UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO __________
1-4462
------------------------------
Commission File Number
STEPAN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36 1823834
- --------------------------------- -----------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Edens and Winnetka Road, Northfield, Illinois 60093
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (847) 446-7500
----------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1999
- -------------------------------- -----------------------------------
Common Stock, $1 par value 9,582,977 Shares
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1999 and December 31, 1998
Unaudited
(Dollars in Thousands) 6/30/99 12/31/98
-------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 2,578 $ 983
Receivables, net 95,079 81,890
Inventories (Note 2) 49,648 52,496
Deferred income taxes 10,572 10,572
Other current assets 3,487 3,817
-------- ---------
Total current assets 161,364 149,758
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 582,458 568,601
Less: Accumulated depreciation 370,533 353,505
-------- ---------
Property, plant and equipment, net 211,925 215,096
-------- ---------
OTHER ASSETS 38,046 39,507
-------- ---------
Total assets $411,335 $ 404,361
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,310 $ 6,807
Accounts payable 44,763 43,977
Accrued liabilities 35,085 37,160
-------- ---------
Total current liabilities 88,158 87,944
-------- ---------
DEFERRED INCOME TAXES 41,933 39,920
-------- ---------
LONG-TERM DEBT, less current maturities 109,844 107,708
-------- ---------
OTHER NON-CURRENT LIABILITIES 17,819 20,805
-------- ---------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 783,287 shares in 1999 and 784,417
shares in 1998 19,582 19,611
Common stock, $1 par value; authorized 30,000,000 shares;
issued 10,049,276 shares in 1999 and 9,997,736 shares in 1998 (Note 8) 10,049 9,998
Additional paid-in capital 11,715 10,962
Accumulated other comprehensive loss (10,265) (9,050)
Retained earnings (approximately $49,575 unrestricted in 1999 and $44,346 in 1998) 138,247 127,478
-------- ---------
169,328 158,999
Less: Treasury stock, at cost 15,747 11,015
-------- ---------
Stockholders' equity 153,581 147,984
-------- ---------
Total liabilities and stockholders' equity $411,335 $ 404,361
======== =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 1999 and 1998
Unaudited
Three Months Ended Six Months Ended
(In Thousands, except per share amounts) June 30 June 30
--------------------- ----------------------
1999 1998 1999 1998
---- ---- ---- ----
NET SALES $166,759 $155,509 $330,720 $305,897
Cost of Sales 134,368 125,855 269,410 248,414
-------- -------- -------- --------
Gross Profit 32,391 29,654 61,310 57,483
-------- -------- -------- --------
Operating Expenses:
Marketing 6,144 5,591 11,826 11,544
Administrative 6,025 5,208 11,545 10,382
Research, Development and Technical Services 5,295 5,272 10,787 10,576
-------- -------- -------- --------
17,464 16,071 34,158 32,502
-------- -------- -------- --------
Operating Income 14,927 13,583 27,152 24,981
Other Income (Expense):
Interest, Net (2,158) (1,769) (4,268) (3,676)
Income from Equity Joint Ventures 194 45 227 92
-------- -------- -------- --------
(1,964) (1,724) (4,041) (3,584)
-------- -------- -------- --------
Income Before Income Taxes 12,963 11,859 23,111 21,397
Provision for Income Taxes 5,007 4,749 9,013 8,565
-------- -------- -------- --------
NET INCOME $ 7,956 $ 7,110 $ 14,098 $ 12,832
======== ======== ======== ========
Net Income Per Common Share (Note 5)
Basic $ 0.81 $ 0.70 $ 1.42 $ 1.26
======== ======== ======== ========
Diluted $ 0.75 $ 0.64 $ 1.32 $ 1.16
======== ======== ======== ========
Dividends per Common Share $ 0.1500 $ 0.1375 $ 0.3000 $ 0.2750
======== ======== ======== ========
Average Common Shares Outstanding 9,616 9,854 9,648 9,850
======== ======== ======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1999 and 1998
Unaudited
(Dollars In Thousands) 6/30/99 6/30/98
------- -------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 14,098 $ 12,832
Depreciation and amortization 20,411 18,673
Deferred revenue recognition (3,656) (2,163)
Deferred income taxes 2,072 2,412
