<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________
FORM 10-Q/A
(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, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO __________
1-4462
------------------------------
Commission File Number
STEPAN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36 1823834
- ------------------------------- --------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Edens and Winnetka Road, Northfield, Illinois 60093
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (847) 446-7500
--------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at October 31, 1999
- ------------------------------- --------------------------------
Common Stock, $1 par value 9,513,954 Shares
<PAGE>
Part I FINANCIAL INFORMATION
- -------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1999 and December 31, 1998
Unaudited
<TABLE>
<CAPTION>
(Dollars in Thousands) 9/30/99 12/31/98
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,635 $ 983
Receivables, net 104,319 81,890
Inventories (Note 2) 50,678 52,496
Deferred income taxes 10,572 10,572
Other current assets 4,050 3,817
-------- ---------
Total current assets 174,254 149,758
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 590,292 568,601
Less: Accumulated depreciation 379,827 353,505
-------- ---------
Property, plant and equipment, net 210,465 215,096
-------- ---------
OTHER ASSETS 38,410 39,507
-------- ---------
Total assets $423,129 $ 404,361
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,368 $ 6,807
Accounts payable 46,167 43,977
Accrued liabilities 52,382 37,160
-------- ---------
Total current liabilities 105,917 87,944
-------- ---------
DEFERRED INCOME TAXES 38,851 39,920
-------- ---------
LONG-TERM DEBT, less current maturities 111,904 107,708
-------- ---------
OTHER NON-CURRENT LIABILITIES 16,338 20,805
-------- ---------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 783,287 shares in 1999 and 784,417
shares in 1998 19,582 19,611
Common stock, $1 par value; authorized 30,000,000 shares;
issued 10,084,276 shares in 1999 and 9,997,736 shares in 1998 (Note 8) 10,084 9,998
Additional paid-in capital 11,998 10,962
Accumulated other comprehensive loss (10,088) (9,050)
Retained earnings (approximately $45,165 unrestricted in 1999 and $44,346 in 1998) 136,618 127,478
-------- ---------
168,194 158,999
Less: Treasury stock, at cost 18,075 11,015
-------- ---------
Stockholders' equity 150,119 147,984
-------- ---------
Total liabilities and stockholders' equity $423,129 $ 404,361
======== =========
</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, 1999 and 1998
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
(In Thousands, except per share amounts) September 30 September 30
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $166,932 $154,134 $497,652 $460,031
Cost of Sales 138,683 128,307 408,093 376,721
-------- -------- -------- --------
Gross Profit 28,249 25,827 89,559 83,310
-------- -------- -------- --------
Operating Expenses:
Marketing 5,810 5,593 17,636 17,137
Administrative (Note 4) 15,187 5,428 26,732 15,810
Research, Development and Technical Services 5,624 4,955 16,411 15,531
-------- -------- -------- --------
26,621 15,976 60,779 48,478
-------- -------- -------- --------
Operating Income 1,628 9,851 28,780 34,832
Other Income (Expense):
Interest, Net (2,052) (1,853) (6,320) (5,529)
Income from Equity Joint Ventures 447 133 674 225
-------- -------- -------- --------
(1,605) (1,720) (5,646) (5,304)
-------- -------- -------- --------
Income Before Income Taxes 23 8,131 23,134 29,528
Provision for Income Taxes 9 3,099 9,022 11,664
-------- -------- -------- --------
NET INCOME $ 14 $ 5,032 $ 14,112 $ 17,864
======== ======== ======== ========
Net Income Per Common Share (Note 5)
Basic $ (0.02) $ 0.49 $ 1.40 $ 1.74
======== ======== ======== ========
Diluted $ (0.02) $ 0.45 $ 1.32 $ 1.62
======== ======== ======== ========
Dividends per Common Share $ 0.1500 $ 0.1375 $ 0.4500 $ 0.4125
======== ======== ======== ========
Average Common Shares Outstanding 9,560 9,881 9,619 9,861
======== ======== ======== ========
</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, 1999 and 1998
Unaudited
<TABLE>
<CAPTION>
(Dollars In Thousands) 9/30/99 9/30/98
-------- --------
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 14,112 $ 17,864
Depreciation and amortization 30,142 28,189
Deferred revenue recognition (4,411) (3,244)
Customer prepayments 0 800
Deferred income taxes (1,005) 2,261
