<PAGE>
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, 1994
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO __________
1-4462
----------------------
Commission File Number
STEPAN COMPANY
- - --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36 1823834
- - ------------------------------- ------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Edens and Winnetka Road Northfield, Illinois 60093
- - --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (708) 446-7500
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----------- -----------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at July 31, 1994
- - -------------------------- ------------------------------------
Common Stock, $1 par value 4,970,000 Shares
<PAGE>
Part I FINANCIAL INFORMATION
- - --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1994 and December 31, 1993
Unaudited
<TABLE>
<CAPTION>
(Dollars in Thousands) 6/30/94 12/31/93
------- --------
ASSETS
- - ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,457 $ 1,515
Receivables, net 66,773 57,250
Inventories (Note 3) 42,493 48,918
Other current assets 11,439 11,477
-------- --------
Total current assets 123,162 119,160
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Cost 399,891 378,828
Less accumulated depreciation 223,167 208,558
-------- --------
176,724 170,270
-------- --------
OTHER ASSETS 10,967 11,058
-------- --------
Total assets $310,853 $300,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- - ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,588 $ 7,447
Accounts payable 32,615 34,832
Accrued liabilities 26,654 28,312
-------- --------
Total current liabilities 67,857 70,591
-------- --------
DEFERRED INCOME TAXES 35,172 36,020
-------- --------
LONG-TERM DEBT, less current maturities (Note 4) 93,383 89,660
-------- --------
DEFERRED REVENUE (Note 9) 5,808 -
-------- --------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock,
cumulative, voting without par 19,992 19,992
value; authorized 2,000,000
shares; issued 799,684 shares in
1994 and in 1993
Common stock, $1 par value; 5,127 5,113
authorized 15,000,000 shares;
issued 5,127,244 shares in 1994
and 5,113,024 shares in 1993
Additional paid-in capital 3,909 3,781
Cumulative translation adjustments (1,268) (2,058)
Retained earnings (approximately 85,955 82,475
$33,937 unrestricted in 1994 -------- --------
and $32,789 in 1993)
113,715 109,303
Less - Treasury stock, at cost (Note 6) 4,971 4,863
Deferred ESOP compensation 111 223
-------- --------
Stockholders' equity 108,633 104,217
-------- --------
Total liabilities and stockholders' equity $310,853 $300,488
======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
<PAGE>
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 1994 and 1993
Unaudited
<TABLE>
<CAPTION>
(In Thousands, Three Months Ended Six Months Ended
except per share amounts) June 30 June 30
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $112,305 $110,578 $219,584 $225,198
-------- -------- -------- --------
COSTS AND EXPENSES:
Cost of Sales (Note 7) 91,648 89,916 179,784 181,668
General and Administrative (Note 8) 3,301 4,526 8,238 9,012
Marketing 4,118 4,145 8,339 8,294
Research, Development 4,523 4,327 9,163 8,698
and Technical Services
Interest, net (Note 4) 1,803 1,904 3,721 3,791
-------- -------- -------- --------
105,393 104,818 209,245 211,463
-------- -------- -------- --------
PRE-TAX INCOME 6,912 5,760 10,339 13,735
PROVISION FOR INCOME TAXES 2,834 2,392 4,239 5,680
-------- -------- -------- --------
NET INCOME $ 4,078 $ 3,368 $ 6,100 $ 8,055
======== ======== ======== ========
NET INCOME PER
COMMON SHARE (Note 5)
Primary $0.77 $ 0.63 $ 1.12 $ 1.52
===== ====== ====== ======
Fully Diluted $0.75 $ 0.61 $ 1.11 $ 1.46
===== ====== ====== ======
DIVIDENDS PER COMMON SHARE $0.21 $ 0.20 $ 0.42 $ 0.40
===== ====== ====== ======
AVERAGE COMMON SHARES 4,957 4,948 4,953 4,944
OUTSTANDING ===== ====== ====== ======
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1994 and 1993
Unaudited
<TABLE>
<CAPTION>
(Dollars in Thousands) 6/30/94 6/30/93
------- -------
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 6,100 $ 8,055
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 15,117 13,944
Deferred taxes 419 426
Recognition of prepaid pension cost (147) (357)
Other non-cash items 365 176
Deferred revenue (Note 9) 5,808 -
Changes in Working Capital:
Receivables, net (9,523) (5,967)
Inventories 6,425 2,482
Accounts payable and accrued liabilities (5,040) (8,111)
Other 105 625
------- --------
Net Cash Provided by Operating Activities 19,629 11,273
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (20,797) (13,436)
Investment in joint venture (1,000) (1,401)
Other non-current assets (416) (183)
------- --------
Net Cash Used for Investing Activities (22,213) (15,020)
------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 13,147 (2,365)
Other debt borrowings - 15,000
Other debt repayments (7,349) (7,431)
Purchases of treasury stock, net of sales (108) 137
Dividends paid (2,620) (2,529)
Other 456 18
------- --------
Net Cash Provided by Financing and $ 3,526 2,830
Other Related Activities ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 942 (917)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 1,515 $ 2,915
------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,457 $ 1,998
======= ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,234 $ 4,142
Income taxes $ 4,202 $ $3,422
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1994 and December 31, 1993
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
Management believes that the disclosures are adequate and make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's latest Annual
Report to Stockholders and the Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1993. In the opinion
of Management all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial position
of Stepan Company as of June 30, 1994 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.