Environmental and legal liabilities (761) (1,797)
Other non-cash items 397 156
Changes in Working Capital:
Receivables, net (13,189) (8,328)
Inventories 2,848 3,354
Accounts payable and accrued liabilities 142 (1,336)
Other 330 848
-------- --------
Net Cash Provided by Operating Activities 22,692 24,651
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (17,133) (15,603)
Investment in acquisitions - (19,695)
Other non-current assets 109 1,829
-------- --------
Net Cash Used for Investing Activities (17,024) (33,469)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 10,300 17,590
Other debt borrowings 66 -
Other debt repayments (6,727) (4,957)
Purchase of treasury stock, net (4,732) (804)
Dividends paid (3,329) (3,162)
Other non-cash items 349 167
-------- --------
Net Cash Provided by (Used for) Financing and Other Related Activities (4,073) 8,834
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,595 16
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 983 5,507
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,578 $ 5,523
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,433 $ 3,851
Income taxes $ 7,162 $ 4,945
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and December 31, 1998
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, 1998. 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 June 30, 1999, and the consolidated
results of operations for the three and six months then ended and cash
flows for the six months then ended, have been included.
2. INVENTORIES
-----------
Inventories include the following amounts:
6/30/99 12/31/98
------- --------
(Dollars in Thousands)
Inventories valued primarily on LIFO basis --
Finished products $32,272 $33,444
Raw materials 17,376 19,052
------- -------
Total inventories $49,648 $52,496
======= =======
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$9,800,000 and $10,000,000 higher than reported at June 30, 1999, and
December 31, 1998, respectively.
3. DEFERRED REVENUES
-----------------
Net sales for the three and six months ended June 30, 1999, included the
recognition of $2.5 million and $3.7 million, respectively, of previously
deferred revenues. Approximately $1.43 million of the amounts was
accelerated and recorded in the second quarter when a customer released the
company from further performance under a prepaid contract that originally
extended into the year 2000.
4. CONTINGENCIES
-------------
There are a variety of legal proceedings pending or threatened against the
company. Some of these proceedings may result in fines, penalties,
judgments or costs being assessed against the company at some future time.
The company's operations are subject to extensive local, state and federal
regulations, including the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("Superfund") and the Superfund
amendments of 1986. The company, and others, have been named as potentially
responsible parties at affected geographic sites. 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 $4.2 million to $26.4 million at June 30, 1999. At June 30,
1999, the company's reserve was $16.8 million for legal and environmental
matters compared to $17.6 million at December 31, 1998.
For certain sites, estimates cannot be made of the total costs of
compliance, or the company's share of such costs; accordingly, the company
is unable to predict the effect thereof on future results of operations. In
the event of one or more adverse determinations in any annual or interim
period, the impact on results of operations for those periods could be
material. However, based upon the company's present belief as to its
relative involvement at these sites, other viable entities'
responsibilities for cleanup and the extended period over which any costs
would be incurred, the company believes that these matters will not have a
material effect on the company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings, in the 1998 Form 10-K
Annual Report and in other filings of the company with the Securities and
Exchange Commission, which are available upon request from the company.
5. EARNINGS PER SHARE
------------------
Below is the computation of basic and diluted earnings per share for the
three and six months ended June 30, 1999 and 1998.