Environmental and legal liabilities (1,488) (2,226)
Other non-cash items 288 (527)
Changes in Working Capital:
Receivables, net (22,429) (7,066)
Inventories 1,818 399
Accounts payable and accrued liabilities 18,843 10,409
Other (233) 1,404
-------- --------
Net Cash Provided by Operating Activities 35,637 48,263
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (24,877) (30,038)
Investment in acquisitions 0 (19,695)
Other non-current assets (631) 1,597
-------- --------
Net Cash Used for Investing Activities (25,508) (48,136)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 15,400 12,390
Other debt borrowings 0 35
Other debt repayments (10,643) (5,714)
Purchase of treasury stock, net (7,060) (1,680)
Dividends paid (4,972) (4,749)
Stock option excercises 508 1,579
Other non-cash items 290 (525)
-------- --------
Net Cash Provided by (Used for) Financing and Other Related Activities (6,477) 1,336
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,652 1,463
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 983 5,507
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4,635 $ 6,970
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 5,300 $ 4,995
Income taxes $ 10,249 $ 8,047
</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, 1999 and December 31, 1998
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-------------------------------------------
The condensed consolidated financial statements included herein have been
prepared by the company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate and make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report to Stockholders and the Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1998. In the
opinion of management all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of Stepan Company as of September 30, 1999, 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.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in Thousands) 9/30/99 12/31/98
------- ---------
Inventories valued primarily on LIFO basis -
Finished products $31,112 $33,444
Raw materials 19,566 19,052
------- -------
Total inventories $50,678 $52,496
======= =======
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$10,120,000 and $10,000,000 higher than reported at September 30, 1999, and
December 31, 1998, respectively.
3. CONTINGENCIES
-------------
There are a variety of legal proceedings pending 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
<PAGE>
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 $18.7 million to $39.6 million at September 30, 1999. At
September 30, 1999, the company's reserve was $27.3 million for legal and
environmental matters compared to $17.6 million at December 31, 1998.
For certain sites, estimates cannot be made of the total costs of
compliance, or the company's share of such costs; accordingly, the company
is unable to predict the effect thereof on future results of operations. In
the event of one or more adverse determinations in any annual or interim
period, the impact on results of operations for those periods could be
material. However, based upon the company's present belief as to its
relative involvement at these sites, other viable entities'
responsibilities for cleanup and the extended period over which any costs
would be incurred, the company believes that these matters will not have a
material effect on the company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings, in the 1998 Form 10-K
Annual Report and in other filings of the company with the Securities and
Exchange Commission, which are available upon request from the company.
4. LEGAL SETTLEMENT
----------------
On October 21, 1999, the company reached an agreement in principal to
settle a lawsuit in New Jersey, alleging possible personal injuries related
to environmental claims. Final settlement is scheduled to occur on
December 1, 1999. All terms of the settlement are confidential pursuant to
a court order. As a result of this settlement, the company recorded a
third quarter $10.3 million pre-tax, or $6.3 million after-tax charge, to
earnings ($0.59 per share diluted, quarter and year-to-date). The amount
is an estimate and is subject to change based on the final settlement. The
charge was net of insurance recoveries and previously recorded reserves and
was included in administrative expenses.
<PAGE>
5. EARNINGS PER SHARE
------------------
Below is the computation of basic and diluted earnings per share for the
three and nine months ended September 30, 1999 and 1998.
