<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 SEPTEMBER 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 October 31, 1994
______________________________ _______________________________
Common Stock, $1 par value 4,972,000 Shares
<PAGE>
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1994 and December 31, 1993
Unaudited
<TABLE>
<CAPTION>
(Dollars in Thousands) 9/30/94 12/31/93
------- --------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,799 $ 1,515
Receivables, net 65,024 57,250
Inventories (Note 3) 42,608 48,918
Other current assets 11,604 11,477
-------- --------
Total current assets 121,035 119,160
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Cost 410,788 378,828
Less accumulated depreciation 229,346 208,558
-------- --------
181,442 170,270
-------- --------
OTHER ASSETS 10,888 11,058
-------- --------
Total assets $313,365 $300,488
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,128 $ 7,447
Accounts payable 32,168 34,832
Accrued liabilities 27,187 28,312
-------- --------
Total current liabilities 67,483 70,591
-------- --------
DEFERRED INCOME TAXES 36,144 36,020
-------- --------
LONG-TERM DEBT, less current maturities (Note 4) 91,520 89,660
-------- --------
DEFERRED REVENUE (Note 9) 5,983 -
-------- --------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, 19,992 19,992
cumulative, voting without par
value; authorized 2,000,000 shares;
issued 799,684 shares in 1994 and in 1993
Common stock, $1 par value; authorized 5,008 5,113
15,000,000 shares; issued 5,008,394
shares in 1994 and 5,113,024 shares in 1993
Additional paid-in capital 3,880 3,781
Cumulative translation adjustments (562) (2,058)
Retained earnings (approximately 85,455 82,475
$35,748 unrestricted in 1994 -------- --------
and $32,789 in 1993)
113,773 109,303
Less - Treasury stock, at cost (Note 6) 1,482 4,863
Deferred ESOP compensation 56 223
-------- --------
Stockholders' equity 112,235 104,217
-------- --------
Total liabilities and
stockholders' equity $313,365 $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 Nine Months Ended September 30, 1994 and 1993
Unaudited
<TABLE>
<CAPTION>
(In Thousands, Three Months Ended Nine Months Ended
except per share amounts) September 30 September 30
------------------ ------------------
1994 1993 1994 1993
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $110,761 $111,111 $330,345 $336,309
COSTS AND EXPENSES:
Cost of Sales (Note 7) 89,778 89,962 269,562 271,630
General and Administrative (Note 8) 4,082 4,321 12,320 13,333
Marketing 4,196 4,061 12,535 12,355
Research, Development 4,127 4,210 13,290 12,908
and Technical Services
Interest, net (Note 4) 1,639 1,869 5,360 5,660
-------- -------- -------- --------
103,822 104,423 313,067 315,886
-------- -------- -------- --------
PRE-TAX INCOME 6,939 6,688 17,278 20,423
PROVISION FOR INCOME TAXES 2,827 3,518 7,066 9,198
-------- -------- -------- --------
NET INCOME $ 4,112 $ 3,170 $ 10,212 $ 11,225
======== ======== ======== ========
NET INCOME PER
COMMON SHARE (Note 5)
Primary $ 0.77 $ 0.59 $ 1.90 $ 2.10
======== ======== ======== ========
Fully Diluted $ 0.75 $ 0.58 $ 1.86 $ 2.04
======== ======== ======== ========
DIVIDENDS PER COMMON SHARE $ 0.21 $ 0.20 $ 0.63 $ 0.60
======== ======== ======== ========
AVERAGE COMMON SHARES 4,969 4,952 4,959 4,947
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 Nine Months Ended September 30, 1994 and 1993
Unaudited
<TABLE>
<CAPTION>
(Dollars in Thousands) 9/30/94 9/30/93
------- -------
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $10,212 $11,225
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 22,114 20,935
Deferred taxes 1,218 3,046
Recognition of prepaid pension cost (156) (536)
Other non-cash items 536 430
Deferred revenue (Note 9) 5,983 -
Changes in Working Capital:
Receivables, net (7,774) (3,360)
Inventories 6,310 2,305
Accounts payable and accrued liabilities (4,781) (11,310)
Other (60) 68
------- -------
Net Cash Provided by Operating Activities 33,602 22,803
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (31,856) (18,519)
Investment in joint venture (1,000) (1,422)
Other non-current assets (578) (676)
------- -------
Net Cash Used for Investing Activities (33,434) (20,617)
------- -------
CASH FLOWS FROM FINANCING AND
OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 14,672 (17,806)
Other debt borrowings - 30,000
Other debt repayments (11,268) (12,303)
Purchases of treasury stock, net of sales (164) (273)
Dividends paid (3,932) (3,794)
Other 808 (155)
------- -------
Net Cash Provided by (Used for) Financing
and Other Related Activities 116 (4,331)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 284 (2,145)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR $ 1,515 $ 2,915
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,799 $ 770
======= =======
CASH PAID DURING THE PERIOD FOR:
Interest $ 5,701 $ 5,120
Income taxes $ 7,166 $ 5,421
</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
September 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 September 30, 1994 and the consolidated results of
operations for the three and nine months then ended, and cash flows for the
nine 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.