(In Thousands, except per share amounts) Three Months Ended Six Months Ended
June 30 June 30
------------------ -----------------
1999 1998 1999 1998
------- ------ ------- -------
Computation of Basic Earnings per Share
- ---------------------------------------
Net income $7,956 $7,110 $14,098 $12,832
Deduct dividends on preferred stock 213 224 437 449
------ ------ ------- -------
Income applicable to common stock $7,743 $6,886 $13,661 $12,383
====== ====== ======= =======
Weighted-average number of shares outstanding 9,616 9,854 9,648 9,850
Basic earnings per share $ 0.81 $ 0.70 $ 1.42 $ 1.26
====== ====== ======= =======
EARNINGS PER SHARE (continued)
- ------------------------------
Computation of Diluted Earnings per Share
- -----------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
------------------ -------------------
1999 1998 1999 1998
------- ------- ------- -------
Net Income $ 7,956 $ 7,110 $14,098 $12,832
Weighted-average number of shares outstanding 9,616 9,854 9,648 9,850
Add net shares issuable from assumed exercise of
options (under treasury stock method) 333 485 334 438
Add weighted-average shares issuable from assumed
conversion of convertible preferred stock 721 744 732 745
------- ------- ------- -------
Shares applicable to diluted earnings 10,670 11,083 10,714 11,033
======= ======= ======= =======
Diluted earnings per share $ 0.75 $ 0.64 $ 1.32 $ 1.16
======= ======= ======= =======
6. COMPREHENSIVE INCOME
Below is the company's comprehensive income for the three and six months
ended June 30, 1999 and 1998:
(Dollars in Thousands) Three Months Ended Six Months Ended
------------------- --------------------
June 30 June 30
------- -------
1999 1998 1999 1998
---- ---- ---- ----
Net income $7,956 $ 7,110 $14,098 $12,832
Other comprehensive loss:
Foreign currency translation adjustments (287) (1,174) (1,215) (1,773)
------ ------- ------- -------
Comprehensive income $7,669 $ 5,936 $12,883 $11,059
====== ======= ======= =======
7. SEGMENT REPORTING
In 1998, the company adopted Statement of Financial Accounting Standards
No. 131 "Disclosures about Segments of an Enterprise and Related
Information" (SFAS No. 131), effective for the periods beginning after
December 15, 1997. Stepan Company has three reportable segments:
surfactants, polymers and specialty products. Financial results of Stepan
Company's operating segments for the quarters and six months ended June 30,
1999 and 1998 are summarized below:
(Dollars in Thousands) Specialty Segment
Surfactants Polymers Products Totals
----------- -------- --------- -------
For the quarter ended June 30, 1999
- -----------------------------------
Net sales $130,857 $31,619 $ 4,283 $166,759
Operating income 14,320 6,546 528 21,394
For the quarter ended June 30, 1998
- -----------------------------------
Net sales $120,960 $29,361 $ 5,188 $155,509
Operating income 12,681 5,216 1,197 19,094
SEGMENT REPORTING (continued)
- -----------------------------
(Dollars in Thousands) Specialty Segment
Surfactants Polymers Products Totals
----------- -------- -------- --------
For six months ended June 30, 1999
- ----------------------------------
Net sales $262,606 $59,381 $ 8,733 $330,720
Operating income 27,925 11,402 1,154 40,481
For six months ended June 30, 1998
- ----------------------------------
Net sales $240,160 $55,402 $10,335 $305,897
Operating income 25,344 8,844 2,435 36,623
Below are reconciliations of segment operating income to consolidated
income before income taxes:
(Dollars in Thousands) Three Months Ended Six Months Ended
---------------------------- -----------------------------
June 30 June 30
---------------------------- -----------------------------
1999 1998 1999 1998
------------ -------------- -------------- -------------
Operating income segment totals $21,394 $19,094 $ 40,481 $ 36,623
Unallocated corporate expenses (a) (6,467) (5,511) (13,329) (11,642)
Interest expense (2,158) (1,769) (4,268) (3,676)
Income from equity in joint ventures 194 45 227 92
------- ------- -------- --------
Consolidated income before income taxes $12,963 $11,859 $ 23,111 $ 21,397
======= ======= ======== ========
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to evaluate
segment performance.
8. AUTHORIZED COMMON SHARES
------------------------
On May 11, 1999, shareholders approved an amendment to the company's
Certificate of Incorporation which increased the number of authorized
shares of Common Stock, par value $1 per share, from 15,000,000 shares to
30,000,000 shares.
9. SOFTWARE DEVELOPMENT COSTS
--------------------------
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance on accounting for costs related to obtaining or
developing internal-use software. The company adopted SOP 98-1 in 1999.
