1
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 MARCH 31, 1996
( ) 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 April 30, 1996
- ------------------------------------ ------------------------------------
Common Stock, $1 par value 10,044,000 Shares
2
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1996 and December 31, 1995
Unaudited
(Dollars in Thousands) 3/31/96 12/31/95
------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 4,026 $ 3,148
Receivables, net 77,935 79,814
Inventories (Note 2) 51,056 54,363
Deferred income taxes 9,444 9,444
Other current assets 3,107 3,385
---------- ----------
Total current assets $ 145,568 $ 150,154
---------- ----------
PROPERTY, PLANT AND EQUIPMENT:
Cost 464,640 454,104
Less accumulated depreciation 269,341 261,634
---------- ----------
195,299 192,470
---------- ----------
OTHER ASSETS 19,548 19,903
---------- ----------
Total assets $ 360,415 $ 362,527
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,927 $ 6,946
Accounts payable 37,646 42,530
Accrued liabilities 33,338 37,423
---------- ----------
Total current liabilities 77,911 86,899
---------- ----------
DEFERRED INCOME TAXES 35,840 36,469
---------- ----------
LONG-TERM DEBT, less current maturities 110,115 109,023
---------- ----------
DEFERRED REVENUE 9,718 7,659
---------- ----------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 797,124 shares in 1996 and 797,172
shares in 1995 19,928 19,929
Common stock, $1 par value; authorized 15,000,000 shares;
issued 10,101,307 shares in 1996 and 10,086,653 shares in 1995 10,101 10,087
Additional paid-in capital 4,740 4,568
Cumulative translation adjustments (4,030) (3,691)
Retained earnings (approximately $41,803 unrestricted in 1996 and $37,904 in 1995) 97,480 93,292
---------- ----------
128,219 124,185
Less - Treasury stock, at cost 1,388 1,708
---------- ----------
Stockholders' equity 126,831 122,477
---------- ----------
Total liabilities and stockholders' equity $ 360,415 $ 362,527
========== ==========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
3
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1996 and 1995
Unaudited
(In Thousands, except per share amounts) Three Months
Ended March 31
---------------------------
1996 1995
---- ----
NET SALES $130,643 $134,786
---------- -----------
COSTS AND EXPENSES:
Cost of Sales 104,935 108,131
General and Administrative 5,037 5,804
Marketing 4,749 4,552
Research, Development and Technical Services 4,792 4,499
Interest, net 1,987 1,864
----------- -----------
121,500 124,850
----------- -----------
PRE-TAX INCOME 9,143 9,936
PROVISION FOR INCOME TAXES 3,508 3,827
----------- -----------
NET INCOME $ 5,635 $ 6,109
=========== ===========
NET INCOME PER COMMON SHARE (Note 3)
Primary $ 0.54 $ 0.59
=========== ===========
Fully Diluted $ 0.51 $ 0.55
=========== ===========
DIVIDENDS PER COMMON SHARE $ 0.1175 $ 0.1100
=========== ===========
AVERAGE COMMON SHARES OUTSTANDING 10,016 9,953
=========== ===========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
4
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1996 and 1995
Unaudited
(Dollars In Thousands) 3/31/96 3/31/95
------- -------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 5,635 $ 6,109
Depreciation and amortization 8,395 7,722
Deferred revenue, net 2,059 (592)
Deferred income taxes (628) 289
Other non-cash items 192 (210)
Changes in Working Capital:
Receivables, net 1,879 (8,111)
Inventories 3,307 3,665
Accounts payable and accrued liabilities (8,969) (8,093)
Other 278 80
---------- ----------
Net Cash Provided by Operating Activities 12,148 859
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (11,285) (7,673)
Investment in joint venture (50) (3,750)
Other non-current assets 80 (15)
---------- ----------
Net Cash Used for Investing Activities (11,255) (11,438)
---------- ----------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 1,101 11,353
Other debt borrowings - 70
Other debt repayments (36) -
Sales of treasury stock, net 320 280
Dividends paid (1,447) (1,364)
Other non-cash items 47 (93)
---------- ----------
Net Cash (Used for) Provided by Financing and Other Related Activities (15) 10,246
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 878 (333)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 3,148 2,452
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,026 $ 2,119
========== ==========
CASH PAID DURING THE PERIOD FOR:
Interest $ 2,573 $ 1,445
Income taxes $ 786 $ 3,238
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
5
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1996 and December 31, 1995
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, 1995. 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, 1996, and the consolidated
results of operations for the three months then ended, and cash flows
for the three months then ended, have been included.