Because the inventory determination under the LIFO method can only be made
at the end of each year based on the inventory levels and costs at that
point, interim LIFO determinations must necessarily be based upon
Management's estimates of expected year-end inventory levels and costs.
Since future estimates of inventory levels and prices are subject to many
forces beyond the control of Management, interim financial results are
subject to final year-end LIFO inventory amounts.
2. ENVIRONMENTAL EXPENDITURES
--------------------------
Environmental expenditures that relate to current operations are expensed or
capitalized as appropriate. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current
or future revenue generation, are expensed. Liabilities are recorded when
environmental assessments and/or remedial efforts are probable, and the cost
or range of possible costs can be reasonably estimated. When no amount
within the range is a better estimate than any other amount, at least the
minimum is accrued. Some of the factors on which the Company will base its
estimates include information provided by feasibility studies, potentially
responsible party negotiations and the development of remedial action plans.
Liabilities are recorded at gross amounts of probable future cash outlays
and are not discounted to reflect the time value of money. While the Company
has insurance policies that may cover some of its liabilities, it does not
record those claims until such time as they become probable. Expenditures
that mitigate or prevent environmental contamination that has yet to occur
<PAGE>
and that otherwise may result from future operations, are capitalized.
Capitalized expenditures are depreciated generally utilizing a 10-year
life.
3. INVENTORIES
-----------
Inventories include the following amounts:
<TABLE>
<CAPTION>
(Dollars in Thousands) 6/30/94 12/31/93
------- --------
<S> <C> <C>
Inventories valued primarily on LIFO basis -
Finished products $23,556 $27,269
Raw materials 18,937 21,649
------- -------
Total inventories $42,493 $48,918
======= =======
</TABLE>
If the first-in, first-out (FIFO) inventory valuation method had been used for
all inventories, inventory balances would have been approximately $10,200,000
and $9,700,000 higher than reported at June 30, 1994 and December 31, 1993,
respectively.
4. DEBT
----
Long-term debt includes unsecured bank debt of $22.3 million and $7.0
million at June 30, 1994 and December 31, 1993, respectively. The
unsecured bank debt is available to the Company under a line of credit
based on rates that fluctuate daily. The average interest rate on
unsecured bank debt for the three month period ended June 30 was 4.78
percent and 3.86 percent for 1994 and 1993, respectively. For the six
months ended June 30, 1994 and 1993, the average interest rate was 4.56
percent and 3.90 percent, respectively.
5. 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.
6. TREASURY STOCK
--------------
At June 30, 1994, treasury stock consists of 20,208 shares of preferred
stock and 161,189 shares of common stock. At December 31, 1993, treasury
stock consisted of 8,700 shares of preferred stock and 165,029 shares of
common stock.
<PAGE>
7. COST OF SALES
-------------
Cost of sales in the first half of 1994 includes a pre-tax gain of $950,000
arising from the settlement of claims filed against the Company's insurance
carrier in connection with production outages and business interruption
suffered in the phthalic anhydride business in 1993.