The adoption does not have a material impact on the company's operating
results or financial position.
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 six months of 1999, net cash from operations totaled $22.7
million, down by $2.0 million compared to the same period in 1998. Net income
increased by $1.3 million while depreciation and amortization and other non-cash
income add-backs were up by a total of $1.2 million. Working capital amounted
to a cash use of $9.9 million for the current year period compared to a $5.5
million use for the same period in 1998.
Capital expenditures totaled $17.1 million for the first half of 1999, compared
to $15.6 million in 1998. Despite higher current year spending, total year
capital expenditures are expected to be lower for 1999 compared to 1998.
Since December 31, 1998, total company debt has increased by $3.6 million, to
$118.2 million. As of June 30, 1999, the ratio of long-term debt to long-term
debt plus shareholders' equity was 41.7 percent, down from 42.1 percent at year-
end.
The company maintains contractual relationships with its domestic banks that
provide for revolving credit which may be drawn upon as needed for general
corporate purposes. This credit facility was amended on March 12, 1999, to
increase the total amount of the commitment from $45 million to $60 million.
Other terms of the agreement remained unchanged.
The company also meets short-term liquidity requirements through uncommitted
bank lines of credit. The company's foreign subsidiaries maintain committed and
uncommitted bank lines of credit in their respective countries to meet working
capital requirements as well as to fund capital expenditure programs and
acquisitions.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
There have been no material changes in the company's market risks since December
31, 1998.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998
Net income for the second quarter ended June 30, 1999, was a record $8.0
million, or $0.81 per share ($0.75 per share diluted), up 12 percent from the
$7.1 million, or $0.70 per share ($0.64 per share diluted), reported a year ago.
Net sales rose seven percent to $166.8 million from $155.5 million in the second
quarter of 1998. Net sales by segment were:
(Dollars in Thousands) Three Months
Ended June 30
----------------------------------------------
1999 1998 % Change
------------ ------------ -----------------
Net Sales:
Surfactants $130,857 $120,960 +8%
Polymers 31,619 29,361 +8%
Specialty Products 4,283 5,188 -17%
-------- --------
Total $166,759 $155,509 +7%
======== ========
Surfactants net sales increased eight percent from $121.0 million in the second
quarter of 1998 to $130.9 million in the second quarter of 1999. The increase
was due to an eight percent growth in sales volume. Domestic operations, which
accounted for 77 percent of total surfactant revenues, reported net sales that
were $5.0 million, or five percent, greater than a year ago. Sales volume
increased five percent. The volume increase was mainly due to increased demand
for the company's personal care products. Domestic sales included $2.5 million
of deferred revenue recognition of which $1.43 million was accelerated due to
the company's release from a prepaid contract for future supply of product.
Foreign operations posted an increase in net sales between quarters of $4.9
million, or 20 percent. A rise in sales volume for all foreign subsidiaries led
to the increase. Stepan Mexico reported a 37 percent increase in net sales on
higher sales volume and selling prices. The fourth quarter 1998 acquisition of
the anionic and cationic surfactant business from Boehme Filatex Canada, Inc.
contributed to a 10 percent growth in net sales for Stepan Canada. Stepan
Europe's net sales increased nine percent on a 27 percent gain in sales volume.
Stepan Colombia accounted for 36 percent of the total foreign sales volume gain.
The subsidiary was consolidated for the first time in June of 1998. There was
no material exchange rate fluctuation impact on net sales.
Surfactants gross profit increased eight percent from $21.6 million for the
second quarter in 1998 to $23.2 million for the second quarter in 1999.
Domestic operations gross profit increased five percent due to the earlier noted
rise in sales volume and accelerated recognition of deferred revenues, partially
offset by lower margins. Foreign operations gross profit increased $0.7
million, or 22 percent, due primarily to higher sales volume. Increased margins
in Canada also contributed to the increased gross profit, while all other
foreign subsidiaries reported lower margins.