<TABLE>
<CAPTION>
(In Thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30
---------------------- ----------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------- ------- ------- -------
Computation of Basic Earnings per Share
- ---------------------------------------
Net income $ 14 $ 5,032 $14,112 $17,864
Deduct dividends on preferred stock/2/ 211 0 0 0
------- ------- ------- -------
Income applicable to common stock $ (197) $ 5,032 $14,112 $17,864
======= ======= ======= =======
Weighted-average number of shares outstanding 9,560 9,881 9,619 9,861
Basic earnings per share $ (0.02) $ 0.49 $ 1.40 $ 1.74
======= ======= ======= =======
Computation of Diluted Earnings per Share
- -----------------------------------------
Net Income $ 14 $ 5,032 $14,112 $17,864
Deduct dividends on preferred stock(a) 211 0 0 0
------- ------- ------- -------
Income applicable to common stock $ (197) $ 5,032 $14,112 $17,864
======= ======= ======= =======
Weighted-average number of shares outstanding 9,560 9,881 9,619 9,861
Add net shares issuable from assumed exercise of
options (under treasury stock method) 321 491 330 456
Add weighted-average shares issuable from assumed
conversion of convertible preferred stock(a) 0 743 722 744
------- ------- ------- -------
Shares applicable to diluted earnings 9,881 11,115 10,671 11,061
======= ======= ======= =======
Diluted earnings per share $ (0.02) $ 0.45 $ 1.32 $ 1.62
======= ======= ======= =======
</TABLE>
(a) The assumed conversion of convertible preferred stock is antidilutive
for the three months ended September 30, 1999, and, accordingly, is
excluded from the diluted earnings per share calculation for that
period.
6. COMPREHENSIVE INCOME
--------------------
Below is the company's comprehensive income for the three and nine months
ended September 30, 1999 and 1998:
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months Ended Nine Months Ended
September 30 September 30
------------------ ----------------------
1999 1998 1999 1998
----- ------ ------- -------
<S> <C> <C> <C> <C>
Net income $ 14 $5,032 $14,112 $17,864
Other comprehensive income:
Foreign currency translation adjustments 177 199 (1,038) (1,574)
----- ------ ------- -------
Comprehensive income $ 191 $5,231 $13,074 $16,290
===== ====== ======= =======
</TABLE>
<PAGE>
7. SEGMENT REPORTING
-----------------
In 1998, the company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS
No. 131), effective for the periods beginning after December 15, 1997.
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Financial results of Stepan Company's operating
segments for the quarters and nine months ended September 30, 1999 and 1998
are summarized below:
<TABLE>
<CAPTION>
(Dollars in Thousands) Specialty Segment
Surfactants Polymers Products Totals
-------------- ------------- ----------- ----------
<S> <C> <C> <C> <C>
For the quarter ended September 30, 1999
- -------------------------------------------------
Net sales $130,399 $31,599 $ 4,934 $166,932
Operating income 10,569 6,182 615 17,366
For the quarter ended September 30, 1998
- -------------------------------------------------
Net sales $116,370 $33,198 $ 4,566 $154,134
Operating income 7,925 6,459 260 14,644
For nine months ended September 30, 1999
- -------------------------------------------------
Net sales $393,005 $10,980 $13,667 $497,652
Operating income 38,494 17,584 1,769 57,847
For nine months ended September 30, 1998
- -------------------------------------------------
Net sales $356,530 $88,600 $14,901 $460,031
Operating income 33,269 15,303 2,695 51,267
</TABLE>
Below are reconciliations of segment operating income to consolidated
income before income taxes:
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months Ended Nine Months Ended
--------------------------- ----------------------------
September 30 September 30
--------------------------- ----------------------------
<S> <C> <C> <C> <C>
1999 1998 1999 1998
------------ ------------- ------------ --------------
Operating income segment totals $ 17,366 $14,644 $ 57,847 $ 51,267
Unallocated corporate expenses (a) (15,738) (4,793) (29,067) (16,435)
Interest expense (2,052) (1,853) (6,320) (5,529)
Income from equity in joint ventures 447 133 674 225
-------- ------- -------- --------
Consolidated income before income taxes $ 23 $ 8,131 $ 23,134 $ 29,528
======== ======= ======== ========
</TABLE>
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to evaluate
segment performance. Administrative expenses include $10.3 million for a
legal settlement. See note 4.
<PAGE>
8. AUTHORIZED COMMON SHARES
------------------------
On May 11, 1999, shareholders approved an amendment to the company's
Certificate of Incorporation which increased the number of authorized
shares of Common Stock, par value $1 per share, from 15,000,000 shares to
30,000,000 shares.
9. SOFTWARE DEVELOPMENT COSTS
--------------------------
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 98-1, "Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use". SOP 98-1
provides guidance on accounting for costs related to obtaining or
developing internal-use software. The company adopted SOP 98-1 in 1999.
The adoption does not have a material impact on the company's operating
results or financial position.
