products 31,182 30,874 +1
- -------------------------------------------------------
Total $435,764 $414,069 +5
- -------------------------------------------------------
Surfactant sales volume increased six percent. Domestic volume represented 86
percent of total surfactant sales volume and grew by three percent over the
prior year. Sales of our foreign subsidiaries repre-
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
senting 14 percent of surfactant sales volume grew by 23 percent. Europe's
volume increased 40 percent as a result of continued penetration of the European
fabric softener market. Mexico's volume increased 42 percent and Canada was
unchanged.
Polymer sales declined due to a two percent decrease in volume. Polyurethane
polyols, which represent 35 percent of total polymer volume, experienced a nine
percent decline in volume due to economic conditions. Phthalic anhydride, which
represents 56 percent of polymer volume, experienced a nine percent increase in
sales due primarily to higher selling prices as volume only increased slightly.
Polyurethane systems sales decreased four percent as a result of declining
selling prices.
Specialty products revenues were up slightly despite a four percent decrease
in volume. Average selling prices were up five percent with most of the
improvement coming from higher selling prices for lubricant additives.
Gross profit in 1992 was $81.8 million, or 18.8 percent of net sales, an
increase from $74.0 million, or 17.9 percent of net sales in 1991. Surfactants
gross profit reached $61.7 million for 1992, an increase of six percent from
1991. Foreign operations generated the increased surfactant gross profit as
Stepan Europe continued to expand into more of the European fabric softener
market. Canada and Mexico both showed improvement over 1991. Domestic
surfactants were down $.8 million, or two percent, as a result of a slight
decrease in gross profit margins. Polymers gross profit grew by $4.4 million to
$14.0 million for 1992 representing a 45 percent increase over 1991. Phthalic
anhydride accounted for most of the increased polymer gross profit showing
significantly improved gross profit margins as a result of improved balance of
supply and demand in the marketplace. Polyurethane polyols gross profit also
increased despite lower sales volume as a result of higher margins. Polyurethane
systems gross profit declined on lower margins. Specialty products was unchanged
from the prior year.
Raw material costs remained relatively stable during 1992. Labor costs
increased at a modest rate reflecting the low levels of inflation experienced in
1992. Depreciation expense increased to $22.4 million in 1992 from $20.1 million
in 1991 as a result of bringing into service a significant capacity expansion
project, as well as continuing capital spending for plant improvements.
Operating income, pre-tax income before net interest expense, was $24.0
million, a five percent decline from 1991. Operating income in 1992 included a
$6.5 million charge relating to environmental expenses and the write down of the
Company's investment in Mexico. See Note 10 of the Notes to the Consolidated
Financial Statements. Operating expenses increased $2.6 million or five percent.
Administrative expenses increased $2.3 million or 13 percent primarily due to an
increase in legal settlement costs and higher costs associated with the leasing
of additional corporate office space. Marketing expenses increased a modest
three percent largely due to increased personnel in Europe. Research and
development costs decreased by one percent. Cost containment efforts undertaken
in 1992 are expected to continue in 1993.
Net interest expense increased two percent due to higher average debt levels,
ending the year at $97.1 million in total debt compared to $92.5 million at the
end of 1991. Average cost of borrowed funds declined as rates on revolving bank
debt averaged well below 1991 levels.
The effective tax rate on income before the effects of accounting changes was
40 percent in 1992 compared to 33.5 percent in 1991. The 1992 tax provision
reflects the retroactive adoption of Statement of Financial Accounting Standard
No.109, "Accounting for Income Taxes" to January 1, 1992 and a change from the
deferred method to the flow-through method of
16
accounting for investment tax credits. The cumulative effect of these accounting
changes was a favorable $5.4 million or $1.02 per share in 1992. See Note 5 of
the Notes to the Consolidated Financial Statements for a further explanation of
the accounting change as well as a reconciliation of the statutory to the
effective tax rate.
Net income in 1992 was a record $15.8 million or $2.93 per share, up from
$12.5 million or $2.30 per share in 1991. Net income excluding accounting
changes was $10.4 million, or $1.91 per share in 1992.
LIQUIDITY AND FINANCIAL CONDITION
Cash provided by operating activities totaled $35.3 million during 1993, down by
$3.5 million compared to $38.8 million for 1992. Working capital increased by
$4.3 million for 1993, compared to an increase of $2.3 million during 1992. Net
income, adjusted for non-cash items, declined by $1.4 million from year-to-year.
For 1992, non-cash items included $6.5 million of environmental and
restructuring charges.
Capital expenditures for 1993 were $25.4 million, down by $9.0 million from
the $34.4 million total for 1992. Capital spending is scheduled to increase
during 1994 from the 1993 amount, which represented a five-year low.
Total debt was unchanged during 1993, opening and closing the year at $97.1
million. In 1993, the Company entered into $30 million of new long term notes
placed at 7.22 percent. Proceeds from the new loans were used to reduce floating
rate debt, which fell by $20 million from one year earlier, and to repay $12
million in higher cost fixed rate debt. During 1993, the Company recorded a $1.0
million note payable to its new Colombian joint venture, while debt of foreign
subsidiaries increased by $1.0 million. The year-end ratio of long term debt to
long term debt plus shareholders' equity was 46.2 percent for 1993, compared to
47.6 percent for 1992 and 49.7 percent for 1991.
The Company maintains contractual relationships with its banks which provide
for $45 million of revolving credit which may be drawn upon as needed for
general corporate purposes. See Note 3 of the Notes to the Consolidated
Financial Statements for a discussion of the terms of this agreement. The
Company also meets short term liquidity requirements through uncommitted bank
lines of credit and bankers' acceptances.
The Company anticipates that cash from operations and from committed credit
facilities will be sufficient to meet anticipated capital expenditure programs,
dividend requirements and other planned financial commitments in 1994 and for
the foreseeable future.
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 1993, Company expenditures
for capital projects related to the environment were $4.1 million and should
approximate $6.5 million for 1994. These projects are capitalized and typically
depreciated over 10 years. Capital spending on such projects is likely to
continue at these or higher levels in future years. Recurring costs associated
with the operation and maintenance of environmental protection facilities for
ongoing operations were approximately $8.0 million for 1993 compared to $10.0
million for 1992. 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 dis-
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
posal 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 the sites. The Company has estimated a range of possible
environmental and legal losses from $4.4 million to $22.8 million at December
31, 1993, compared to $6.1 million to $25.2 million at December 31, 1992. The
Company reserves for such losses based on its best estimate of probable losses.