<PAGE>
Expenditures that mitigate or prevent environmental contamination that has
yet to occur 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) 9/30/94 12/31/93
------- --------
<S> <C> <C>
Inventories valued primarily on LIFO
basis -
Finished products $25,139 $27,269
Raw materials 17,469 21,649
------- -------
Total inventories $42,608 $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
$11,500,000 and $9,700,000 higher than reported at September 30, 1994 and
December 31, 1993, respectively.
4. DEBT
----
Long-term debt includes unsecured bank debt of $23.6 million and $7.0
million at September 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 September 30 was 5.26
percent and 3.93 percent for 1994 and 1993, respectively. For the nine
months ended September 30, 1994 and 1993, the average interest rate was
4.89 percent and 3.91 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.
<PAGE>
6. TREASURY STOCK
--------------
At September 30, 1994, treasury stock consists of 20,208 shares of
preferred stock and 37,575 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.
During the third quarter of 1994, 125,000 shares of common stock from
treasury were retired. The excess of the costs of the treasury shares over
par ($3.4 million) was charged against additional paid-in capital and
retained earnings for $.1 million and $3.3 million, respectively.
7. COST OF SALES
-------------
Cost of sales for the first nine months 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
-----------------------------------
During the three month and nine month periods ended September 30, 1994, the
Company received $.5 million and $2.0 million, respectively, 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 nine months 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 September
30, 1994 is $6.0 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
<PAGE>
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 $5.0 million to $21.5 million
at September 30, 1994. At September 30, 1994, the Company's reserve was
$6.5 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 claims
until such time as they become probable. During the three month and nine
month periods ended September 30, 1994, the Company received $.5 million
and $2.0 million, respectively, from insurers related to legal costs
previously incurred by the Company. The recoveries were 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 three quarters of 1994, cash from operations totaled $33.6 million
compared to $22.8 million for the same period in 1993. Net income, adjusted for
non-cash items, totaled $33.9 million, compared to $35.1 million last year.
Included in cash flow from operations for 1994 is $6.0 million in advances from
customers for future delivery of products. During 1994, working capital items
comprised a $6.3 million use of cash compared to $12.3 million during 1993.
Capital expenditures totaled $31.9 million for the first nine months of 1994, up
from $18.5 million for the same period last year. It is expected that total
expenditures for 1994 will approximate $45 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 concentrated products. 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 $2.5 million.
Since year end, the ratio of long-term debt to long-term debt plus shareholders'
equity has fallen from 46.2 percent to 44.9 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 September 30, 1994 and 1993
- ----------------------------------------------
Net income for the third quarter ended September 30, 1994 was $4.1 million, or
$.77 per share, up 30 percent from $3.2 million, or $.59 per share for the same
quarter a year ago. A lower tax provision accounted for most of the increase in
net income. A U.S. tax rate hike, resulting in an
<PAGE>
upward restatement of previously deferred tax liabilities, caused the unusually
large 1993 third quarter tax provision. Also favorably impacting the current
quarter results was a $384,000 after-tax benefit from insurance recoveries
relating to previously incurred legal, environmental and property damage costs.