<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 CAPITAL RESOURCES
- -------------------------------
For the first nine months of 1999, net cash from operations totaled $35.6
million, down by $12.6 million compared to the same period in 1998. Net income
decreased by $3.8 million while depreciation and amortization and other non-cash
income add-backs were down by a total of $1.7 million. Working capital amounted
to a cash use of $2.0 million for the current year period compared to a $5.1
million source for the same period in 1998. Accounts receivable increased by
$22.4 million since December 31, 1998, due mainly to increased sales combined
with higher non-trade receivables. Accounts payable and accrued liabilities
were up by $18.8 million for the year-to-date due to accrued legal expenses as
well as higher trade payables.
Capital expenditures totaled $24.9 million for the first three quarters of 1999,
compared to $30.0 million in 1998. Total current-year capital expenditures are
expected to be lower than in 1998.
Since December 31, 1998, total company debt has increased by $4.8 million, to
$119.3 million. As of September 30, 1999, the ratio of long-term debt to long-
term debt plus shareholders' equity was 42.7 percent compared to 42.1 percent as
of last year end.
The company maintains contractual relationships with its domestic banks that
provide for revolving credit which may be drawn upon as needed for general
corporate purposes. This credit facility was amended on March 12, 1999, to
increase the total amount of the commitment from $45 million to $60 million.
Other terms of the agreement remained unchanged.
The company also meets short-term liquidity requirements through uncommitted
bank lines of credit. The company's foreign subsidiaries maintain committed and
uncommitted bank lines of credit in their respective countries to meet working
capital requirements as well as to fund capital expenditure programs and
acquisitions.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
There have been no material changes in the company's market risks since December
31, 1998.
<PAGE>
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1999 and 1998
- ----------------------------------------------
Net income for the third quarter declined to $14.0 thousand ($0.02 loss per
share diluted) from $5.0 million ($0.45 per share diluted) for the same period
in 1998. The third quarter results included a $6.3 million after-tax ($10.3
million pre-tax) legal charge relating to an agreement in principal to settle a
lawsuit. See further discussion of this matter in the legal proceedings section
of this filing. Net sales rose eight percent to $166.9 million from $154.1
million reported a year ago. Net sales by segment were:
(Dollars in Thousands) Three Months
Ended September 30
------------------------------------
1999 1998 % Change
-------- -------- --------
Net Sales:
Surfactants $130,399 $116,370 +12%
Polymers 31,599 33,198 -5%
Specialty Products 4,934 4,566 +8%
-------- --------
Total $166,932 $154,134 +8%
======== ========
Surfactants net sales increased $14.0 million, or 12 percent, from $116.4
million in the third quarter of 1998 to $130.4 million in the third quarter of
1999. The increase was primarily due to a nine percent growth in sales volume.
Domestic operations, which accounted for 75 percent of total surfactant
revenues, reported net sales that were $6.0 million, or seven percent, higher
than a year ago. The rise was mainly due to a five percent growth in sales
volume. The volume increase was due to higher demand for the company's personal
care products. Foreign operations posted an $8.0 million, or 33 percent,
increase in net sales between quarters. Stepan Mexico posted an 85 percent rise
in net sales on higher sales volume and average selling prices. The fourth
quarter 1998 acquisition of the anionic and cationic surfactant business from
Boehme Filatex Canada, Inc. contributed to a 20 percent climb in net sales for
Stepan Canada. Stepan Europe's net sales increased 25 percent on a 36 percent
increase in sales volume, which more than offset a drop in average selling
prices. There was no material exchange rate fluctuation impact on net sales.
Surfactants gross profit increased 14 percent from $17.3 million for the third
quarter in 1998 to $19.7 million for the same period in 1999. Gross profit for
domestic operations rose 13 percent due to a five percent increase in sales
volume and to income of $1.3 million related to a contract settlement. The 25
percent rise in sales volume for foreign surfactants resulted in a $0.6 million,
or 20 percent, increase in foreign surfactants earnings. The growth in sales
volume was somewhat tempered by weaker margins.
