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, 1997
( ) 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,
1997
- --------------------------- ------------------------------
Common Stock, $1 par value 9,801,000 shares
Part I FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
Item 1 - Financial
Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1997 and December 31, 1996
Unaudited
(Dollars in Thousands) 3/31/97 12/31/96
------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 3,033 $ 4,778
Receivables, net 84,194 85,017
Inventories (Note 2) 45,040 50,242
Deferred income taxes 10,703 10,703
Other current assets 2,908 2,958
-------- ---------
Total current assets $145,878 $ 153,698
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 504,477 497,882
Less accumulated depreciation 297,768 290,723
-------- ---------
206,709 207,159
-------- ---------
OTHER ASSETS 19,551 20,155
-------- ---------
Total assets $372,138 $ 381,012
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 6,697 $ 6,973
Accounts payable 38,840 43,417
Accrued liabilities 32,255 32,986
-------- ---------
Total current liabilities 77,792 83,376
-------- ---------
DEFERRED INCOME TAXES 35,279 35,954
-------- ---------
LONG-TERM DEBT, less current maturities 97,848 102,567
-------- ---------
OTHER NON-CURRENT LIABILITIES 28,236 27,500
-------- ---------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock,
cumulative, voting without par
value; authorized 2,000,000 shares;
issued 796,972 shares in 1997
and 796,972 shares in 1996 19,924 19,924
Common stock, $1 par value;
authorized 15,000,000 shares;
issued 10,137,306 shares in 1997
and 10,131,706 shares in 1996 10,137 10,132
Additional paid-in capital 5,215 5,066
Cumulative translation adjustments (6,202) (4,820)
Retained earnings (approximately
$49,382 unrestricted in 1997 and
$46,689 in 1996) 109,490 106,513
-------- --------
138,564 136,815
Less - Treasury stock, at cost 5,581 5,200
-------- ---------
Stockholders' equity 132,983 131,615
-------- ---------
Total liabilities and
stockholders' equity $372,138 $ 381,012
======== =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
2
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1997 and 1996
Unaudited
(In Thousands, except per share amounts) Three Months
Ended March 31
-------------------
1997 1996
-------- --------
NET SALES $139,670 $130,643
Cost of Sales 115,625 104,768
-------- --------
Gross Profit 24,045 25,875
-------- --------
Operating Expenses:
Marketing 4,866 4,749
Administrative 4,765 5,037
Research, Development and Technical
Services 4,909 4,792
-------- --------
14,540 14,578
-------- --------
Operating Income 9,505 11,297
Other Income (Expense):
Interest, Net (1,870) (1,987)
Income (Loss) from Equity Joint
Ventures (96) (167)
-------- --------
(1,966) (2,154)
-------- --------
Income Before Income Taxes 7,539 9,143
Provision for Income Taxes 3,062 3,508
-------- --------
NET INCOME $ 4,477 $ 5,635
======== ========
Net Income Per Common Share (Note 3)
Primary $ 0.43 $ 0.54
======== ========
Fully Diluted $ 0.41 $ 0.51
======== ========
Dividends per Common Share $ 0.1250 $ 0.1175
======== ========
Average Common Shares Outstanding 9,839 10,016
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
3
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1997 and 1996
Unaudited
(Dollars In Thousands) 3/31/97 3/31/96
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 4,477 $ 5,635
Depreciation and amortization 8,876 8,395
Deferred revenue recognition (724) (641)
Customer prepayments 2,000 2,700
Deferred income taxes (599) (628)
Non-current environmental and legal
liabilities (540) -
Other non-cash items 284 192
Changes in Working Capital:
Receivables, net 823 1,879
Inventories 5,202 3,307
Accounts payable and accrued
liabilities (5,308) (8,969)
Other 50 278
-------- --------
Net Cash Provided by Operating
Activities 14,541 12,148
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and
equipment (9,332) (11,285)
Investment in subsidiaries or joint
venture - (50)
Other non-current assets 228 80
-------- --------
Net Cash Used for Investing
Activities (9,104) (11,255)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER
RELATED ACTIVITIES
Revolving debt and notes payable to
banks, net (3,729) 1,101
Other debt borrowings - -
Other debt repayments (1,247) (36)
Sales of treasury stock, net (381) 320
Dividends paid (1,500) (1,447)
Other non-cash items (325) 47
-------- --------
Net Cash Used for Financing and
Other Related Activities (7,182) (15)
-------- --------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS (1,745) 878
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR 4,778 3,148
CASH AND CASH EQUIVALENTS AT END OF -------- --------
PERIOD $ 3,033 $ 4,026
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 855 $ 2,573
Income taxes $ 1,872 $ 786
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1997 and December 31, 1996
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, 1996. 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, 1997, and the consolidated
results of operations and cash flows for the three months then ended, have
been included.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in Thousands) 3/31/97 12/31/96
------- --------
Inventories valued primarily on LIFO basis -
Finished products $29,952 $30,689
Raw materials 15,088 19,553
------- -------
Total inventories $45,040 $50,242
======= =======
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$12,900,000 and $12,800,000 higher than reported at March 31, 1997, and
December 31, 1996, 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 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 $4.1 million to $26.2 million at March 31, 1997. At March 31,
1997, the company's reserve was $20.5 million for legal and environmental
matters compared to $21.0 million at December 31, 1996.