At December 31, 1993, the Company's reserve was $7.2 million for legal and
environmental matters compared to $9.6 million at December 31, 1992. During
1993, expenditures related to legal and environmental matters approximated $4.5
million compared to $7.2 million expended in 1992. While it is difficult to
forecast the expenditure for 1994, the Company believes that the $7.2 million
reserve balance at December 31, 1993 is more likely to be paid out over multiple
years. At certain of the 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 presently 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 1993 Form 10-K Annual Report and in other filings of the Company with the
Securities and Exchange Commission, which filings are available upon request
from the Company.
In addition, reference should be made to the Ten-Year Summary on pages 30 and
31.
18
Report of Management
Management Report on Financial Statements
The financial statements of Stepan Company and subsidiaries were prepared by and
are the responsibility of management. The statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and include some amounts that are based on management's best
estimates and judgments. The Board of Directors, through its Audit Committee,
assumes an oversight role with respect to the preparation of the financial
statements.
In meeting its responsibility for the reliability of the financial
statements, the Company depends on its system of internal accounting control.
The system is designed to provide reasonable assurance that assets are
safeguarded and that transactions are executed as authorized and are properly
recorded. The system is augmented by written policies and procedures and an
internal audit department.
The Audit Committee of the Board of Directors, composed solely of directors
who are not officers or employees of the Company, meets regularly with
management, with the Company's internal auditors and with its independent
certified public accountants to discuss its evaluation of internal accounting
controls and the quality of financial reporting. The independent auditors and
the internal auditors have free access to the Audit Committee, without
management's presence.
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
Walter J. Klein
Vice President-Finance
February 11, 1994
Report of Independent Public Accountants
To the Stockholders of Stepan Company:
We have audited the accompanying consolidated balance sheets of Stepan Company
(a Delaware corporation) and subsidiaries as of December 31, 1993 and 1992, and
the related consolidated statements of income, cash flows and stockholders'
equity, for each of the three years in the period ended December 31, 1993. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stepan
Company and subsidiaries as of December 31, 1993 and 1992, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1993, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 5 to the consolidated financial statements,
effective January 1, 1992, Stepan Company changed its methods of accounting for
investment tax credits and for income taxes.
Arthur Andersen & Co.
Chicago, Illinois,
February 11, 1994
19
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
(Dollars in Thousands) 1993 1992
- --------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,515 $ 2,915
Receivables, less allowances of $1,739 in 1993 and $1,444 in 1992 57,250 57,030
Inventories (Note 2) 48,918 47,778
Deferred income taxes (Note 5) 7,498 6,922
Other current assets 3,979 3,980
- --------------------------------------------------------------------------------------------
Total current assets 119,160 118,625
- --------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT:
Land 4,533 4,533
Buildings and improvements 50,143 42,781
Machinery and equipment 311,621 290,866
Construction in progress 11,142 15,819
- --------------------------------------------------------------------------------------------
377,439 353,999
Less accumulated depreciation 208,558 186,069
- --------------------------------------------------------------------------------------------
Property, plant and equipment, net 168,881 167,930
- --------------------------------------------------------------------------------------------
Other Assets 12,447 10,525
- --------------------------------------------------------------------------------------------
Total assets $300,488 $297,080
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt (Note 3) $ 7,447 $ 6,604
Accounts payable 34,832 37,542
Accrued liabilities (Note 9) 28,312 30,214
- --------------------------------------------------------------------------------------------
Total current liabilities 70,591 74,360
- --------------------------------------------------------------------------------------------
Deferred Income Taxes (Note 5) 36,020 32,709
- --------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 89,660 90,505
- --------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (NOTE 6):
5 1/2 percent convertible preferred stock, cumulative, voting,
without par value; authorized 2,000,000 shares; issued
799,684 shares in 1993 and 800,000 shares in 1992 19,992 20,000
Common stock, $1 par value, authorized 15,000,000 shares;
issued 5,113,024 in 1993 and 5,100,945 in 1992 5,113 5,101
Additional paid-in capital 3,781 3,688
Cumulative translation adjustments (2,058) (1,023)
Retained earnings 82,475 76,804
- --------------------------------------------------------------------------------------------
109,303 104,570
Less: Treasury stock, at cost (Note 6) 4,863 4,619
Deferred ESOP compensation (Note 7) 223 445
- --------------------------------------------------------------------------------------------
Stockholders' equity 104,217 99,506
- --------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $300,488 $297,080
============================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
20
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1993, 1992 and 1991
(Dollars in Thousands, except per share amounts) 1993 1992 1991
- ------------------------------------------------------------------------------------------
Net Sales $438,825 $435,764 $414,069
- ------------------------------------------------------------------------------------------
COST AND EXPENSES:
Cost of sales 358,790 353,950 340,047
Marketing 16,738 16,061 15,566
Administrative 18,378 20,110 17,775
Research, development and technical services (Note 1) 17,669 15,134 15,331
Interest, net (Note 3) 7,626 6,644 6,484
Environmental and restructuring charges (Note 10) -- 6,500 --
- ------------------------------------------------------------------------------------------
419,201 418,399 395,203
- ------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes and Cumulative
Effect of Accounting Changes 19,624 17,365 18,866
Provision for Income Taxes (Note 5) 8,848 6,942 6,319
- ------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Changes 10,776 10,423 12,547
Cumulative Effect of Accounting Changes (Notes 1 and 5) -- 5,406 --
- ------------------------------------------------------------------------------------------
Net Income $ 10,776 $ 15,829 $ 12,547
- ------------------------------------------------------------------------------------------
PRIMARY EARNINGS PER SHARE:
