SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1994
( ) 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 (708) 446-7500
------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1994
- - -------------------------- -------------------------------
Common Stock, $1 par value 4,953,000 Shares
Part I FINANCIAL INFORMATION
----------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1994 and December 31, 1993
Unaudited
(Dollars in Thousands) 3/31/94 12/31/93
-------- --------
ASSETS
- - ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,737 $ 1,515
Receivables, net 64,387 57,250
Inventories (Note 2) 42,975 48,918
Other current assets 9,974 11,477
-------- --------
Total current assets 120,073 119,160
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Cost 386,653 378,828
Less accumulated depreciation 215,662 208,558
-------- --------
170,991 170,270
-------- --------
OTHER ASSETS 11,068 11,058
-------- --------
Total assets $302,132 $300,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,622 $ 7,447
Accounts payable 30,347 34,832
Accrued liabilities 26,268 28,312
-------- --------
Total current liabilities 64,237 70,591
-------- --------
DEFERRED INCOME TAXES 35,258 36,020
-------- --------
LONG-TERM DEBT, less current maturities (Note 3) 94,646 89,660
-------- --------
OTHER LONG-TERM LIABILITIES (Note 7) 2,793 -
-------- --------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, 19,992 19,992
cumulative, voting without par value;
authorized 2,000,000 shares; issued 799,684
shares in 1994 and in 1993
Common stock, $1 par value; authorized 5,114 5,113
15,000,000 shares; issued 5,113,574 shares
in 1994 and 5,113,024 shares in 1993
Additional paid-in capital 3,804 3,781
Cumulative translation adjustments (1,978) (2,058)
Retained earnings (approximately $32,281
unrestricted in 1994 and $32,789 in 1993) 83,185 82,475
-------- --------
110,117 109,303
Less - Treasury stock, at cost (Note 5) 4,752 4,863
Deferred ESOP compensation 167 223
-------- --------
Stockholders' equity 105,198 104,217
-------- --------
Total liabilities and stockholders' equity $302,132 $300,488
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
2
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1994 and 1993
Unaudited
(In Thousands, except per share amounts)
Three Months Ended
March 31
--------------------
1994 1993
--------------------
NET SALES $107,279 $114,620
-------- --------
COSTS AND EXPENSES:
Cost of Sales (Note 6) 88,136 91,752
General and Administrative 4,937 4,486
Marketing 4,221 4,149
Research, Development and Technical Services 4,640 4,371
Interest, net (Note 3) 1,918 1,887
-------- --------
103,852 106,645
-------- --------
PRE-TAX INCOME 3,427 7,975
PROVISION FOR INCOME TAX 1,405 3,288
-------- --------
NET INCOME $ 2,022 $ 4,687
======== ========
NET INCOME PER COMMON SHARE (Note 4)
Primary $0.35 $0.89
===== =====
Fully Diluted $0.35 $0.85
===== =====
DIVIDENDS PER COMMON SHARE $0.21 $0.20
===== =====
AVERAGE COMMON SHARES OUTSTANDING 4,949 4,941
===== =====
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1994 and 1993
Unaudited
(Dollars in Thousands) 3/31/94 3/31/93
------- -------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $2,022 $4,687
Depreciation and amortization 7,566 6,998
Deferred taxes 206 42
Other long-term liabilities (Note 7) 2,793 -
Other non-cash items 84 (100)
------ ------
12,671 11,627
Changes in Working Capital:
Receivables, net (7,137) (8,180)
Inventories 5,943 (484)
Accounts payable and accrued liabilities (6,105) (5,040)
Other 280 1,104
------ ------
Net Cash Provided by (Used for) 5,652 (973)
Operating Activities ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (8,192) (7,540)
Other non-current assets (244) (14)
------ ------
Net Cash Used for Investing Activities (8,436) (7,554)
------ ------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks - net 5,102 8,631
Other debt - repayments (9) (27)
Sales of treasury stock, net of purchases 111 208
Dividends paid (1,312) (1,264)
Other 114 106
------ ------
Net Cash Provided by Financing and Other 4,006 7,654
Related Activities ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,222 (873)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $1,515 $2,915
------ ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $2,737 $2,042
====== ======
CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Interest $1,247 $1,159
Income taxes 579 (5)
The accompanying Notes to Condensed Consolidated Financial Statements
are an integral part of these statements.