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 1996 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. SUBSEQUENT EVENT
----------------
In April 1997, the company completed its previously announced acquisition
of the West Coast anionic surfactant business from Lonza, Inc. The
acquisition consists of intangible assets, including customer lists,
goodwill, know-how and a non-compete covenant. No manufacturing facilities
were included in the agreement.
6. RECLASSIFICATIONS
-----------------
Certain amounts in the 1996 financial statements have been reclassified to
conform with the 1997 presentation.
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 quarter ended March 31, 1997, net cash from operations totaled $14.5
million, an increase of $2.4 million, or 20 percent, over last year's first
quarter. The current year increase came as a result of insurance recoveries and
working capital improvements, partially offset by lower net income.
For the first quarter of 1997, net income was down by $1.2 million compared to
the same quarter in 1996. Insurance recoveries received during the first quarter
essentially offset a trade receivable increase which was driven by higher sales
compared to the fourth quarter of 1996. Inventories fell by $5.2 million for the
current year quarter compared to a decrease of $3.3 million for the first
quarter of 1996.
Capital expenditures totaled $9.3 million for the current quarter, down by $2.0
million compared to $11.3 million for the same period in 1996. During April
1997, the company also entered into an agreement to purchase certain portions of
the anionic surfactant business of Lonza, Inc., of Fair Lawn, New Jersey.
For the first three months of 1997, total company debt decreased by $5.0
million, to $104.5 million. At quarter-end, the ratio of long-term debt to long-
term debt plus shareholders' equity stood at 42.4 percent, down from 43.8
percent as of December 31, 1996.
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. At March 31, 1997, the company had $6.5 million
outstanding under this revolving credit line. 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, joint venture investments and other planned financial
commitments for the foreseeable future.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended March 31, 1997 and 1996
- ------------------------------------------
Net income for the first quarter ended March 31, 1997, was $4.5 million, or $.43
per share, down 20 percent from $5.6 million, or $.54 per share reported for the
same quarter a year earlier. Net sales increased seven percent to $139.7
million, from $130.6 million reported last year. Net sales by product group
were:
(Dollars in Thousands) Three Months
Ended March 31
------------------------------
1997 1996 % Change
-------- -------- --------
Net Sales:
Surfactants $107,718 $102,270 +5
Polymers 24,928 20,392 +22
Specialty Products 7,024 7,981 -12
-------- --------
Total $139,670 $130,643 +7
======== ========
Surfactants net sales increased due mainly to a nine percent rise in sales
volume. Improved domestic sales, most notably for the company's laundry and
cleaning product lines, accounted for most of the volume and net sales gains.
Foreign operations also contributed to the overall sales volume growth, but the
related net sales dipped slightly between years partly as a result of weaker
foreign currency exchange rates.
Surfactants gross profit decreased eight percent from $18.9 million for the
first quarter of 1996 to $17.3 million for the first quarter of 1997. Both
domestic and foreign operations reported lower gross profit. The company's
European subsidiaries were the major contributors to a 30 percent fall in
foreign gross profit. France reported a 17 percent drop in gross profit
principally from the impact of a weaker French franc as well as continued
pricing pressures in the European market. Germany reported a loss for the
quarter (Stepan Germany was not acquired until the second quarter of 1996). Both
Canadian and Mexican gross profits were down on decreased margins. Lower selling
prices coupled with recent raw material price increases lowered domestic gross
profit despite higher sales volume.
Polymers net sales increased 22 percent on a 13 percent gain in sales volume.
All product groups contributed to the improved net sales and volume.
Polyurethane systems reported a 66 percent growth in net sales due to 59 percent
growth in sales volume. Polyols net sales increased 19 percent due to increased
domestic sales volume as well as stronger volumes to major export customers.
Improved phthalic anhydride net sales resulted primarily from higher selling
prices due to increased raw material costs.
Polymers gross profit increased 17 percent from $4.9 million in the first
quarter of 1996 to $5.7 million in the first quarter of 1997. Polyurethane
systems contributed most of the increase in gross profit as both sales volumes
and margins grew. A shift to a more profitable mix of products caused the growth
in systems margins. Polyols gross profit improved in the current quarter due to
stronger volume partially offset by increased raw material costs. PA gross
profit increased on improved margins and sales volume.