Net sales declined less than one percent to $110.8 million, down from $111.1
million reported a year earlier. Net sales by product group were
<TABLE>
<CAPTION>
Three Months
Ended September 30
----------------------------
(Dollars in Thousands)
1994 1993 % Change
-------- -------- --------
<S> <C> <C> <C>
Surfactants $ 79,306 $ 81,316 -2
Polymers 21,742 20,541 +6
Specialty Products 9,713 9,254 +5
-------- --------
Total $110,761 $111,111 -
======== ========
</TABLE>
Surfactants net sales decreased $2.0 million or two percent from the comparable
quarter in 1993. Domestic operations reported a $2.6 million decline in sales,
partially offset by a $.6 million increase in foreign operations. The decrease
in the domestic operation was due primarily to the reduced volume of the larger
national customers which was attributable to product reformulations, partially
offset by a four percent volume increase of the broad commercial customer base.
The increase in international sales was primarily attributable to a strong 57
percent increase in volume in the Mexican subsidiary, slightly offset by lower
European volume.
Surfactants gross profit decreased $2.2 million or 14 percent to $13.9 million
for the third quarter of 1994 compared to $16.1 million a year ago. The
unfavorable results arose from the lost volume of the larger national customers
and continued competitive pricing pressure reported by the European subsidiary.
Partially offsetting the unfavorable results were improved volume and margin in
both the Mexican and Canadian subsidiaries.
Polymers net sales increased $1.2 million or six percent from the same quarter a
year earlier. Volume improvements in phthalic anhydride (PA) and polyurethane
polyols were the main causes of the sales increase. Substantially offsetting the
increase were weak polyurethane systems sales which decreased by $2.9 million on
a 53 percent volume loss. Improved PA volume was driven mainly by greater
marketplace demand and decreased foreign imports. Delays in commercialization of
new products with more favorable environmental characteristics contributed to
the 53 percent volume decline in polyurethane systems.
Polymers gross profit rose $1.6 million or 55 percent to $4.5 million for the
current quarter from $2.9 million reported in the prior year. The increase was
due entirely to improved earnings in PA and polyurethane polyols. PA's
improvement was principally attributable to higher volume and lower
manufacturing costs. While polyurethane polyols recorded higher gross profit on
higher
<PAGE>
sales, increased export freight expenses partially offset the margin. Negatively
impacting the results were lower polyurethane systems earnings resulting
primarily from decreased sales volume.
Specialty products sales were up $.5 million or five percent from the same
quarter in 1993. Contributing to this result was a 14 percent volume gain over
last year's quarter. Lubricant additives and food additives led the volume
gains.
Specialty products gross profit increased $.5 million, or 22 percent to $2.6
million from last year due primarily to the higher sales. Partially offsetting
the result was a decline in royalty income compared to the prior year's quarter.
Operating expenses recorded a slight one percent decline. Reflected in the
result were insurance recoveries of $451,000 relating to prior legal defense
costs on 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.
Nine Months Ended September 30, 1994 and 1993
- ---------------------------------------------
Net income for the nine months ended September 30, 1994 was $10.2 million, or
$1.90 per share, down nine percent from $11.2 million, or $2.10 per share for
the same period a year ago. The unfavorable results were largely attributable to
lower surfactants earnings despite improved polymers performance. Insurance
recoveries related to previously incurred legal, environmental, production
outages and property damage costs contributed a $1.9 million after-tax benefit
to the year-to-date results. A lower tax provision, as discussed earlier, also
favorably contributed to the year-to-date results. Net sales fell a moderate two
percent to $330.3 million, down from $336.3 million recorded a year ago. Net
sales by product group were
<TABLE>
<CAPTION>
Nine Months
Ended September 30
------------------------------
%
(Dollars in Thousands) 1994 1993 Change
-------- -------- ------
<S> <C> <C> <C>
Surfactants $246,174 $248,827 -1
Polymers 56,656 60,865 -7
Specialty Products 27,515 26,617 +3
-------- --------
Total $330,345 $336,309 -2
======== ========
</TABLE>
Surfactants net sales were down slightly for the first nine months of 1994
compared to the same period a year ago. Domestic sales were down two percent due
mostly to volume losses of larger national customers who reformulated their
products. Partially offsetting this was a 10 percent volume growth in the broad
commercial customer base. Foreign operations reported a two percent increase in
sales. The Mexican and Canadian subsidiaries posted 31 percent and 12
<PAGE>
percent volume gains, respectively, while the moderate European subsidiary's
volume growth was more than offset by reduced selling prices in response to
competitive pressures.