8. GENERAL AND ADMINISTRATIVE EXPENSES
-----------------------------------
In the second quarter of 1994, the Company received $1.6 million for
insurance recoveries of legal costs previously incurred in defending
environmental actions against the Company. The Company recorded the
recoveries as reductions to the current year's legal and environmental
expense which is included in the "General and Administrative" caption on
the Consolidated Statements of Income. As discussed in Note 10, the
Company is involved in certain environmental actions. While further
recoveries are possible in the future, the Company only recognizes them as
they become probable.
9. DEFERRED REVENUE
-----------------
During the first and second quarters of 1994, the Company received partial
prepayments on certain multi-year commitments for future shipments of
products. Upon shipment, sales will be included in the Company's
consolidated statement of income along with the related cost of sales. As
the commitments are fulfilled, a proportionate share of the deferred
revenue will be taken into income. Related deferred revenue at June 30,
1994 is $5.8 million which is included in the "Deferred Revenue" caption of
the Condensed Consolidated Balance Sheets.
10. CONTINGENCIES
-------------
There are a variety of legal proceedings pending or threatened against the
Company. Some of these proceedings may result in fines, penalties,
judgments or costs being assessed against the Company at some future time.
The Company's operations are subject to extensive local, state and federal
regulations, including the Federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("Superfund") and the Superfund
amendments of 1986. The Company, and others, have been named as
potentially responsible parties at affected geographic sites. As discussed
in Management's Discussion and Analysis of Financial Condition and Results
of Operations included in this filing, the Company believes that it has
made adequate provisions for the costs it may incur with respect to these
sites. The Company has estimated a range of possible environmental and
legal losses from $5.5 million to $21.8 million at June 30, 1994. At June
30, 1994, the Company's reserve was $6.6 million for legal and
environmental matters compared to $7.2 million at December 31, 1993. While
the Company has insurance policies that may cover some of its environmental
costs, it does not record those
<PAGE>
claims until such time as they become probable. For the three months ended
June 30, 1994, the Company received $1.6 million from insurers related to
legal costs previously incurred by the Company. The recovery was included
in income and reduced General and Administrative Expense in the
Consolidated Statements of Income. There were no insurance recoveries
recorded in 1993.
At certain of the sites, estimates cannot be made of the total costs of
compliance, or the Company's share of such costs; accordingly, the Company
is unable to predict the effect thereof on future results of operations.
In the event of one or more adverse determinations in any annual or interim
period, the impact on results of operations for those periods could be
material. However, based upon the Company's present belief as to its
relative involvement at these sites, other viable entities'
responsibilities for cleanup and the extended period over which any costs
would be incurred, the Company believes that these matters will not have a
material effect on the Company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings in the 1993 Form 10-K
Annual Report and in other filings of the Company with the Securities and
Exchange Commission, which filings are available upon request from the
Company.
11. RECLASSIFICATIONS
-----------------
Certain amounts in the 1993 financial statements have been reclassified to
conform with the 1994 presentation.
<PAGE>
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 FINANCIAL CONDITION
- - ---------------------------------
For the first six months of 1994, cash from operations totaled $19.6 million
compared to $11.3 million for the same period in 1993. Net income, adjusted for
non-cash items, totaled $21.9 million, compared to $22.2 million last year.
Included in cash flow from operations for 1994 is $5.8 million in advances from
customers for future delivery of products. During 1994, working capital items
comprised an $8.0 million use of cash compared to $11.0 million during 1993.
Capital expenditures totaled $20.8 million for the first half of 1994, compared
to $13.4 million for the same period last year. It is expected that total
expenditures for 1994 will approximate $40 million, compared to $25.4 million
spent in 1993 which represented a five-year low for the Company. A significant
portion of the projected spending relates to a specific capacity expansion
project for the production of higher active ingredients. Future year capital
spending is not expected to be at this higher level. Separately, the Company
repaid a $1.0 million note related to its Colombian joint venture entered into a
year ago.
Since December 31, 1993, total company debt has increased by $4.9 million.
Since year end, the ratio of long-term debt to long-term debt plus shareholders'
equity has remained at 46.2 percent.
The Company maintains contractual relationships with its banks which provide for
$45 million of revolving credit which may be drawn upon as needed for general
corporate purposes. The Company also meets short-term liquidity requirements
through uncommitted bank lines of credit and bankers' acceptances.