Specialty products net sales were down 12 percent due to a lower sales volume.
Gross profit decreased 52 percent on lower volume among higher margin products
with the food and pharmaceutical applications.
Operating expenses were down slightly between years due to a five percent
decrease in administrative expenses partially offset by a two percent increase
in marketing expenses and a two percent increase in research and development
expenses.
Interest expense for the quarter decreased six percent primarily as a result of
decreased debt levels.
1997 OUTLOOK
- ------------
The outlook for the remainder of 1997 for both surfactants and polymers is good.
Although the first quarter earnings were below those of the prior year's first
quarter, the company still believes that the full year result will set an
earnings record. Recent surfactant price adjustments appear to have been
successful and may compensate for the past increase in raw material prices. The
company has also completed its previously announced acquisition of the West
Coast surfactant business of Lonza, Inc. This acquisition, as well as other
indications of consolidation in the surfactant industry, leaves the company
strategically well positioned for growth in the core surfactant business. In
addition, continued growth, particularly in global sales of polyurethane
polyols, is expected for the polymer group.
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 1997,
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 1997.
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 $2.0 million for the first three
months of 1997. 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 15 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 $4.1 million to $26.2 million at March 31,
1997. At March 31, 1997, the company's reserve was $20.5 million for legal and
environmental matters compared to $21.0 million at December 31, 1996. During the
first three months of 1997, expenditures related to legal and environmental
matters approximated $.7 million. 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 1996 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.
ACCOUNTING STANDARD
- -------------------
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 - Earnings Per Share ("SFAS No. 128").
SFAS 128 is effective for financial statements for both interim and annual
periods ending after December 15, 1997. Earlier application is not permitted.
SFAS 128 supersedes APB Opinion 15 - Earnings Per Share and replaces primary
earnings per share with basic earnings per share. Fully diluted earnings per
share is still required but will be titled diluted earnings per share. Had SFAS
128 been adopted in the first quarter of 1997, there would have been no impact
on current and prior year quarterly earnings per share. At this time, the
company is not able to determine whether SFAS 128 will have a material impact on
earnings per share upon adoption in the fourth quarter of 1997.
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, and the general economic conditions.
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
On April 30, 1997, the company received from the U.S. Environmental Protection
Agency, Region VIII, Denver, Colorado, a Notice of Request for Information
Pursuant to Section 104(e) of CERCLA for the Twins Inn Site in Arvada, Jefferson
County. The company has responded to this request for information and based upon
the information available to the company at this time, the company does not
believe it has any liability with regard to this site. The company has no record
of being at this site although it did do business with the operator of the Twin
Inns Site, but at a geographically different site which is not part of the Twins
Inn investigation.
Item 4 - Submission of Matters to a Vote of Security Holders
(A) The company's 1996 Annual Meeting of Stockholders was held on May 6,
1997.
(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
1997
9,882,856 For
19,523 Against
26,533 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
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: May 9, 1997
Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended March 31, 1997 and 1996
Unaudited
(In Thousands, except per share amounts) Three Months
Ended March 31
-----------------
1997 1996
------- -------
Computation of per Share Earnings
- ----------------------------------------
Net income $ 4,477 $ 5,635
Deduct dividends on preferred stock 267 267
------- -------
Income applicable to common stock $ 4,210 $ 5,368
======= =======
Weighted average number of shares
outstanding 9,839 10,016
Per share earnings* $ 0.428 $ 0.536
======= =======
Computation of Per Share Primary
Earnings
- ----------------------------------------
Income applicable to common stock $ 4,210 $ 5,368
======= =======
Weighted average number of shares
outstanding 9,839 10,016
Add net shares issuable from assumed
exercise of options
(under treasury stock method) 276 157
------- -------
Shares applicable to primary earnings 10,115 10,173
======= =======
Per share primary earnings* $ 0.416 $ 0.528
======= =======
Dilutive effect 2.8% 1.5%
Computation of Per Share Fully Diluted
Earnings
- ----------------------------------------
Net income $ 4,477 $ 5,635
======= =======
Weighted average number of shares
outstanding 9,839 10,016
Add net shares issuable from assumed
exercise of options
(under treasury stock method) 276 180
Add weighted average shares issuable
from assumed conversion of
convertible preferred stock 887 887
------- -------
Shares applicable to fully diluted
earnings 11,002 11,083
======= =======
Per share fully diluted earnings* $ 0.407 $ 0.508
======= =======
Dilutive effect 4.9% 5.2%
__________
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
5
1,000
3-MOS
DEC-31-1997
MAR-31-1997
3,033
0
84,194
0
45,040
145,878
504,477
297,768
372,138
77,792
97,848
0
19,924
10,137
102,922
372,138
139,670
139,670
115,625
130,165
96
0
1,870
7,539
3,062
4,477
0
0
0
4,477
0.43
0.41