Income before cumulative effect of accounting changes 1.96 1.91 2.30
Cumulative effect of accounting changes (Notes 1 and 5) -- 1.02 --
- ------------------------------------------------------------------------------------------
Net Income per Common Share $ 1.96 $ 2.93 $ 2.30
- ------------------------------------------------------------------------------------------
FULLY DILUTED EARNINGS PER SHARE:
Income before cumulative effect of accounting changes 1.92 1.87 2.25
Cumulative effect of accounting changes (Notes 1 and 5) -- .97 --
- ------------------------------------------------------------------------------------------
Net Income per Common Share $ 1.92 $ 2.84 $ 2.25
- ------------------------------------------------------------------------------------------
Average Common Shares Outstanding (Note 1) 4,947 5,286 5,458
- ------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(COMBINED SALES Chart Appears Here)
(1993 SALES DOLLAR DISTRIBUTION Chart Appears Here)
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1993, 1992 and 1991
(Dollars in Thousands) 1993 1992 1991
- --------------------------------------------------------------------------------------------------------
Net Cash Flow from Operating Activities
Net income $10,776 $15,829 $12,547
Depreciation and amortization 27,679 23,914 21,108
Cumulative effect of accounting changes (Notes 1 and 5) -- (5,406) --
Provision for environmental and restructuring charges (Note 10) -- 6,500 --
Deferred income taxes and investment tax credits 2,735 2,409 (1,151)
Prepaid pension cost (Note 8) (567) (645) (606)
Other non-cash items 830 271 222
- --------------------------------------------------------------------------------------------------------
41,453 42,872 32,120
Changes in Working Capital:
Receivables, net (220) (2,985) (3,346)
Inventories (1,140) (3,823) (4,061)
Accounts payable and accrued liabilities (4,788) 3,000 5,165
Other 1 (250) 22
- --------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 35,306 38,814 29,900
- --------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (25,435) (34,440) (33,728)
Investment in joint venture (Note 1) (1,422) -- --
Other non-current assets (963) (1,960) (3,036)
- --------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (27,820) (36,400) (36,764)
- --------------------------------------------------------------------------------------------------------
Cash Flows from Financing and Other Related Activities
Revolving debt and notes payable to banks, net (20,631) 11,129 (9,800)
Other debt borrowings 30,000 -- 25,000
Other debt repayments (12,633) (6,556) (2,932)
Purchases of treasury stock, net (244) (2,034) (1,333)
Dividends paid (5,105) (4,172) (3,603)
Other non-cash items (273) (141) 176
- --------------------------------------------------------------------------------------------------------
Net Cash (Used for) Provided by Financing and Other Related Activities (8,886) (1,774) 7,508
- --------------------------------------------------------------------------------------------------------
Net (Decrease) Increase in Cash and Cash Equivalents (1,400) 640 644
Cash and Cash Equivalents at Beginning of Year 2,915 2,275 1,631
- --------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 1,515 $ 2,915 $ 2,275
========================================================================================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refund $ 6,327 $ 6,568 $ 6,017
Cash payments of interest $ 8,002 $ 8,289 $ 7,774
========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
22
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1993, 1992 and 1991
Convertible Additional Cumulative Deferred
Preferred Common Paid-in Treasury Translation ESOP Com- Retained
(Dollars in Thousands) Stock Stock Capital Stock Adjustments pensation Earnings
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1991 $ -- $5,522 $3,320 $(1,252) $ 324 $ (889) $ 75,673
Sale of 28,619 shares under
stock option plan -- 29 245 -- -- -- --
Purchase of 54,126 shares of
common treasury stock, net of
sales -- -- -- (1,333) -- -- --
Compensation expense (Note 7) -- -- -- -- -- 222 --
Net income -- -- -- -- -- -- 12,547
Cash dividends paid
($.66 per common share) -- -- -- -- -- -- (3,603)
Translation adjustments -- -- -- -- 61 -- --
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1991 -- 5,551 3,565 (2,585) 385 (667) 84,617
Sale of 80,066 shares
under stock option plan -- 80 949 -- -- -- --
Purchase of 52,423 shares of
common treasury stock,
net of sales -- -- 49 (2,034) -- -- --
Issuance of preferred stock in
exchange and retirement of
529,801 shares of common
stock (Note 6) 20,000 (530) (875) -- -- -- (19,470)
Compensation expense (Note 7) -- -- -- -- -- 222 --
Net income -- -- -- -- -- -- 15,829
Cash dividends paid
Preferred stock ($.31 per share) -- -- -- -- -- -- (244)
Common stock ($.74 per share) -- -- -- -- -- -- (3,928)
Translation adjustments -- -- -- -- (1,408) -- --
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 20,000 5,101 3,688 (4,619) (1,023) (445) 76,804
Sale of 11,900 shares under
stock option plan -- 12 132 -- -- -- --
Purchase of 22 shares of common
and 8,700 shares of preferred
treasury stock, net of sales -- -- 93 (244) -- -- --
Issuance cost of preferred stock -- -- (140) -- -- -- --
Conversion of preferred stock
to common stock (8) -- 8 -- -- -- --
Compensation expense (Note 7) -- -- -- -- -- 222 --
Net income -- -- -- -- -- -- 10,776
Cash dividends paid
Preferred stock ($1.375
per share) -- -- -- -- -- -- (1,097)
Common stock ($.81 per share) -- -- -- -- -- -- (4,008)
Translation adjustments -- -- -- -- (1,035) -- --
- ----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 $19,992 $5,113 $3,781 $(4,863) $(2,058) $ (223) $ 82,475
- ----------------------------------------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(CAPITAL SPENDING CHART APPEARS HERE) (EQUITY PER SHARE CHART APPEARS HERE)
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1993, 1992 and 1991
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Company's operations consist predominantly of the production and sale of
basic and intermediate chemicals which are sold to other manufacturers for use
in a variety of end products. Principal markets for all products are
manufacturers of cleaning and washing compounds (including detergents, shampoos,
toothpaste and household cleaners), paints, cosmetics, beverages, agricultural
pesticides and herbicides, plastics, furniture, automotive equipment, insulation
and refrigeration.
The Company grants credit to its customers who are widely distributed
throughout North America and Europe. There is no material concentration of
credit risk.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stepan Company and
its wholly-owned domestic and foreign subsidiary companies. All significant
intercompany balances and transactions have been eliminated in consolidation.
The equity method of accounting is used for a 50 percent interest in a joint
venture in Colombia, South America. The financial results of the joint venture
have not been material to the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with original maturities of
three months or less from the date of purchase to be cash equivalents.