4
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1994 and December 31, 1993
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
Management believes that the disclosures are adequate and make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual
Report to Stockholders and the Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1993. In the
opinion of Management all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of Stepan Company as of March 31, 1994 and the consolidated
results of operations for the three months then ended, and cash flows for
the three months then ended, have been included.
Because the inventory determination under the LIFO method can only be made
at the end of each year based on the inventory levels and costs at that
point, interim LIFO determinations must necessarily be based upon
Management's estimates of expected year-end inventory levels and costs.
Since future estimates of inventory levels and prices are subject to many
forces beyond the control of Management, interim financial results are
subject to final year-end LIFO inventory amounts.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in Thousands) 3/31/94 12/31/93
------- --------
Inventories valued primarily on
LIFO basis -
Finished products $26,137 $27,269
Raw materials 16,838 21,649
------- -------
Total inventories $42,975 $48,918
======= =======
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$9,900,000 and $9,700,000 higher than reported at March 31, 1994 and
December 31, 1993, respectively.
5
3. DEBT
----
Long-term debt includes unsecured bank debt of $13.0 million and $7.0
million at March 31, 1994 and December 31, 1993, respectively. The unsecured
bank debt is available to the Company under a line of credit based on rates
that fluctuate daily. The average interest rate on unsecured bank debt for
the three month period ended March 31 was 4.08 percent and 3.94 percent for
1994 and 1993, respectively.
4. NET INCOME PER COMMON SHARE
---------------------------
Primary net income per common share amounts are computed by dividing net
income, less the convertible preferred stock dividend requirement, by the
weighted average number of common shares outstanding. Fully diluted net
income 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 net income per share. For
computation of earnings per share, reference should be made to Exhibit 11.
5. TREASURY STOCK
--------------
At March 31, 1994, treasury stock consists of 10,800 shares of preferred
stock and 159,758 shares of common stock. At December 31, 1993, treasury
stock consisted of 8,700 shares of preferred stock and 165,029 shares of
common stock.
6. COST OF SALES
-------------
Cost of sales in the first quarter of 1994 includes a pre-tax gain of
$950,000 arising from the settlement of claims filed against the Company's
insurance carrier in connection with production outages and business
interruption suffered in the phthalic anhydride (PA) business in 1993.
7. OTHER LONG-TERM LIABILITIES
---------------------------
During the first quarter of 1994, the Company received a partial prepayment
on a multi-year commitment for future shipments of surfactants. Upon
shipment, sales are included in the Company's consolidated statement of
income along with the related cost of sales. As the commitment is
fulfilled, the proportionate share of the deferred revenue is taken into
income. Related deferred revenue at March 31, 1994 is $2.5 million which is
included in the "Other Long-Term Liabilities" caption of the Condensed
Consolidated Balance Sheets.
6
8. CONTINGENCIES
-------------
There are a variety of legal proceedings pending or threatened against the
Company. Some of these proceedings may result in fines, penalties,
judgments or costs being assessed against the Company at some future time.
The Company's operations are subject to extensive local, state and federal
regulations, including the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("Superfund") and the Superfund
amendments of 1986. The Company, and others, have been named as potentially
responsible parties at affected geographic sites. As discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this filing, the Company believes that it has made
adequate provisions for the costs it may incur with respect to these sites.
The Company has estimated a range of possible environmental and legal
losses from $5.4 million to $22.8 million at March 31, 1994. The Company
reserves for such losses based on its best estimate of probable losses. At
March 31, 1994, the Company's reserve was $7.0 million for legal and
environmental matters compared to $7.2 million at December 31, 1993. 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 March 31, 1994, 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 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.
9. RECLASSIFICATIONS
-----------------
Certain amounts in the 1993 financial statements have been reclassified to
conform with the 1994 presentation.
7
STEPAN COMPANY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is Management's discussion and analysis of certain significant
factors which have affected the Company's financial condition and results of
operations during the interim period included in the accompanying condensed
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
- - -------------------------------
For the first three months of 1994, cash from operations has totaled $5.7
million compared to a negative $1.0 million for the same period last year. Net
income, adjusted for non-cash items, totaled $12.7 million, compared to $11.6
million recorded in 1993. Included in cash flow from operations for 1994 is
$2.5 million in customer prepayments for future delivery of products. During
1994, working capital items constituted a $7.0 million use of cash compared to a
use of $12.6 million during 1993. Reduced inventories offset some of the usual
increases in receivables for the first quarter.
