-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NkNncKYa7KI5hZCAwWSNXLjFmpcC777Rn7KTs0XU2wJHX9Id/EB/+LMYMDzfNMnS ApIssVVYzTEtyRrKWKlAsQ== 0000950131-99-004854.txt : 19990813 0000950131-99-004854.hdr.sgml : 19990813 ACCESSION NUMBER: 0000950131-99-004854 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEPAN CO CENTRAL INDEX KEY: 0000094049 STANDARD INDUSTRIAL CLASSIFICATION: SOAP, DETERGENT, CLEANING PREPARATIONS, PERFUMES, COSMETICS [2840] IRS NUMBER: 361823834 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-04462 FILM NUMBER: 99685684 BUSINESS ADDRESS: STREET 1: EDENS & WINNETKA RDS CITY: NORTHFIELD STATE: IL ZIP: 60093 BUSINESS PHONE: 7084467500 MAIL ADDRESS: STREET 1: EDENS & WINNETKA ROAD CITY: NORTHFIELD STATE: IL ZIP: 60093 FORMER COMPANY: FORMER CONFORMED NAME: STEPAN CHEMICAL CO /DE/ DATE OF NAME CHANGE: 19840108 10-Q 1 FORM 10-Q 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 EX-3.A.1 2 AMENDMENT TO ARTICLES OF INCORPORATION OF STEPAN CERTIFICATE OF AMENDMENT OF STEPAN COMPANY -------------- STEPAN COMPANY, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware, DOES HEREBY CERTIFY: FIRST: That the Board of Directors of said corporation at a meeting duly held on February 16, 1999, adopted a resolution proposing and declaring advisable the following amendment to the Certificate of Incorporation of this corporation: RESOLVED, that the Certificate of Incorporation of Stepan Company be amended by changing the first paragraph of Article FOURTH thereof so that, as amended, said first paragraph of Article FOURTH shall be and read as follows: "FOURTH: The total number of shares of stock which the corporation shall have authority to issue is Thirty Two Million (32,000,000) shares, of which Thirty Million (30,000,000) shares shall be Common Stock of a par value of $1.00 per share, and Two Million (2,000,000) shares shall be Preferred Stock without par value." SECOND: That at the annual meeting of stockholders of said corporation held on May 11, 1999, the stockholders have given consent to said amendment in accordance with the provisions of Section 228 of the General Corporation Law of the State of Delaware. THIRD: That the aforesaid amendment was duly adopted in accordance with the applicable provisions of Sections 242 and 228 of the General Corporation Law of the State of Delaware. IN WITNESS WHEREOF, said corporation has caused this certificate to be executed by its authorized officer and attested to by its Secretary this 24th day of May, 1999. STEPAN COMPANY By:/s/ F. Quinn Stepan, Jr. ------------------------ Name: F. Quinn Stepan, Jr. Title: President and Chief Operating Officer By:/s/ Jeffrey W. Bartlett ----------------------- Name: Jeffrey W. Bartlett Title: Secretary EX-27 3 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Condensed Consolidated Balance Sheet as of June 30, 1999 and Consolidated Statement of Income for the six months then ended and is qualified in its entirety by reference to such financial statements. 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 2,578 0 95,079 0 49,648 161,364 582,458 370,533 411,335 88,158 0 0 19,582 10,049 123,950 411,335 330,720 330,720 269,410 303,568 0 0 4,268 23,111 9,013 0 0 0 0 14,098 1.42 1.32
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