Surfactants gross profit dropped $3.6 million or seven percent to $46.2 million
for the first nine months of 1994 compared to $49.8 million a year ago. The
decrease was primarily attributed to the lower domestic volume to larger
national customers and the reduced margin from the European subsidiary.
Partially offsetting this was encouraging volume growth in Canadian and Mexican
operations.
Polymers net sales fell $4.2 million or seven percent from the same period a
year earlier. Polyurethane systems accounted for the majority of the sales
decline which was partially offset by an 18 percent growth in polyurethane
polyols sales on an 18 percent volume gain. Lower polyurethane systems sales
were due to a 41 percent volume decline attributable to delays in new product
roll-outs. Despite a 10 percent climb in sales volume, PA sales approximated
those of a year ago due to lower raw material prices and pricing pressures from
foreign imports during the earlier quarters.
Polymers gross profit rose $.6 million or seven percent to $9.4 million for the
first nine months of 1994 compared to $8.8 million recorded a year ago. This was
mainly due to the improving results for PA which included a $950,000 pre-tax
insurance recovery related to 1993 production outages. Despite the significant
drop in polyurethane systems sales and volume, gross profit only declined 14
percent due primarily to the development of lower cost formulations. While
polyurethane polyols posted increased sales and volume, higher manufacturing
expenses and export freight costs nearly offset all the volume gains.
Specialty products sales were up $.9 million or a moderate three percent from
the same nine month period in 1993 on a strong volume gain of 17 percent.
Lubricant additives and industrial chemicals accounted for a majority of the
volume increase, partially offset by a drop in food ingredients.
Specialty products gross profit fell $1.0 million, or 16 percent to $5.1 million
for the first nine months in 1994. Despite the increased sales and volume noted
above, the decline in gross profit was largely attributable to 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 nine months of 1994. The reduced administrative expenses were due
primarily to the $2,002,000 pre-tax, or $1,181,000 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). Partially offsetting these
favorable results was an increased provision for legal and environmental costs.
Research and product development expenses increased three percent mainly for
salaries, while marketing expenses were up one percent 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 nine months of
1994, Company expenditures for capital projects related to the environment were
$4.1 million and should approximate $5.2 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 $5.4 million for
the first nine 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 $5.0 million to $21.5 million at September
30, 1994. At September 30, 1994, the Company's reserve was $6.5 million for
legal and environmental matters compared to $7.2 million at December 31, 1993.
During the first nine months of 1994, expenditures related to legal and
environmental matters approximated $3.1 million. During the first nine months of
1994, the Company has recovered $2.0 million of legal costs from insurance
claims. The recoveries are 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
Reference is made to the Company's Annual Report Form 10-K for the year
ended December 31, 1993 concerning the Company's Maywood, New Jersey
facility and the Remedial Investigation and Feasibility Study being
conducted at that site. Based on newspaper reports, the Company believes
that during the year, the United States Environmental Protection Agency
("EPA") and the United States Department of Energy ("DOE") reached an
agreement with regard to the clean-up standards for mixed waste, (i.e.
chemically and radiologically contaminated waste.) Under the agreement, the
DOE would clean-up to a standard of 15 pico curries. The State of New
Jersey has objected to this standard and would like a clean-up standard of
5 pico curries. The impact of this split in clean-up standards could have
an impact on the costs which the Company may incur. The Company cannot now,
however, estimate what additional liability, if any, will be incurred.