Capital expenditures totaled $8.2 million for the first quarter of 1994,
compared to $7.5 million for the same period in 1993. It is expected that total
expenditures for 1994 will approximate $40 million, compared to $25.4 million
spent in 1993 which represented a five-year low for the Company. A significant
portion of the projected spending relates to a specific capacity expansion
project for the production of higher active ingredients. Future year capital
spending is not expected to be at this higher level.
Since December 31, 1993, total company debt has increased by $5.2 million.
Since year end, the ratio of long-term debt to long-term debt plus shareholders'
equity has increased from 46.2 percent to 47.4 percent. This increase was
largely due to increased working capital requirements. The Company anticipates
that it will meet its cash requirements without any further increases in debt
for the year.
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. 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.
8
RESULTS OF OPERATIONS
- - ---------------------
Net income for the first quarter of 1994 declined 57 percent to $2.0 million, or
$.35 per share, down from $4.7 million, or $.89 per share, recorded in the same
quarter of 1993. First quarter results included the benefit of a $950,000 pre-
tax, or $560,000 after-tax, insurance recovery. Net sales declined 6 percent to
$107.3 million, down from the quarterly record of $114.6 million reported a year
ago.
Sales data for the 1994 first quarter compared with the same quarter of the
prior year is set forth in the following table:
Three Months
Ended March 31
------------------------
%
($ in millions) 1994 1993 Change
------ ------ ------
Net Sales:
Surfactants $ 83.1 $ 87.4 -5
Polymers 16.4 18.3 -11
Specialty Products 7.8 8.9 -13
------ ------
Total $107.3 $114.6 -6
====== ======
Surfactants' decline in net sales was due to a 6 percent volume decrease from
the same quarter last year. Most of the volume decrease was attributable to
larger national customers as a result of product reformulations, partially
offset by the volume increase of the broad commercial customer base.
Surfactants' gross profit declined 11 percent from $18.1 million to $16.1
million for the first quarter of 1994. Gross profit was negatively affected by
the reduced sales volume. In addition, higher utility and maintenance costs due
to the severe winter also contributed to the lower gross profit. While the
Mexican and Canadian operations reported higher gross profit due to improved
volumes, Europe's gross profit was down due to competitive price pressure in the
fabric softener market.
Polymers' lower net sales were due primarily to a 15 percent decrease in the
average selling price, compared to the first quarter of 1993. Despite a 3
percent increase in volume, phthalic anhydride (PA) suffered the most from lower
selling prices driven mainly by the competitive pressure of foreign imports and
lower raw material prices.
Polymers' gross profit declined 16 percent to $2.3 million for the current
quarter due to the lower selling prices. Favorably impacting PA's gross profit
in the first quarter of 1994 was a $950,000 insurance recovery for claims
related to production outages in 1993. Polyurethane systems' gross profit
improved on a higher margin over raw material costs, whereas polyurethane
polyols' gross profit decreased over higher manufacturing and transportation
costs.
9
Specialty products' reduced net sales were a result of a 17 percent decline in
volume from the first quarter of 1993. Lubricant additives and food ingredients
led the volume decline. Gross profit declined sharply due to the lower volumes.
Further negatively impacting the gross profit was the higher manufacturing costs
attributable to the severe cold weather endured particularly by the
manufacturing facilities on the East Coast.
Operating expenses for the first quarter increased 6 percent over the same
quarter in 1993. Administrative expenses were up 10 percent due primarily to
increased legal and environmental expenses. Research and product development
expenses increased 6 percent mainly for salaries, whereas marketing expenses
were up less than 2 percent.
Interest expense for the quarter rose a modest 2 percent over the same quarter
in 1993.
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 quarter of 1994,
Company expenditures for capital projects related to the environment were $1.0
million and should approximate $6.2 million for the full year 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 in ongoing operations were $1.8 million for
the first three months of 1994. While difficult to project, it is not
anticipated that these recurring expenses will increase significantly in the
future.
The Company has been named by the government as a potentially responsible party
at 16 waste disposal sites where cleanup costs have been or may be incurred
under the Federal Comprehensive Environmental Response, Compensation and
Liability Act and similar state statutes. In addition, damages are being
claimed against the Company in general liability actions for alleged personal
injury or property damage in the case of some disposal and plant sites. The
Company believes that it has made adequate provisions for the costs it may incur
with respect to these sites. The Company has estimated a range of possible
environmental and legal losses from $5.4 million to $22.8 million at March 31,
1994. The Company reserves for such losses based on its best estimate of
probable losses. At March 31, 1994, the Company's reserve was $7.0 million for
legal and environmental matters compared to $7.2 million at December 31, 1993.