<PAGE>
Polymers net sales decreased five percent between quarters from $33.2 million in
1998 to $31.6 million in 1999. Sales volume fell four percent. Domestic
polyurethane polyols, which accounted for 47 percent of net sales, reported a 14
percent decrease in revenue between quarters due to a 14 percent decline in
sales volume. Net sales of polyurethane systems dropped five percent based on a
six percent decrease in sales volume. Despite flat sales volume, net sales of
phthalic anhydride (PA) increased six percent due to a rise in average selling
prices. The increase of average selling prices was due to higher raw material
cost and change in customer mix. Foreign polymers reported a $0.8 million, or
72 percent, increase in net sales based on higher sales volume.
Polymers gross profit declined three percent from $7.9 million in 1998 to $7.7
million in 1999. The four percent drop in sales volume accounted for most of
the decline. Globally, polyurethane polyols reported a four percent drop in
gross profit. A decline in sales volume led to the decrease. PA gross profit
declined from quarter to quarter due to weaker margins and flat sales volume.
Polyurethane systems reported a 20 percent increase in gross profit based on
increased margins. A favorable product mix contributed to the improvement.
Specialty products net sales for the quarter was $4.9 million, up $0.4 million,
or eight percent, from a year ago. Gross profit was up 42 percent from $0.6
million in 1998 to $0.9 million in 1999. A shift to a more profitable product
mix accounted for the increase.
Operating expenses increased $10.6 million, or 67 percent, from quarter to
quarter. Administrative expenses rose by $9.8 million as a result of the $10.3
million legal charge noted earlier. Reimbursement of $0.8 million of certain
expenses from the company's Philippine joint venture partially offset the
increase in administrative expense. Marketing and research and development
expenses increased four and 14 percent, respectively, due to higher payroll
expense.
Interest expenses increased 11 percent due to higher levels of debt.
Nine Months Ended September 30, 1999 and 1998
- ---------------------------------------------
Net income for the first nine months ended September 30, 1999, was $14.1
million, or $1.32 per share diluted, compared to $17.9 million, or $1.62 per
share diluted for the same period in 1998. Annual results included a $6.3
million after-tax ($10.3 million pre-tax) charge relating to an agreement in
principal to settle a lawsuit. Net sales increased eight percent to $497.7
million from $460.0 million reported last year. Net sales by segment were:
(Dollars in Thousands) Nine Months
Ended September 30
-------------------------------------
1999 1998 % Change
-------- -------- --------
Net Sales:
Surfactants $393,005 $356,530 +10%
Polymers 90,980 88,600 +3%
Specialty Products 13,667 14,901 -8%
-------- --------
Total $497,652 $460,031 +8%
======== ========
<PAGE>
Surfactants net sales increased $36.5 million, or ten percent, for the first
nine months of 1999 over those of a year ago. Domestic operations, which
accounted for 77 percent of total surfactant revenue, posted a $17.6 million, or
six percent, increase due to a four percent growth of sales volume. The volume
increased due to higher demand for personal care products. Foreign surfactants
net sales climbed $18.9 million, or 26 percent, from a year ago based on a 23
percent increase in sales volume. Stepan Europe and Stepan Canada reported 15
and 19 percent increases in net sales based on a 25 and a 20 percent growth in
sales volumes, respectively. Canada benefited from the fourth quarter 1998
acquisition of the anionic and cationic surfactant business from Boehme Filatex
Canada, Inc. Stepan Mexico's net sales increased 54 percent on a 39 percent
rise in average selling prices and an 11 percent growth of sales volume.
Mexico's increase was largely due to a major customer switching from consigning
raw material and paying a processing fee to buying finished goods inclusive of
raw material costs.
Surfactants gross profit was up $4.7 million, or eight percent, between years
reaching $64.6 million in 1999. Domestic surfactants gross profit increased
seven percent due to a four percent increase in sales volume and to the second
quarter recognition of $1.4 million of previously deferred revenue and third
quarter recognition of $1.3 million related to a contract settlement. Foreign
operations gross profit grew 11 percent. Sales volume growth, partially offset
by lower margins, led to the increase.
Polymers net sales for the first nine months were $91.0 million, up $2.4
million, or three percent, in comparison with $88.6 million reported a year ago.
Sales volume rose six percent between years. Globally, polyurethane polyols
accounted for most of the growth with a gain in net sales of $3.1 million due to
a 10 percent rise in sales volume. Polyurethane systems reported an eight
percent increase in net sales based on improved sales volume. PA reported a six
percent decrease in net sales based on reduced average selling prices. Lower
raw material cost, competitive pressure on prices and a change in customer mix
caused the average price decline.