Polymers net sales increased eight percent between quarters on sales volume that
increased 10 percent. Most of the net sales and volume gains were contributed
by the polyurethane polyols business. Globally, net sales for polyurethane
polyols grew by $2.5 million, or 17 percent, on
sales volume that increased 19 percent. Polyurethane systems also contributed
with a four percent rise in net sales due to a three percent increase in sales
volume. Despite a two percent growth in sales volume, phthalic anhydride (PA)
net sales declined $0.5 million, or five percent, between quarters. Lower
average selling prices led to the decline. The drop in the average selling
prices was primarily due to decreased raw material cost, change in customer mix
and price reductions necessitated by competitive market situations.
Polymers gross profit increased 27 percent to $8.3 million in the second quarter
of 1999 from $6.5 million in the second quarter of 1998. Polyurethane polyols
reported a $1.9 million, or 45 percent, increase in gross profit between
quarters. The increase was due to increased sales volume and margins.
Polyurethane systems, as a result of better margins and improved sales volume,
reported a 16 percent increase in gross profit. PA's gross profit declined 11
percent due to a drop in margins resulting from reduced prices and a change in
customer mix.
Specialty products net sales decreased $0.9 million, or 17 percent, from quarter
to quarter. Gross profit declined 47 percent from a year ago. A decline in
sales volume led to the drop in net sales and gross profit.
Operating expenses for the second quarter of 1999 rose nine percent, from $16. 1
million in 1998 to $17.5 million in 1999. Administrative expenses increased 16
percent due to larger than usual consulting costs. Marketing expenses increased
10 percent.
Interest expense increased 22 percent due to higher levels of debt.
Six Months Ended June 30, 1999 and 1998
Net income for the first six months ended June 30, 1999, was $14.1 million, or
$1.42 per share ($1.32 per share diluted), compared to $12.8 million, or $1.26
per share ($1.16 per share diluted), for the same period in 1998. Net sales
increased eight percent to $330.7 million from $305.9 million reported last
year. Net sales by segment were:
(Dollars in Thousands) Six Months
Ended June 30
---------------------------------------------
1999 1998 % Change
------------ ------------ -----------------
Net Sales:
Surfactants $262,606 $240,160 +9%
Polymers 59,381 55,402 +7%
Specialty Products 8,733 10,335 -16%
-------- --------
Total $330,720 $305,897 +8%
======== ========
Surfactants net sales increased nine percent for the first six months of 1999
over those of a year ago. The increase was primarily due to a six percent
increase in sales volume, coupled with increased average selling prices.
Domestic operations, which accounted for 78 percent of total surfactant revenue,
posted an $11.5 million, or six percent, increase in net sales due to a three
percent increase in sales volume and a two percent rise in average selling
prices. The domestic growth was primarily driven by increased demand for the
company's personal care products.
Foreign operations net sales climbed $10.9 million, or 23 percent, from year to
year. A 22 percent rise in sales volume was the main driving force behind the
growth. All foreign subsidiaries reported sales volume growth. Volumes for
Stepan Canada and Stepan Europe grew 22 percent and 19 percent, respectively.
Canada benefited from the fourth quarter 1998 acquisition of the anionic and
cationic surfactant business from Boehme Filatex Canada, Inc. Stepan Colombia
contributed 31 percent of the total foreign sales volume gain. The subsidiary
was consolidated for the first time in June of 1998. Stepan Mexico's net sales
increased 39 percent on a two percent sales volume gain. Mexico's sales increase
was largely due to a major customer switching from consigning raw material and
paying a processing fee to buying finished goods inclusive of raw materials
costs.
Surfactants gross profit increased five percent between years to $45.0 million
in 1999 from $42.7 million in 1998. Domestic surfactants reported a five
percent rise in gross profit due to increased sales volume and to the second
quarter 1999 recognition of $1.43 million of previously deferred revenues as
noted in the quarter to quarter discussion. Margins fell slightly between
years, which partially offset the impact of volumes and deferred revenue
recognition. Foreign operations gross profit grew seven percent. Sales volume
growth, partially offset by lower margins, led to the improvement.