During the first three months of 1994, expenditures related to legal and
environmental matters approximated $.8 million. An additional $1.3 million is
expected to be expended during the remainder of 1994. 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
10
period, the impact on results of operations for those periods could be material.
However, based upon the Company's present belief as to its relative involvement
at these sites, other viable entities' responsibilities for cleanup and the
extended period over which any costs would be incurred, the Company believes
that these matters will not have a material effect on the Company's financial
position. Certain of these matters are discussed in Item 3, Legal Proceedings in
the 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.
11
Part II OTHER INFORMATION
- - -------------------------------------------------------------------------------
Item 1 - Legal Proceedings
Reference is made to the Company's Report Form 10-K for the year ended
December 31, 1992 and Report Form 10-Q for the quarter ended September
30, 1993 regarding Nor-Am Chemical Company and Olin Corporation at the
Company's former site in Wilmington, Massachusetts. On March 31, 1994,
the Commonwealth of Massachusetts, Department of Environmental Affairs,
sent to the Company and four other parties, a Notice of Responsibility
and Interim Deadline for the Company's former National Polychem site in
Wilmington, Massachusetts. This site has been the subject of previous
reports. The Company has responded that it believes its obligation has
been settled in view of its settlement with Olin Corporation. At this
time, the Company cannot estimate what its liability will be, if any,
in view of the prior settlement with Olin Corporation.
Item 4 - Submission of Matters to a Vote of Security Holders
(A) The Company's 1993 Annual Meeting of Stockholders was held on
April 29, 1994.
(B) Proxies were solicited by management pursuant to Regulation 14
under the Securities Exchange Act of 1934, there was no
solicitation in opposition to management's nominees as listed in
the proxy statement, and all such nominees were elected.
(C) A majority of the outstanding shares voted to ratify the
appointment of Arthur Andersen & Co. as independent auditors for
the Company for 1994.
4,693,968 For
9,531 Against
20,240 Abstentions
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(11) Statement re Computation of Per Share Earnings
(B) Reports on Form 8-K
None
12
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEPAN COMPANY
/s/ Walter J. Klein
-------------------
Walter J. Klein
Vice President - Finance
Principal Financial and
Accounting Officer
Date: 5/13/94
--------
13
Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended March 31, 1994 and 1993
Unaudited
Three Months
(In Thousands, except per share amounts) Ended March 31
------------------
1994 1993
------- -------
Computation of Per Share Earnings
---------------------------------
Net income $2,022 $4,687
Deduct dividends on preferred stock 271 275
------ ------
Income applicable to common stock $1,751 $4,412
====== ======
Weighted average number of shares outstanding 4,949 4,941
Per share earnings * $0.354 $0.893
====== ======
Computation of Per Share Primary Earnings
-----------------------------------------
Income applicable to common stock $1,751 $4,412
====== ======
Weighted average number of shares outstanding 4,949 4,941
Add net shares issuable from assumed exercise of
options (under treasury stock method) 78 111
------ ------
Shares applicable to primary earnings 5,027 5,052
====== ======
Per share primary earnings * $0.348 $0.873
====== ======
Dilutive effect 1.7% 2.2%
Computation of Per Share Fully Diluted Earnings
-----------------------------------------------
Net income (See Note A) $1,751 $4,687
===== ======
Weighted average number of shares outstanding 4,949 4,941
Add net shares issuable from assumed exercise of
options (under treasury stock method) 78 111
Add weighted average shares issuable from assumed
conversion of convertible preferred stock
(See Note A) - 457
------ ------
Shares applicable to fully diluted earnings 5,027 5,509
====== ======
Per share fully diluted earnings * $0.348 $0.851
====== ======
Dilutive effect 1.7% 4.5%
(A) For 1994, the assumed conversion of convertible preferred stock would have
been antidilutive. Accordingly, the dividends and shares issuable from
assumed conversion have been excluded pursuant to APB No. 15.
- - ----------------
* Rounded
This calculation is submitted in accordance with Regulation S-K,
item 601(b)(11).
14