The Company anticipates that cash from operations and from committed credit
facilities will be sufficient to meet anticipated capital expenditure programs,
dividend requirements and other planned financial commitments in 1994 and for
the foreseeable future.
RESULTS OF OPERATIONS
- - ---------------------
Three Months Ended June 30, 1994 and 1993
- - -----------------------------------------
Net income for the quarter ended June 30, 1994 was $4.1 million, or $.77 per
share, up 21 percent from $3.4 million, or $.63 per share for the same quarter a
year ago. Included in the current quarter results was a $915,000 after-tax
benefit from insurance recoveries relating to legal
<PAGE>
costs previously incurred in defending environmental cases against the Company.
Net sales rose two percent to $112.3 million, up from $110.6 million reported a
year earlier. Net sales by product group were
<TABLE>
<CAPTION>
Three Months
Ended June 30
---------------------------
(Dollars in Thousands) 1994 1993 % Change
------ ------ --------
<S> <C> <C> <C>
Surfactants $ 83,747 $ 80,132 +5
Polymers 18,543 22,008 -16
Specialty Products 10,015 8,438 +19
-------- --------
Total $112,305 $110,578 +2
======== ========
</TABLE>
Surfactants net sales increased $3.6 million or five percent from the comparable
quarter in 1993. Both domestic and international operations reported increased
sales. The increase from the domestic operation was due primarily to the volume
increase of the broad commercial customer base, partially offset by reduced
volume of the larger national customers which was attributable to product
reformulations. The increase in international sales was attributable to a strong
20 percent increase in volume.
Surfactants gross profit increased $.7 million or five percent to $16.2 million
for the second quarter of 1994 compared to $15.5 million a year ago. The
majority of the increase arose from increased gross profit in both the Mexican
and Canadian subsidiaries on their respective strong volume gains. Despite the
European subsidiary's reported volume gain, its gross profit declined eight
percent from the same quarter in last year as it was pressured by competitive
pricing.
Polymers net sales decreased $3.5 million or 16 percent from the same quarter a
year earlier. Lower selling prices in phthalic anhydride (PA) and reduced volume
in polyurethane systems were the main causes of the sales decline. Slightly
offsetting the decline were polyurethane polyols sales which increased by $.9
million on a 13 percent volume gain. Lower PA selling prices were driven mainly
by the competitive pressure of foreign imports and lower raw material prices.
Slow introduction of new products with more favorable environmental
characteristics contributed to the 40% volume decline in polyurethane systems.
Polymers gross profit declined $.6 million or 19 percent to $2.6 million for the
current quarter versus $3.2 million reported in the prior year. The decline was
due primarily to reduced earnings in PA and polyurethane systems. PA's decline
was attributable to competitive pressure on margins and lower sales volume.
Lower polyurethane systems earnings resulted primarily from lower sales volume.
While polyurethane polyols recorded higher sales, increased manufacturing and
logistical expenses almost offset the result.
<PAGE>
Specialty products sales were up $1.6 million or 19 percent from the same
quarter in 1993. Contributing to this result was a strong 70 percent volume gain
over last year's quarter. Lubricant additives and industrial chemicals led the
volume gains, partially offset by lower food additives sales.
Specialty products gross profit decreased $.2 million, despite the strong volume
gain, as a result of unfavorable sales mix and a decline in royalty income
compared to the prior year's quarter.
Operating expenses decreased eight percent due primarily to the $1,551,000
pre-tax, or $915,000 after-tax, insurance recoveries relating to legal costs
previously incurred in defending environmental cases against the Company. (See
also Note 8 of the Notes to Condensed Consolidated Financial Statements). The
recoveries are recorded as reductions to the current quarter's administrative
expenses.