INVENTORIES
Inventories are valued at cost, which is not in excess of market value, and
include material, labor and plant overhead costs. The last-in, first-out (LIFO)
method is used to determine the cost of most domestic inventories. The first-in,
first-out (FIFO) method is used for all other inventories. Inventories priced at
LIFO as of December 31, 1993 and 1992 amounted to 89 percent of total
inventories.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of physical properties is provided on a straight-line basis over
the estimated useful lives of various assets. Lives used for calculating
depreciation are 30 years for buildings, 15 years for building improvements and
from three to 15 years for machinery and equipment. Major renewals and
betterments are capitalized in the property accounts, while maintenance and
repairs ($16,505,000, $15,335,000, and $15,218,000 in 1993, 1992 and 1991,
respectively), which do not renew or extend the life of the respective assets,
are charged to operations currently. The cost of property retired or sold and
the related accumulated depreciation are removed from the accounts and any
resulting gain or loss is reflected in income.
Interest charges on borrowings applicable to major construction projects are
capitalized and subsequently amortized over the lives of the related assets.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated. Some of the factors on which the Company will base its estimates
include information provided by feasibility studies, potentially responsible
party negotiations and the development of remedial action plans. Liabilities are
recorded at gross amounts of probable future cash outlays and are not discounted
to reflect the time value of money. While the Company has insurance policies
that may cover some of its liabilities, it does not record those claims until
such time as they become probable. The Company has not recorded any of such
insurance claims at December 31, 1993 and 1992. Expenditures that mitigate or
prevent environmental contamination that has yet to occur and that otherwise may
result from future operations, are capitalized. Capitalized expenditures are
depreciated generally utilizing a 10-year life.
INTANGIBLE ASSETS
Included in other assets are intangible assets consisting of patents, agreements
not to compete, trademarks, customer lists and goodwill, all of which were
acquired as part of business acquisitions. These assets are presented net of
amortization provided on a straight-line basis over their estimated useful lives
ranging from two to ten years.
RESEARCH AND DEVELOPMENT COSTS
The Company's research and development costs are expensed as incurred. These
expenses are aimed at discovery and commercialization of new knowledge with the
intent that such effort will be useful in developing a new product or in
bringing about a significant improvement to an existing product or process.
Total expenses were $12,613,000, $11,320,000 and $11,558,000 in 1993, 1992 and
1991, respectively. The balance of expenses reflected on the Consolidated
Statements of Income relates to technical services which include routine product
testing, quality control and sales support service.
INCOME TAXES
As discussed in Note 5, in 1992 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period. Prior to
January 1, 1992, under Accounting Principles Board Opinion No. 11, deferred
income tax expenses or credits were recorded to reflect the tax consequences of
timing differences between the recording of income and expenses for financial
reporting purposes and for purposes of filing federal income tax returns at
income tax rates in effect when the difference arose.
24
As discussed in Note 5, in 1992 the Company also changed its accounting method
for investment tax credits from the deferred method to the flow-through method
in order to conform with predominant U.S. industry practice. The flow-through
method recognizes the credits in the year earned, while the deferred method
used in prior years, amortizes the credits over the useful lives of the related
assets.
TRANSLATION OF FOREIGN CURRENCIES
In general, assets and liabilities of consolidated foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect at year end, while
revenues and expenses are translated at average exchange rates prevailing
during the year. The resulting translation adjustments are included in
stockholders' equity. Gains or losses on foreign currency transactions and
the related tax effects are reflected in net income.
PER SHARE DATA
Primary earnings per share amounts are computed based on the weighted average
number of common shares outstanding, 4,947,000 in 1993, 5,286,000 in 1992 and
5,458,000 in 1991. Common share equivalents resulting from dilutive stock
options have been excluded as the dilutive effect was not material. Net income
used in computing primary earnings per share has been reduced by dividends
payable to preferred shareholders. Fully diluted earnings per share amounts are
based on an increased number of common shares that would be outstanding
assuming the exercise of certain outstanding stock options and the conversion of
the convertible preferred stock, when such conversion would have the effect of
reducing earnings per share. The number of shares used in the computations of
fully diluted earnings per share were 5,050,000 in 1993, 5,577,000 in 1992 and
5,576,000 in 1991, respectively.
RECLASSIFICATIONS
Certain amounts in the 1991 financial statements have been reclassified to
conform with the 1992 and 1993 presentation.
2. INVENTORIES
The composition of inventories was as follows:
December 31
--------------------
(Dollars in Thousands) 1993 1992
- -----------------------------------------------------------
Finished products $27,269 $29,823
Raw materials 21,649 17,955
- -----------------------------------------------------------
Total inventories $48,918 $47,778
===========================================================
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $9,700,000 and $11,700,000 higher
than reported at December 31, 1993 and 1992, respectively.
3. DEBT
Debt was composed of the following:
December 31
---------------------
(Dollars in Thousands) Maturity Dates 1993 1992
- -----------------------------------------------------------------------------
Unsecured promissory notes
10.54% 1994-1998 $17,856 $25,000
9.52% 1995-2001 15,000 15,000
9.70% 1994-2001 8,000 10,000
9.70% 1997-2006 10,000 10,000
9.40% 1994-1995 2,860 5,716
7.22% 1999-2008 30,000 --
Unsecured bank debt, interest
at 5.31% at December 31, 1993 1995-1998 7,000 26,700
ESOP loan guarantee (Note 7) 1994 300 600
Loans of foreign subsidiaries
payable in foreign currency 1994-2003 5,091 4,093
Note payable to joint venture
interest in Columbia, South America 1994 1,000 --
- -----------------------------------------------------------------------------
Total debt 97,107 97,109
Less current maturities 7,447 6,604
- -----------------------------------------------------------------------------
Long-term debt $89,660 $90,505
=============================================================================
Unsecured bank debt at December 31, 1993, consists of borrowings under a
committed $45,000,000 revolving credit agreement which bears interest at
varying rates. Borrowings under this agreement at September 20, 1995, if any,
would convert to a term loan payable over three years. The Company must pay a
commitment fee of .25 percent per annum on the unused portion of the commitment.
Periodically, the Company also availed itself of other borrowings under notes
payable to banks of which there were no outstanding balances at December 31,
1993 and 1992.
The various loan agreements contain restrictions on the minimum current ratio,
minimum interest coverage, additional debt, investments and payment of
dividends. Unrestricted retained earnings were $32,789,000 and $39,669,000 at
December 31, 1993 and 1992, respectively. The Company is in compliance with all
loan agreements.