Polymers net sales increased $4.0 million, or seven percent, to $59.4 million in
1999 from $55.4 million in 1998. Sales volume grew 12 percent and more than
offset a four percent decline in average selling prices. Polyurethane polyols
accounted for most of the improvement with a gain in net sales of $4.8 million
on a 21 percent increase in sales volume. Polyurethane systems net sales
increased 16 percent due to a 17 percent growth in sales volume. Lower raw
material cost, competitive pressure on prices and a change in customer mix
caused a decline in PA's selling prices, which led to a 12 percent decrease in
net sales.
Polymers gross profit increased 26 percent from $11.6 million in 1998 to $14.7
million in 1999. The growth was mainly due to a strong performance by domestic
and foreign polyurethane polyols. Higher margins and sales volume led to a $3.6
million, or 48 percent, increase in polyol gross profit. Polyurethane systems
gross profit grew 16 percent due to increased sales volume. Lower margins, due
to competitive pressure and a change in customer mix, led to a $0.7 million, or
22 percent, decline in PA's gross profit.
Specialty products net sales for the first half of the year were $8.7 million,
down $1.6 million, or 16 percent, from a year ago. Gross profit decreased by
$1.5 million from $3.2 million in 1998 to $1.7 million in 1999. Lower sales
volume led to the net sales and gross profit declines.
Operating expenses rose five percent to $34.2 million in 1999 from $32.5 million
in 1998. Administrative expenses increased 11 percent due to unusually high
consulting cost and to higher payroll costs.
Interest expense increased 16 percent due to higher levels of debt.
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 six months of
1999, company expenditures for capital projects related to the environment were
$2.1 million and should approximate $3.5 million to $4.5 million for the full
year 1999. These projects are capitalized and typically depreciated over 10
years. Recurring costs associated with the operation and maintenance of
facilities for waste treatment and disposal and managing environmental
compliance in ongoing operations at our manufacturing locations were $3.7
million for the first six months of 1999.
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 $4.2 million to $26.4 million at June 30,
1999. At June 30, 1999, the company's reserve was $16.8 million for legal and
environmental matters compared to $17.6 million at December 31, 1998. During
the first six months of 1999, expenditures related to legal and environmental
matters approximated $1.2 million. For certain sites, estimates cannot be made
of the total costs of compliance or the company's share of such costs;
accordingly, the company is unable to predict the effect thereof on future
results of operations. In the event of one or more adverse determinations in
any annual or interim period, the impact on results of operations for those
periods could be material. However, based upon the company's present belief as
to its relative involvement at these sites, other viable entities'
responsibilities for cleanup and the extended period over which any costs would
be incurred, the company believes that these matters will not have a material
effect on the company's financial position. Certain of these matters are
discussed in Item 3, Legal Proceedings, in the 1998 Form 10-K Annual Report and
in other filings of the company with the Securities and Exchange Commission,
which are available upon request from the company.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue is a result of computer systems that utilize two digits,
rather than four, to represent a given year. Computer systems used by the
company and its business partners that have date-sensitive processing may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or inaccurate calculation that may interrupt
normal business operations. The company has established a steering team to
oversee all efforts and is addressing Year 2000 compliance for 3 major areas:
Information Technology ("IT")
systems, non-"IT" systems and third-party relationships. The project plan
involves 3 phases: inventory and assessment, remediation and testing, and
implementation.
Implementation of approximately 90 percent of "IT" systems is fully complete and
the remainder of the systems is in the process of remediation and testing.
Implementation of the remaining systems is planned for the third quarter.
The non-"IT" systems are comprised of manufacturing process control, telephone,
security, laboratory and other embedded chip systems. Implementation of
approximately 80 percent of these systems are complete and implementation the
remaining non-"IT" systems are expected to be complete in the third quarter of
1999.
The company has initiated formal communications with suppliers and service
providers to determine the extent of their efforts in resolving Year 2000
issues. The assessment phase, which includes evaluation of responses and
meetings with significant suppliers, is in progress and will continue through
the third quarter of 1999. Contingency plans will be developed if responses
indicate a probability of non-compliance with Year 2000 requirements.