Six Months Ended June 30, 1994 and 1993
- - ---------------------------------------
Net income for the six months ended June 30, 1994 was $6.1 million, or $1.12 per
share, down 25 percent from $8.1 million, or $1.52 per share for the same period
a year ago. Included in the year-to-date results were a $560,000 after-tax
insurance recovery related to production outages in 1993 and $915,000 after-tax
insurance recoveries related to legal costs previously incurred in defending
environmental cases. Net sales fell a moderate two percent to $219.6 million,
down from $225.2 million recorded a year ago. Net sales by product group were
Six Months
Ended June 30
---------------------------
%
(Dollars in Thousands) 1994 1993 Change
---- ---- ------
Surfactants $166,868 $167,511 -
Polymers 34,914 40,324 -13
Specialty Products 17,802 17,363 +3
-------- --------
Total $219,584 $225,198 -2
======== ========
Surfactants net sales were relatively flat for the first six months of 1994
compared to the same period a year ago. Domestic sales were down slightly due
mostly to volume losses in larger national customers who reformulated their
products. Partially offsetting this was a 13 percent volume growth in the broad
commercial customer base. Foreign operations reported a slight volume growth in
the broad commercial customer base. Foreign operations reported a slight
increase in sales. The Canadian and Mexican subsidiaries posted strong 14
percent and 20 percent volume gains, respectively, while the European
subsidiary's volume growth was more than offset by reduced selling prices in
response to competitive pressures.
<PAGE>
Surfactants gross profit dropped $1.2 million or four percent to $32.4 million
for the first half of 1994 compared to $33.6 million a year ago. The decrease
was primarily attributed to the reduced margin from the European subsidiary and
the lower domestic volume to larger national customers. Partially offsetting
this were stronger volume growth in Canadian and Mexican operations, as well as
volume gain in the broad domestic commercial customer base.
Polymers net sales fell $5.4 million or 13 percent from the same period a year
earlier. PA and polyurethane systems accounted for the majority of the sales
decline which was partially offset by an 18 percent growth in polyurethane
polyols sales on a 19 percent volume gain. Foreign imports and lower raw
material prices have kept PA's selling prices down which has resulted in lower
sales despite volumes which have held up between years. Lower polyurethane
systems sales were due to a volume decline attributable to delays in new product
roll-outs.
Polymers gross profit declined $1.0 million or 17 percent to $4.9 million for
the first half of 1994 compared to $5.9 million recorded a year ago. This was
mainly due to lower profit margins for PA. The current year results for PA
included a $950,000 pre-tax insurance recovery related to 1993 production
outages. PA's decline was attributable to decreased margins caused largely by
the foreign imports. Despite the significant drop in polyurethane systems
sales and volume, gross profit declined modestly due primarily to the
development of lower cost formulations. While polyurethane polyols posted
increased sales and volume, higher manufacturing expenses and logistics costs
nearly offset all the volume gains.
Specialty products sales were up $.4 million or a moderate three percent
from the same first half in 1993. Strong volume gain in the second quarter has
made up for the slow first quarter, posting an 18 percent gain on a year-to-date
basis over a year ago. Lubricant additives and industrial chemicals accounted
for all the volume increase, partially offset by the drop in food ingredients.
The average selling price declined eight percent reflecting an unfavorable sales
mix in lubricant additives partially offset by a favorable mix in industrial
chemicals.
Specialty products gross profit fell $1.4 million, or 36 percent to $2.5 million
for the first six months in 1994. Despite the increased sales and volume noted
above, the drop in gross profit was largely attributable to unfavorable sales
mix and reduced royalty income compared to a year earlier.
Operating expenses declined one percent reflecting lower administrative expenses
partially offset by higher research and development spending for the first half
of 1994. The reduced administrative expenses were due primarily to the
$1,551,000 pre-tax, or $915,000 after-tax, insurance recoveries relating to
legal costs previously incurred in defending environmental cases against the
Company. Research and product development expenses increased five percent mainly
for salaries, while marketing expenses were virtually unchanged between years.
<PAGE>
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
1994, Company expenditures for capital projects related to the environment
were $2.7 million and should approximate $5.6 million for the full year 1994.
These projects are capitalized and typically depreciated over 10 years. Capital
spending on such projects is likely to continue at these or higher levels in
future years. Recurring costs associated with the operation and maintenance of
environmental protection facilities in ongoing operations were $3.6 million for
the first six months of 1994. While difficult to project, it is not anticipated
that these recurring expenses will increase significantly in the future.