2. INVENTORIES
Inventories include the following amounts:
(Dollars in Thousands) 3/31/96 12/31/95
------- --------
Inventories valued primarily on LIFO basis -
Finished products $31,360 $32,204
Raw materials 19,696 22,159
------ -------
Total inventories $51,056 $54,363
======= =======
If the first-in, first-out (FIFO) inventory valuation method had been
used for all inventories, inventory balances would have been
approximately $12,300,000 and $12,100,000 higher than reported at
March 31, 1996, and December 31, 1995, respectively.
3. 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
6
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.
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 $4.3 million to $23.8 million at
March 31, 1996. At March 31, 1996, the company's reserve was $7.6
million for legal and environmental matters compared to $8.7 million
at December 31, 1995. 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, 1996,
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 1995 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.
5. SUBSEQUENT EVENTS
In April 1996, the company completed its previously announced
acquisition of a sulfonation plant from Shell Group in Cologne,
Germany. The acquisition, which will be accounted for under the
purchase method, consisted of land, sulfonation equipment, inventories
and intangible assets. This plant will allow the company to serve
Northern European customers with a wide range of sulfate and sulfonate
products used in household, personal care, individual, institutional
and agricultural markets.
7
6. RECLASSIFICATIONS
Certain amounts in the 1995 financial statements have been
reclassified to conform with the 1996 presentation.
8
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 quarter of 1996, net cash from operating activities totaled $12.1
million compared to $0.9 million for the same period in 1995. Decreased
working capital requirements were mostly responsible for the improved cash flow
for the current year quarter. For 1996, working capital items combined to a
seasonal cash use of $3.5 million, compared to a use of $12.5 million during
1995. Also helping operating cash for the current quarter were customer
contract prepayments of $2.7 million.
Capital expenditures totaled $11.3 million for the quarter ended March 31,
1996, up from $7.7 million for the same quarter last year. As reported in the
company's 1995 annual report, cash requirements for investing activities are
expected to increase significantly during 1996 mainly due to higher capital
spending.
Since year-end, consolidated debt has increased by $1.1 million, to close the
current quarter at $117.0 million. As of March 31, 1996, the company's ratio
of long-term debt to long-term debt plus shareholders' equity stood at 46.5
percent compared to 47.1 percent as of December 31, 1995, and to 46.4 percent
one year earlier. For the balance of 1996, the company expects that higher
earnings will permit stronger operating cash flows to fund most of its
investing activities. As a result, the company anticipates the ratio of
long-term debt to long-term debt plus shareholders' equity to decline modestly
from year to year.
The company maintains contractual relationships with its domestic 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'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, acquisitions and joint venture investments and other planned
financial commitments in 1996.
9
RESULTS OF OPERATIONS
Three Months Ended March 31, 1996 and 1995
Net income for the first quarter ended March 31, 1996, was $5.6 million, or
$.54 per share, down eight percent from the record $6.1 million, or $.59 per
share reported for the same quarter a year earlier. Net sales declined three
percent to $130.6 million, from $134.8 million reported last year. Net sales by
product group were:
(Dollars in Thousands) Three Months
Ended March 31
--------------------------------
1996 1995 % Change
------ ------ --------
Net Sales:
Surfactants $102,270 $ 98,749 +4
Polymers 20,392 27,356 -25
Specialty Products 7,981 8,681 -8
-------- --------
Total $130,643 $134,786 -3
======== ========
Surfactants net sales increased due mainly to a 10 percent increase in sales
volume. A large part of the volume gain stemmed from increased demand for high
active surfactant in the United States. Many other surfactant product lines
experienced lower sales on a decline in volume. Foreign operations reported
higher sales which was entirely contributed by improved European sales volume
and selling prices. Mexico reported lower sales on weaker sales volume.
Surfactants gross profit decreased seven percent from $20.2 million to $18.7
million for the first quarter of 1996. Domestic gross profit dropped due
primarily to lower sales from the broad commercial customer base. Mexican
gross profit was down 51 percent as a result of lower sales and higher raw
material costs. Canadian gross profit was also down as a result of higher raw
material costs. European gross profit improved slightly on higher sales volume.
Polymers net sales decreased primarily due to a 42 percent drop in sales of
phthalic anhydride (PA). The decrease in PA sales was precipitated by
significantly lower selling prices due to a significant decline in raw material
costs between years and a 15 percent decrease in sales volume due to sluggish
beginning of the year demand. An increase in polyurethane systems net sales was
essentially offset by reduced sales for polyurethane polyols. Polyurethane
systems sales improved on stronger sales volume, partially offset by a lower
average selling price resulting from a shift in sales mix. Reduced polyols
sales were largely attributed to weaker export sales volume, despite improved
selling prices between years. The improved pricing was in response to higher
raw material costs in the latter part of 1995.
10
Polymers gross profit for the quarter fell six percent to $4.9 million from
$5.2 million recorded in the prior year. Reduced PA sales and margin accounted
for a majority of the decrease in gross profit. Partially offsetting the
decline was a higher polyurethane polyols gross profit due primarily to the
improved selling prices noted above. Polyurethane systems gross profit declined
slightly due mainly to the change in sales mix.