Debt at December 31, 1993 matures as follows: $7,447,000 in 1994; $9,218,000
in 1995; $10,070,000 in 1996; $11,052,000 in 1997; $11,846,000 in 1998 and
$47,474,000 after 1998.
Net interest expense for the years ended December 31, was composed of the
following:
(Dollars in Thousands) 1993 1992 1991
- ----------------------------------------------------------------------
Interest expense $8,552 $ 8,326 $ 8,396
Interest income (331) (150) (78)
- ----------------------------------------------------------------------
8,221 8,176 8,318
Capitalized interest (595) (1,532) (1,834)
- ----------------------------------------------------------------------
Interest, net $7,626 $ 6,644 $ 6,484
======================================================================
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1993, 1992 and 1991
4. LEASED PROPERTIES
The Company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $2,932,000, $3,343,000 and $3,239,000 in 1993, 1992 and 1991,
respectively.
Minimum future rental payments under operating leases with terms
in excess of one year as of December 31, 1993 are:
(Dollars in Thousands) Year Amount
- -----------------------------------------------
1994 $2,271
1995 1,710
1996 1,136
1997 668
1998 555
Subsequent to 1998 1,905
- -----------------------------------------------
Total minimum future rental payments $8,245
===============================================
5. INCOME TAXES
In 1992, the Company adopted SFAS No. 109, "Accounting for Income Taxes," which
requires the use of the liability method of accounting for income taxes. As a
result of adopting SFAS No. 109, the Company recognized a cumulative benefit of
$4,254,000 ($.80 per primary share and $.76 per fully diluted share), as of
January 1, 1992. The benefit was included under the caption "Cumulative Effect
of Accounting Changes" in the Consolidated Statements of Income. Prior year
financial statements have not been restated to reflect the new accounting
method. The effect of this new standard on income tax expense (exclusive of the
cumulative benefit) for the year ended December 31, 1992, and for each of the
quarters in the period then ended, was not material.
In 1992, the Company also changed its method of accounting for investment
tax credits from the deferred method to the flow-through method. This change
resulted in the recognition of a cumulative benefit of $1,152,000 ($.22 per
primary share and $.21 per fully diluted share) as of January 1, 1992, for
credits earned but not recognized under the deferred method used prior to this
date. The benefit was included under the caption "Cumulative Effect of
Accounting Changes" in the Consolidated Statements of Income. The effect of this
change on net income (exclusive of the cumulative benefit) for the year ended
December 31, 1992 and for each of the quarters in the period then ended, was not
material. If the flow-through rather than deferred method of accounting for
investment tax credits had been used in 1991, net income and the related per
share amount would have been reduced by $552,000 ($.10 per share).
The provision for taxes on income and the related income before taxes, are
as follows:
TAXES ON INCOME
(Dollars in Thousands) 1993 1992 1991
- -------------------------------------------------------------
Federal
Current $3,818 $2,462 $4,666
Deferred 1,365 1,023 (296)
Net deferred investment
tax credits -- -- (552)
State
Current 1,076 692 1,103
Deferred 239 359 90
Foreign
Current 1,426 1,643 1,166
Deferred 924 763 142
- -------------------------------------------------------------
Total $8,848 $6,942 $6,319
=============================================================
INCOME BEFORE TAXES AND ACCOUNTING CHANGES
(Dollars in Thousands) 1993 1992 1991
- -------------------------------------------------------------
Domestic $14,493 $ 9,781 $15,916
Foreign 5,131 7,584 2,950
- -------------------------------------------------------------
Total $19,624 $17,365 $18,866
=============================================================
No Federal income taxes have been provided on approximately $16,884,000 of
undistributed earnings of the Company's foreign subsidiaries. These earnings
are expected to be reinvested indefinitely. Such earnings would become taxable
upon the sale or liquidation of the foreign subsidiaries or upon the remittance
of dividends. Because of the probable availability of foreign tax credits, it is
not practicable to estimate the amount, if any, of the deferred tax liability on
such earnings.
The variations between the effective and statutory Federal income tax rates are summarized as follows:
1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount % Amount % Amount %
- ----------------------------------------------------------------------------------------------------------------------------------
Income tax provision at statutory tax rate $6,731 34.3 $5,903 34.0 $6,413 34.0
State taxes on income less applicable Federal tax benefit 864 4.4 694 4.0 943 5.0
Beginning-of-year deferred tax adjustment for tax rate change 558 2.8 -- -- -- --
Amortization of investment tax credits -- -- -- -- (552) (2.9)
Research and development credit (55) (.3) -- -- (339) (1.8)
Valuation allowance 319 1.6 390 2.2 -- --
Other items 431 2.3 (45) (.2) (146) (.8)
- ----------------------------------------------------------------------------------------------------------------------------------
Total income tax provision $8,848 45.1 $6,942 40.0 $6,319 33.5
==================================================================================================================================
26
Disclosure requirements pursuant to accounting standards for income taxes
prior to SFAS No. 109, require a detail of deferred income tax expense (benefit)
by component. For the period presented prior to the adoption of SFAS No. 109,
the provision for deferred income taxes resulted from the tax effect of the
following items:
(Dollars in Thousands) 1991
- ----------------------------------------------------------------------------
Tax over book depreciation $ 1,095
Safe Harbor leases (309)
SFAS No. 87 pension accounting 252
Book reserves deductible in other periods (556)
Other, net (546)
- ----------------------------------------------------------------------------
Deferred tax provision $ (64)
============================================================================
Pursuant to SFAS No. 109, deferred taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of the enacted tax
laws. The net deferred tax liability at December 31 is comprised of the
following:
(Dollars in Thousands) 1993 1992
- ----------------------------------------------------------------------------
Current deferred income taxes
Gross assets $ 7,740 $ 7,166
Gross liabilities (242) (244)
- ----------------------------------------------------------------------------
Total current deferred tax assets 7,498 6,922
Non-current deferred income taxes
Gross assets 2,066 1,447
Valuation allowance (730) (390)
Gross liabilities (37,356) (33,766)
- ----------------------------------------------------------------------------
Total non-current deferred
tax liabilities (36,020) (32,709)
- ----------------------------------------------------------------------------
Net deferred tax liability $ (28,522) $ (25,787)
============================================================================
At December 31, the tax effect of significant temporary differences
representing deferred tax assets and liabilities are as follows:
(Dollars in Thousands) 1993 1992
- ----------------------------------------------------------------------------
Tax over book depreciation $ (29,608) $ (26,201)
Safe Harbor leases (4,547) (5,448)
SFAS No. 87 pension accounting (2,282) (1,994)
State income tax accrual 1,437 1,450
Book reserves deductible in other
periods 7,204 6,223
Valuation allowance (730) (390)
Other, net 4 573
- ----------------------------------------------------------------------------
Net deferred tax liability $ (28,522) $ (25,787)
============================================================================
6. STOCKHOLDERS' EQUITY
On April 28, 1993, the shareholders approved an increase in the authorized
shares of the 5 1/2% convertible preferred stock ("preferred stock") from
200,000 to 2,000,000 and approved an eight-for-one stock split to shareholders
of record on April 30, 1993. All share and per share data appearing in the
consolidated financial statements and notes thereto have been retroactively
adjusted for the stock split and the increased authorized shares.