On October 24, 1994, the Company received a Request for Information from
the Commonwealth of Massachusetts Department of Environmental Protection
relating to the Company's formerly-owned site at 51 Eames Street,
Wilmington, Massachusetts, and alleged releases at this site. The Company
is in the process of gathering information and cannot make a determination
as to what liability, if any, it may have.
On April 11,1994, the Company was served in an action entitled "General
Electric Company vs. Buzby Brother Material Corp." (CA 87-4263 JHR) which
action sought to recover damages for alleged dumping of hazardous materials
at the Voorhes Township Landfill in New Jersey. The Company has settled
this action, subject to final documentation.
As reported previously in the Company's Quarterly Report Form 10-Q for the
quarter ended September 30, 1993, the Company is involved at the Ewan,
Shamong Township, and D'Imperio, Hamilton Township, sites in New Jersey.
Attempts to reach an allocation for costs at these sites among the various
parties by mediation have not been successful. As a consequence, the
Company believes that it will be involved in protracted litigation
involving these sites.
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
<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: 11/11/94
------------
<PAGE>
Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three and Nine Months Ended September 30, 1994 and 1993
Unaudited
<TABLE>
<CAPTION>
(In Thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1994 1993 1994 1993
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Computation of Per Share Earnings
- ---------------------------------
Net income $4,112 $3,170 $10,212 $11,225
Deduct dividends on preferred stock 269 275 808 825
------ ------ ------- -------
Income applicable to common stock $3,843 $2,895 $ 9,404 $10,400
====== ====== ======= =======
Weighted average number of shares outstanding 4,969 4,952 4,959 4,947
Per share earnings * $0.773 $0.585 $1.896 $2.102
====== ====== ======= =======
Computation of Per Share Primary Earnings
- -----------------------------------------
Income applicable to common stock $3,843 $2,895 $9,404 $10,400
====== ====== ======= =======
Weighted average number of shares outstanding 4,969 4,952 4,959 4,947
Add net shares issuable from assumed exercise 67 100 72 106
of options (under treasury stock method) ------ ------ ------- -------
Shares applicable to primary earnings 5,036 5,052 5,031 5,053
====== ====== ======= =======
Per share primary earnings * $0.763 $0.573 $1.869 $2.058
====== ====== ======= =======
Dilutive effect 1.3% 2.1% 1.4% 2.1%
Computation of Per Share Fully Diluted Earnings
- -----------------------------------------------
Net income $4,112 $3,170 $10,212 $11,225
====== ====== ======= =======
Weighted average number of shares outstanding 4,969 4,952 4,959 4,947
Add net shares issuable from assumed exercise 90 100 90 106
of options (under treasury stock method)
Add weighted average shares issuable from 445 457 448 457
assumed conversion of convertible preferred ------ ------ ------- -------
stock
Shares applicable to fully diluted earnings 5,504 5,509 5,497 5,510
====== ====== ======= =======
Per share fully diluted earnings * $0.747 $0.575 $1.858 $2.037
====== ====== ======= =======
Dilutive effect 3.4% 1.7% 2.0% 3.1%
</TABLE>
- ------------
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONDENSED CONSOLIDATED BALANCE SHEET AS OF SEPTEMBER 30, 1994 AND CONSOLIDATED
STATEMENT OF INCOME FOR THE NINE MONTHS THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 1,799
<SECURITIES> 0
<RECEIVABLES> 65,024
<ALLOWANCES> 0
<INVENTORY> 42,608
<CURRENT-ASSETS> 121,035
<PP&E> 410,788
<DEPRECIATION> 229,346
<TOTAL-ASSETS> 313,365
<CURRENT-LIABILITIES> 67,483
<BONDS> 91,520
<COMMON> 5,008
0
19,992
<OTHER-SE> 87,235
<TOTAL-LIABILITY-AND-EQUITY> 313,365
<SALES> 330,345
<TOTAL-REVENUES> 330,345
<CGS> 269,562
<TOTAL-COSTS> 307,707
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,360
<INCOME-PRETAX> 17,278
<INCOME-TAX> 7,066
<INCOME-CONTINUING> 10,212
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,212
<EPS-PRIMARY> 1.90
<EPS-DILUTED> 1.86
</TABLE>