Specialty products net sales were down due to a lower sales volume. Sales for
prior year's quarter included some lower margin products which had since been
discontinued. Gross profit actually improved by $.8 million to $2.1 million as
a result of the streamlined product mix between years.
Operating expenses for the first quarter declined two percent from the same
quarter a year ago. Administrative expenses dropped 13 percent as a result of
lower legal and environmental expenses. Marketing expenses rose four percent
primarily due to higher salaries and travel expenses. Research and development
expenses increased seven percent due primarily to higher maintenance, outside
contracting services and salaries.
Interest expense for the quarter increased seven percent primarily as a result
of increased debt.
1996 OUTLOOK
The outlook for the remainder of 1996 for both surfactants and polymers is
excellent. The first quarter earnings are in line with the company's
expectations, and the company believes that the full year result will set an
earnings record. The company's investment of capital to support the demands of
the U.S. market has led to a solid foundation for sustainable earnings. The
company has completed its previously announced acquisition of a sulfonation
plant in Cologne, Germany which will significantly broaden the surfactant
product line in Europe. The company's joint venture in the Philippines is
nearing the startup of its new plant, for which a large portion of the capacity
is under contract. The company continues to pursue global opportunities that
will broaden its base of markets on which to build future earnings growth.
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 1996,
company expenditures for capital projects related to the environment were $2.0
million and should approximate $6 million to $7 million for the full year 1996.
These projects are capitalized and typically depreciated over 10 years.
Capital spending on such projects is likely to be somewhat lower in future
years as 1996 includes some larger projects. 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 $1.8 million for the first
11
three months of 1996. 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 17 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 $4.3 million to $23.8 million at
March 31, 1996. At March 31, 1996, the company's reserve was $7.6 million for
legal and environmental matters compared to $8.7 million at December 31, 1995.
During the first three months of 1996, expenditures related to legal and
environmental matters approximated $1.3 million. The company continues to
pursue and expects to receive reimbursement of legal and environmental costs
from insurers and other third parties. However, currently the company has no
receivable recorded for such 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 1995 Form 10-K Annual Report and
in other filings of the company with the Securities and Exchange Commission,
which filings are available upon request from the company.
12
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, 1995, and the discussion relating to the alleged OSHA violations at the
company's Maywood, New Jersey plant. The company has contested the findings
and a hearing is schedule for May 14, 1996. The company cannot, at this time,
predict the outcome of the hearing.
Item 4 - Submission of Matters to a Vote of Security Holders
(A) The company's 1995 Annual Meeting of Stockholders was held on
May 7, 1996.
(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 LLP as independent auditors for
the company for 1996.
10,157,920 For
9,585 Against
11,637 Abstentions
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(11) Statement re computation of Per Share Earnings
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
13
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: 5/14/96
-----------------------
1
Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended March 31, 1996 and 1995
Unaudited
(In Thousands, except per share amounts) Three Months
Ended March 31
------------------------
1996 1995
---- ----
Computation of per Share Earnings
- ---------------------------------
Net income $ 5,635 $ 6,109
Deduct dividends on preferred stock 267 268
--------- --------
Income applicable to common stock $ 5,368 $ 5,841
========= ========
Weighted average number of shares outstanding 10,016 9,953
Per share earnings* $ 0.536 $ 0.587
========= ========
Computation of Per Share Primary Earnings
- -----------------------------------------
Income applicable to common stock $ 5,368 $ 5,841
========= ========
Weighted average number of shares outstanding 10,016 9,953
Add net shares issuable from assumed exercise of options
(under treasury stock method) 157 176
--------- --------
Shares applicable to primary earnings 10,173 10,129
========== ========
Per share primary earnings* $ 0.528 $ 0.577
========= ========
Dilutive effect 1.5% 1.7%
Computation of Per Share Fully Diluted Earnings
- -----------------------------------------------
Net income $ 5,635 $ 6,109
========= ========
Weighted average number of shares outstanding 10,016 9,953
Add net shares issuable from assumed exercise of options
(under treasury stock method) 180 176
Add weighted average shares issuable from assumed conversion of
convertible preferred stock 887 889
--------- --------
Shares applicable to fully diluted earnings 11,083 11,018
========= ========
Per share fully diluted earnings* $ 0.508 $ 0.554
========= ========
Dilutive effect 5.2% 5.6%
__________
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
5
1,000
3-MOS
DEC-31-1996
MAR-31-1996
4,026
0
77,935
0
51,056
145,568
464,640
269,341
360,415
77,911
110,115
10,101
0
19,928
96,802
360,415
130,643
130,643
104,935
119,513
0
0
1,987
9,143
3,508
5,635
0
0
0
5,635
0.54
0.51