In 1992, the Company acquired 529,801 shares of its common stock in
exchange for 800,000 shares of its then newly issued preferred stock at an
exchange ratio of one share of preferred stock for each .66225 share of common
stock. In connection with the exchange transaction, the Company recorded
$20,000,000 of preferred stock based on the market value of the 529,801 shares
of common stock acquired. Simultaneously, the Company retired these common
shares by reducing common stock in the amount of $529,801 (par value) and
retained earnings by $19,470,199. Additional paid-in capital was reduced by
$875,000, representing the costs related to the issuance of the preferred stock.
The preferred stock is convertible at the option of the holder at any time
(unless previously redeemed) into shares of common stock at a conversion rate of
.57087 share of common stock for each share of preferred stock. Dividends on
preferred stock accrue at a rate of $1.375 per share per annum which are
cumulative from the date of original issue. The Company may not declare and pay
any dividend or make any distribution of assets (other than dividends or other
distribution payable in shares of common stock) on, or redeem, purchase or
otherwise acquire, shares of common stock, unless all accumulated and unpaid
preferred dividends have been paid or are contemporaneously declared and paid.
The preferred stock is subject to optional redemption by the Company, in whole
or in part, at any time on or after September 1, 1997, at a redemption price of
$25.69 per share reduced annually by $.14 per share to a minimum of $ 25 per
share on or after September 1, 2002, plus accrued and unpaid dividends thereon
to the date fixed for redemption. The aggregate liquidation preference is
approximately $20.0 million at December 31, 1993 and 1992. Preferred stock is
entitled to a .57087 vote per share on all matters submitted to stockholders for
action, and votes together with the common stock as a single class, except as
otherwise provided by law or the Certificate of Incorporation of the Company.
There is no mandatory redemption or sinking fund obligation with respect to the
preferred stock.
In 1992, the shareholders approved the Stepan Company 1992 Stock Option
Plan ("1992 Plan"). The 1992 Plan replaces the 1982 Plan and extends
participation to directors who are not employees of the Company. The 1992 Plan
authorizes the award of up to 800,000 shares of the Company's common stock for
stock options ("options") and stock appreciation rights ("SAR"). SARs entitle
the employee to receive an amount equal to the difference between the fair
market value of a share of stock at the time the SAR is exercised and the
exercise price specified at the time the SAR is granted. Options are granted at
the market price on the date of grant and become exercisable on various dates
over a ten-year period. The purchase price per share of options currently
outstanding ranges from $7.6875 to $36.4375 with option expiration dates ranging
from May 15, 1994 to April 27, 2002. The options become exercisable as follows:
235,170 currently exercisable and 121,952 on April 28, 1994.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1993, 1992 and 1991
A summary of option transactions during the two years ended December 31, 1993,
follows:
Options Outstanding
Shares ------------------------------------------
Available Aggregate
(Dollars in Thousands, except per share amounts) for Grant Shares Price per Share Option Price
- -------------------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 1992 -- 330,336 $6.000 -- 29.375 $5,805
1992 Stock Option Plan 800,000 -- -- --
Granted (124,152) 124,152 36.4375 4,524
Exercised -- (80,066) 6.000 -- 24.1875 (1,029)
Cancelled -- (3,200) 18.875 (60)
- -------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1992 675,848 371,222 7.6875 -- 36.4375 9,240
Exercised -- (11,900) 7.6875 -- 24.1875 (144)
Cancelled -- (2,200) 36.4375 (80)
- -------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1993 675,848 357,122 $7.6875 -- 36.4375 $9,016
=============================================================================================================
Became exercisable in 1993 35,000 $25.125 $ 879
=============================================================================================================
Became exercisable in 1992 64,100 $18.875 $1,210
=============================================================================================================
At December 31, 1993, treasury stock consists of 8,700 shares of preferred
stock and 165,029 shares of common stock. At December 31, 1992, treasury stock
consisted of no preferred stock and 165,007 shares of common stock.
7. DEFERRED ESOP COMPENSATION
In 1985, the Company established an Employee Stock Ownership Plan ("ESOP").
Under the Plan, the Company makes contributions to a trust for the benefit of
eligible employees. The amount of the contribution is discretionary except that
it must be sufficient to enable the trust to meet its current obligations.
The Trust originally borrowed $2,000,000 to purchase 219,178 common shares for
the Plan. The Company has guaranteed the loan and is obligated to contribute
sufficient cash to the Plan to repay the loan. The loan bears interest at 85
percent of the prime rate which was 6.0 percent at December 31, 1993 and 1992.
The remaining balance of the loan is reported as current maturities of long-term
debt in the consolidated balance sheet of the Company at December 31, 1993
(Note 3), and a related amount of deferred compensation has been reported as a
reduction of stockholders' equity. Compensation expense is recognized in equal
annual amounts through 1994.
8. PENSION PLANS
The Company has non-contributory defined benefit plans covering substantially
all employees. The benefits under these plans are based primarily on years of
service and compensation levels. The Company funds the annual provision
deductible for income tax purposes. The plans' assets consist principally of
marketable equity securities and government and corporate debt securities. The
plans' assets at December 31, 1993, include $5,906,000 of the Company's common
stock.