The Company has been named by the government as a potentially responsible party
at 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 $5.5 million to $21.8 million at June 30,
1994. At June 30, 1994, the Company's reserve was $6.6 million for legal and
environmental matters compared to $7.2 million at December 31, 1993. During the
first six months of 1994, expenditures related to legal and environmental
matters approximated $2.1 million. During the first six months of 1994, the
Company has recovered $1.6 million of legal costs from insurance claims. The
recovery is recorded as a reduction to the current year's legal and
environmental expense. (See also Note 8 of the Notes to Condensed Consolidated
Financial Statements). At certain of the sites, estimates cannot be made of the
total costs of compliance, or the Company's share of such costs; accordingly,
the Company is unable to predict the effect thereof on future results of
operations. In the event of one or more adverse determinations in any annual or
interim period, the impact on results of operations for those periods could be
material. However, based upon the Company's present belief as to its relative
involvement at these sites, other viable entities' responsibilities for cleanup
and the extended period over which any costs would be incurred, the Company
believes that these matters will not have a material effect on the Company's
financial position. Certain of these matters are discussed in Item 3, Legal
Proceedings in the 1993 Form 10-K Annual Report and in other filings of the
Company with the Securities and Exchange Commission, which filings are available
upon request from the Company.
<PAGE>
Part II OTHER INFORMATION
- - -------------------------------------------------------------------------------
Item 1 - Legal Proceedings
On June 22, 1994, the Commonwealth of Pennsylvania, Department of
Environmental Resources, sent to the Company a request for information
regarding the Company's Fieldsboro, New Jersey plant use of Reclamation
Resource, Inc. and its landfill located at Lenhart Road, Hartfield Township,
Montgomery County, Pennsylvania. The Company has responded that it has no
knowledge of Reclamation Resource, Inc. or the landfill and, to the
Company's knowledge, no use of Reclamation Resource, Inc. or the landfill
and, to the Company's knowledge, no use of Reclamation Resource, Inc. was
ever made by the Company. Consequently, the Company cannot determine what
its liability, if any, will be.
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(11) Statement re Computation of Per Share Earnings
(B) Reports on Form 8-K
None
<PAGE>
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: 8/11/94
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Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three and Six Months Ended June 30, 1994 and 1993
Unaudited
<TABLE>
<CAPTION>
(In Thousands, except per share amounts) Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
1994 1993 1994 1993
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Computation of Per Share Earnings
- - ---------------------------------
Net income $4,078 $3,368 $6,100 $8,055
Deduct dividends on preferred stock 268 275 539 550
------ ------ ------ ------
Income applicable to common stock $3,810 $3,093 $5,561 $7,505
====== ====== ====== ======
Weighted average number of shares 4,957 4,948 4,953 4,944
outstanding
Per share earnings * $0.769 $0.625 $1.123 $1.518
====== ====== ====== ======
Computation of Per Share Primary Earnings
- - -----------------------------------------
Income applicable to common stock $3,810 $3,093 $5,561 $7,505
====== ====== ====== ======
Weighted average number of shares 4,957 4,948 4,953 4,944
outstanding
Add net shares issuable from assumed 71 108 75 109
exercise of options (under treasury ------ ------ ------ ------
stock method)
Shares applicable to primary earnings 5,028 5,056 5,028 5,053
====== ====== ====== ======
Per share primary earnings * $0.758 $0.612 $1.106 $1.485
====== ====== ====== ======
Dilutive effect 1.4% 2.1% 1.5% 2.2%
Computation of Per Share Fully Diluted Earnings
- - -----------------------------------------------
Net income (See Note A) $4,078 $3,368 $5,561 $8,055
====== ====== ====== ======
Weighted average number of shares 4,957 4,948 4,953 4,944
outstanding
Add net shares issuable from assumed 71 108 75 109
exercise of options (under treasury stock
method)
Add weighted average shares issuable 447 457 - 457
from assumed conversion of ------ ------ ------ ------
convertible preferred stock (See Note A)
Shares applicable to fully diluted 5,475 5,513 5,028 5,510
earnings ====== ====== ====== ======
Per share fully diluted earnings * $0.745 $0.611 $1.106 $1.462
====== ====== ====== ======
Dilutive effect 3.2% 2.2% 1.5% 3.7%
</TABLE>
(A) For the six months ended June 30, 1994, the assumed conversion of
convertible preferred stock would have been antidilutive. Accordingly, the
dividends and shares issuable from assumed conversion have been excluded
pursuant to APB No. 15.
- - ---------
* Rounded
This calculation is submitted in accordance with Regulation S-K, item 601(b)
(11).