Costs for the Year 2000 project are currently estimated to be $2.9 million with
$2.0 million expended to date. Of the total estimated cost, $1.8 million will
be capitalized and the remaining will be expensed as incurred. These costs are
not material to the overall IT budget and no projects have been deferred due to
Year 2000 efforts. The company's actual cost to achieve Year 2000 compliance
could differ significantly from amounts disclosed above due to new issues which
have not yet been identified.
Although the company is in the process of implementing its Year 2000 project
plan, there can be no assurance that all phases of the plan will be completed
prior to the Year 2000 or that if completed prior to the Year 2000 that
disruption will not occur. In addition, there can be no assurance that the
company's customers, suppliers and service providers will successfully resolve
their own Year 2000 issues in a manner which would not cause material impact to
the company's operations and financial results. Recognizing these
uncertainties, the company is in the process of identifying most reasonable
likely worst case scenarios. Contingency plans for these scenarios will be
developed as warranted throughout 1999.
OTHER
Except for the historical information contained herein, the matters discussed in
this document are forward looking statements that involve risks and
uncertainties. The results achieved this quarter are not necessarily an
indication of future prospects for the company. Actual results in future
quarters may differ materially. Potential risks and uncertainties include,
among others, fluctuations in the volume and timing of product orders, changes
in demand for the company's products, changes in technology, continued
competitive pressures in the marketplace, outcome of environmental
contingencies, availability of raw materials, foreign currency fluctuations and
the general economic conditions.
Part II OTHER INFORMATION
Item 1 - Legal Proceedings
Reference is made to the USEPA v. Jerome Lightman (92CV4710) (JVS) which
------------------------
involves the Ewan and D'Imperio Superfund Sites located in New Jersey. It was
reported the company had filed a Motion for Summary Judgment with regard to its
liability at these sites and versus the other named defendants at this site.
The other defendants (collectively known as the Joint Defense Group) filed a
Cross-motion for Summary Judgment. In addition to which, the company filed
certain motions to disqualify experts of the Joint Defense Group (JDG). The
Federal District Court, on June 30, 1999, issued an Opinion denying both the
company's and the JDG's Motions for Summary Judgment. In addition to which, the
Court disqualified one of the JDG's experts. A conference is scheduled for
August 24 at which time a trial schedule will be set. The trial will be divided
into parts -- one on the issue of liability and the second with regard to
allocation, if necessary. While the company believes it has adequate defenses
to the issue of liability, the company at this time cannot indicate what its
liability, if any, will be at this site but believes adequate reserves have been
set in the event it should lose at either or both sites.
Reference is made to the lawsuit Accurso v. Stepan Company et al. (CA 98-139
--------------------------------
Middlesex County, New Jersey) (previously known as the Gilberg Case). While the
company has attempted to mediate and resolve this case, mediation efforts have
not been successful. Consequently, the company is preparing for trial of this
case which currently is scheduled to occur in late October, 1999. Depositions
and other discovery are continuing. While the company believes it has defenses
to the claims brought by the plaintiffs in this action, the company cannot, at
this time, indicate what its liability, if any, will be.
Reference is made to lawsuit Olin Corporation v. Fissons plc et al. (93-11166-
--------------------------------------
MLW). The company was dismissed from this action by the Federal Court with the
right of Nor-Am Chemical Company ("Nor-Am"), one of the defendants, to file a
Motion for Reconsideration. Nor-Am filed a Motion for Reconsideration of the
company's dismissal on June 28. If Nor-Am is successful in its Motion for
Reconsideration, Stepan Company would be brought back into the case, solely on
an issue of whether or not it has Resource Conservation Recovery Act (RCRA)
liability with regard to its former site located in Wilmington, Massachusetts.
There are a variety of factors including the company's settlement with Olin and
the Massachusetts law of contribution which impact on the question of liability
and therefore, the company, cannot determine what liability, if any, it would
have should Nor-Am's Motion for Reconsideration be granted.
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(3)a(1) Copy of Certificate of Amendment of Certificate of
Incorporation dated May 24, 1999.
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
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: August 13, 1999