Net 1993, 1992 and 1991 periodic pension cost for the plans consists of the
following:
(Dollars in Thousands) 1993 1992 1991
- --------------------------------------------------------------------
Service cost $1,251 $1,095 $ 1,025
Interest cost on projected
benefit obligation 2,228 1,997 1,805
Actual return on plan assets (3,222) (3,372) (10,279)
Net amortization and deferral (824) (365) 6,843
- --------------------------------------------------------------------
Net prepaid pension cost $ (567) $ (645) $ (606)
====================================================================
The reconciliation of the funded status of the plans to the amount reported in
the Company's consolidated balance sheet is as follows:
(Dollars in Thousands) 1993 1992
- --------------------------------------------------------------------
Vested benefit obligation $(24,388) $(18,473)
- --------------------------------------------------------------------
Accumulated benefit obligation (27,190) (20,661)
- --------------------------------------------------------------------
Projected benefit obligation (32,818) (26,608)
Plan assets at fair value 46,471 44,296
- --------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 13,653 17,688
Unrecognized net gain (3,855) (7,751)
Unamortized net transitional assets (4,755) (5,434)
Unamortized prior service cost 508 481
- --------------------------------------------------------------------
Prepaid pension asset $ 5,551 $ 4,984
====================================================================
The prepaid pension asset is included in the "Other Assets" caption on the
Consolidated Balance Sheets.
The projected benefit obligations were determined using a discount rate of 7.0
and 8.25 percent for 1993 and 1992, respectively. The projected benefit
obligations were determined under assumed compensation increases for different
employee groups of 7.0 percent, 6.0 percent, and 5.0 percent for 1993 and 9.5
percent, 8.0 percent, 7.0 percent and 6.0 percent for 1992. The assumed long-
term rate of return on plan assets was 8.5 percent for 1993 and 1992. The
plans' net transitional assets are being amortized over a period of 15 years.
The prior service costs are being amortized over an average of 12 years.
28
9. ACCRUED LIABILITIES
Accrued liabilities consisted of:
December 31
------------------------------
(Dollars in Thousands) 1993 1992
- --------------------------------------------------------------------
Accrued payroll and benefits $ 9,583 $10,402
Provision for uninsured risks 8,786 11,258
Other accrued liabilities 9,943 8,554
- --------------------------------------------------------------------
Total accrued liabilities $28,312 $30,214
====================================================================
10. ENVIRONMENTAL AND RESTRUCTURING CHARGES
In 1992, the Company recorded a provision for environmental expenditures of $5.0
million and a write-down of certain assets of $1.0 million and the related
restructuring reserve of $.5 million. The purpose of the environmental provision
was to bring the Company's reserve for existing claims to a more conservative
level of probability. These future expenditures are indicative of the Company's
commitment to improve and maintain the environment in which it operates.
Environmental accruals are included in the "Accrued liabilities" caption of the
Company's consolidated balance sheets. In connection with a realignment of its
operation in late 1992, the Company conducted a review of its operating
subsidiaries and determined that certain assets should be written down, which
resulted in non-recurring charges of $1.5 million. These charges included a $1.0
million write-down of certain non-performing assets of its subsidiary located
in Matamoros, Mexico, and an accrual of $.5 million for related restructuring
costs. This wholly owned subsidiary continues to serve the surfactant market
throughout Mexico.
11. CONTINGENCIES
There are a variety of legal proceedings pending or threatened against the
Company. Some of these proceedings may result in fines, penalties, judgments or
costs being assessed against the Company at some future time. The Company's
operations are subject to extensive local, state and federal regulations,
including the Federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund") and the Superfund amendments of 1986. The
Company, and others, have been named as potentially responsible parties at
affected geographic sites. As discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations, the Company believes that it
has made adequate provisions for the costs it may incur with respect to these
sites. The Company has estimated a range of possible environmental and legal
losses from $4.4 million to $22.8 million at December 31, 1993, compared to $6.1
million to $25.2 million at December 31, 1992. The Company reserves for such
losses based on its best estimate of probable losses. At December 31, 1993, the
Company's reserve was $7.2 million for legal and environmental matters compared
to $9.6 million at December 31, 1992. The Company made payments of $4.5 million
in 1993 and $7.2 million in 1992 related to legal costs, settlements and costs
related to remedial design studies at various sites. While the Company has
insurance policies that may cover some of its environmental costs, it does not
record those claims until such time as they become probable. At December 31,
1993 and 1992, the Company has not recorded any of such insurance claims.
At certain of the 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 presently
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 1993 Form 10-K Annual Report and in other filings of the
Company with the Securities and Exchange Commission, which filings are available
upon request from the Company.
12. GEOGRAPHIC DATA
(Dollars in Thousands) 1993 1992 1991
- --------------------------------------------------------------------
Net Sales
United States $368,461 $365,666 $355,179
Other 70,364 70,098 58,890
- --------------------------------------------------------------------
$438,825 $435,764 $414,069
====================================================================
Operating Income (a)
United States $ 22,122 $ 21,998 $ 21,407
Other 5,128 8,511 3,943
- --------------------------------------------------------------------
$ 27,250 $ 30,509 $ 25,350
====================================================================
Identifiable Assets
United States $256,398 $255,696 $232,897
Other 44,090 41,384 38,545
- --------------------------------------------------------------------
$300,488 $297,080 $271,442
====================================================================
(a) Operating income is calculated as income before net interest expense,
environmental and restructuring charges, provision for income taxes and
cumulative effect of accounting changes.
Other includes subsidiaries in Canada, Europe and Mexico. Export sales and
transfers between geographic areas are not significant.
29
TEN YEAR SUMMARY
(In Thousands, except per share and employee data)
FOR THE YEAR 1993 1992 1991
- ---------------------------------------------------------------------------
Net Sales $438,825 $435,764 $414,069
- ---------------------------------------------------------------------------
Income from Operations 19,624 23,865(g) 18,866
Percent of net sales 4.5% 5.5% 4.6%
- ---------------------------------------------------------------------------
Gain on Sale of Assets -- -- --
Environmental and Restructuring Charges -- 6,500 --
Pre-tax Income 19,624 17,365 18,866
Percent of net sales 4.5% 4.0% 4.6%
- ---------------------------------------------------------------------------
Provision for Income Taxes 8,848 6,942 6,319
- ---------------------------------------------------------------------------
Net Income 10,776 15,829(h) 12,547
Per share(a)(b) 1.96 2.93 2.30
Percent of net sales 2.5% 3.6% 3.0%
Percent to stockholders' equity(c) 10.8% 17.4% 15.2%
- ---------------------------------------------------------------------------
Cash Dividends Paid 5,105 4,172 3,603
Per common share(a) .810 .740 .660
- ---------------------------------------------------------------------------
Depreciation and Amortization 27,679 23,914 21,108
Capital Expenditures 25,435 34,440 33,728
Average Common Shares Outstanding(a) 4,947 5,286 5,458
- ---------------------------------------------------------------------------
AS OF YEAR END
- ---------------------------------------------------------------------------
Working Capital $ 48,569 $ 44,265 $ 41,972
Current Ratio 1.7 1.6 1.7
- ---------------------------------------------------------------------------
Property, Plant and Equipment(net) 168,881 167,930 157,063
Total Assets 300,488 297,080 271,442
Long-term Debt 89,660 90,505 89,759
- ---------------------------------------------------------------------------
Stockholders' Equity 104,217 99,506 90,866
Per share(a)(d) 19.30 18.45 16.71
Number of Employees 1,302 1,317 1,317
===========================================================================
(a) Adjusted for two-for-one stock split in 1988.
(b) Based on average number of common shares outstanding during the year.
(c) Based on equity at beginning of year.
(d) Based on common shares outstanding at year end.
(e) Change in method of accounting for pensions increased net income in 1986 by
$467 or $.08 per share.
(f) Pre-tax income before gain on sale of assets.
(g) Pre-tax income before environmental and restructuring charges and
cumulative effect of accounting changes.
(h) Reflected cumulative effect of accounting changes for income taxes and
investment tax credits of $5.4 million, or $1.02 per primary
share and $.97 per fully diluted share.
QUARTERLY STOCK DATA (UNAUDITED) Dividends Paid
Stock Price Range Per Common Share
-----------------------------------------------------------------
1993 1992 1993 1992
-----------------------------------------------------------------
Quarter High Low High Low
- ---------------------------------------------------------------
First $37 5/8 $30 3/4 $34 1/4 $26 1/4 $.20 $.18
Second 37 1/8 31 5/8 45 32 3/4 .20 .18
Third 33 5/8 29 45 3/4 34 1/4 .20 .18
Fourth 29 5/8 25 1/8 36 3/4 30 7/8 .21 .20
------------
Year 37 5/8 25 1/8 45 3/4 26 1/4 .81 .74
========================================================================================
30
1990 1989 1988 1987 1986 1985 1984
- --------------------------------------------------------------------------------
$389,612 $346,350 $333,033 $288,935 $259,787 $235,919 $234,930
- --------------------------------------------------------------------------------
21,420(f) 11,701 20,554 19,230 14,037 9,231 6,103
5.5% 3.4% 6.2% 6.7% 5.4% 3.9% 2.6%
- --------------------------------------------------------------------------------
874 -- -- -- -- -- --
-- -- -- -- -- -- --
22,294 11,701 20,554 19,230 14,037 9,231 6,103
5.7% 3.4% 6.2% 6.7% 5.4% 3.9% 2.6%
- --------------------------------------------------------------------------------
7,803 3,861 7,126 8,271 6,524 3,760 680
- --------------------------------------------------------------------------------
14,491 7,840 13,428 10,959 7,513(e) 5,471 5,423
2.64 1.42 2.39 1.83 1.26(e) .94 .83
3.7% 2.3% 4.0% 3.8% 2.9% 2.3% 2.3%
20.5% 11.7% 22.4% 19.9% 15.2% 11.5% 9.3%
- --------------------------------------------------------------------------------
3,190 2,919 2,658 2,386 2,145 2,000 2,095
.580 .530 .475 .415 .370 .345 .325
- --------------------------------------------------------------------------------
19,391 17,061 15,393 13,815 11,630 9,949 9,426
38,375 34,090 20,442 25,705 14,322 19,189 11,557
5,496 5,517 5,608 5,977 5,944 5,793 6,550
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$ 38,943 $ 36,952 $ 28,498 $ 26,637 $ 23,386 $ 20,602 $ 23,289
1.7 1.8 1.6 1.7 1.6 1.6 1.7
- --------------------------------------------------------------------------------
143,342 122,509 104,697 98,994 85,607 82,796 73,261
246,992 215,351 185,601 172,726 152,794 139,307 133,941
77,326 68,568 45,369 44,399 34,868 36,962 34,049
- --------------------------------------------------------------------------------
82,698 70,741 66,790 59,936 55,029 49,575 47,660
15.14 12.90 12.13 10.65 9.53 8.56 8.23
1,311 1,152 1,028 1,002 948 894 870
================================================================================
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, except per share data)
1993 1992
--------------------------------------------------------------------------------------------------------------
Quarter FIRST SECOND THIRD FOURTH TOTAL First Second Third Fourth Total
- -----------------------------------------------------------------------------------------------------------------------------------
Net Sales $114,620 $110,578 $111,111 $102,516 $438,825 $107,404 $113,909 $109,897 $104,554 $435,764
- -----------------------------------------------------------------------------------------------------------------------------------
Gross Profit 22,868 20,662 21,149 15,356 80,035 20,347 21,594 20,262 19,611 81,814
- ----------------------------------------------------------------------------------------------------------------------------------
Interest, net (1,887) (1,904) (1,869) (1,966) (7,626) (1,736) (1,569) (1,551) (1,788) (6,644)
- ----------------------------------------------------------------------------------------------------------------------------------
Pre-tax Income
(Loss)(b) 7,975 5,760 6,688 (799) 19,624 6,378 6,365 6,230 (1,608) 17,365
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income
(Loss)(a)(b) 4,687 3,368 3,170 (449) 10,776 9,297 3,883 3,800 (1,151) 15,829
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
per Share(a)(b) .89 .63 .59 (.15) 1.96 1.71 .71 .70 (.29) 2.93
==================================================================================================================================
[FN]
(a) In 1992, net income and net income per share for the first three quarters
have been restated to reflect the cumulative effect of the accounting
changes for SFAS No. 109 ($4,254) and investment tax credits ($1,152).
(Notes 1 and 5.) The restatement has increased net income per share $.96
for the first quarter and reduced net income per share $.04 and $.05 for
the second and third quarters, respectively, from those previously
reported amounts.
(b) In 1992, the provisions for environmental and restructuring charges
(Note 10) had the effect of increasing pre-tax loss, net loss and net
loss per share for the fourth quarter by $6,500, $4,355 and $.89,
respectively.
31