Polymers gross profit increased 14 percent to $22.3 million in 1999 from $19.6
million in 1998. Polyurethane polyols gross profit increased 25 percent due to
improved sales volume and margins. Polyurethane systems gross profit grew 17
percent on higher margins and sales volume. Competitive environment and a
change in customer mix led to lower PA margins which caused a 17 percent drop in
profit.
Specialty products net sales for the first nine months were $13.7 million, down
eight percent from $14.9 million a year ago. Gross profit was $2.6 million, a
drop of 32 percent from $3.8 million in 1998. A decrease in sales volume led to
the net sales and gross profit declines.
Operating expenses increased $12.3 million, or 25 percent, between years.
Administrative expenses climbed 69 percent due to the previously noted $10.3
million charge related to an agreement in principal to settle a lawsuit.
Research and development expenses rose six percent due to higher payroll cost.
Interest expenses rose 14 percent due to higher level of debt.
<PAGE>
LEGAL AND ENVIRONMENTAL MATTERS
- --------------------------------
In an action entitled Gilberg v. Stepan et al. now known as Accurso v. Stepan et
al. (CA 98-139 Middlesex County, New Jersey), the company has reached a
preliminary agreement with plaintiffs' counsels for the 550 plaintiffs in this
mass tort action. Final settlement is scheduled to occur on December 1, 1999.
All terms of the settlement are confidential pursuant to a court order. As a
result of this settlement, the company recorded a $6.3 million dollar after-tax
charge to earnings.
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. Company expenditures for capital
projects related to the environment should approximate $3.5 million to $4.5
million for 1999. These projects are capitalized and typically depreciated over
10 years. Recurring costs associated with the operation and maintenance of
facilities for waste treatment and disposal and managing environmental
compliance in ongoing operations at our manufacturing locations were $5.5
million for the first nine months of 1999.
The company has been named by the government as a potentially responsible party
at 16 waste disposal sites where cleanup costs have been or may be incurred
under the federal Comprehensive Environmental Response, Compensation and
Liability Act and similar state statutes. In addition, damages are being
claimed against the company in general liability actions for alleged personal
injury or property damage in the case of some disposal and plant sites. The
company believes that it has made adequate provisions for the costs it may incur
with respect to these sites. The company has estimated a range of possible
environmental and legal losses from $18.7 million to $39.6 million at September
30, 1999. At September 30, 1999, the company's reserve was $27.3 million for
legal and environmental matters compared to $17.6 million at December 31, 1998.
During the first nine months of 1999, expenditures related to legal and
environmental matters approximated $3.4 million. For certain sites, estimates
cannot be made of the total costs of compliance or the company's share of such
costs; accordingly, the company is unable to predict the effect thereof on
future results of operations. In the event of one or more adverse
determinations in any annual or interim period, the impact on results of
operations for those periods could be material. However, based upon the
company's present belief as to its relative involvement at these sites, other
viable entities' responsibilities for cleanup and the extended period over which
any costs would be incurred, the company believes that these matters will not
have a material effect on the company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings, in the 1998 Form 10-K Annual
Report, third quarter 1999 Form 10-Q, Part II Item 1, Legal Proceedings, and in
other filings of the company with the Securities and Exchange Commission, which
are available upon request from the company.
<PAGE>
YEAR 2000 READINESS DISCLOSURE
- ------------------------------
The Year 2000 issue is a result of computer systems that utilize two digits,
rather than four, to represent a given year. Computer systems used by the
company and its business partners that have date-sensitive processing may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or inaccurate calculation that may interrupt
normal business operations. The company has established a steering team to
oversee all efforts and is addressing Year 2000 compliance for 3 major areas:
Information Technology ("IT") systems, non-"IT" systems and third-party
relationships. The project plan involves 3 phases: inventory and assessment,
remediation and testing, and implementation.
Implementation of Year 2000 compliant upgrades of "IT" systems has been
completed.
The non-"IT" systems are comprised of manufacturing process control, telephone,
security, laboratory and other embedded chip systems. Implementation of
approximately 99 percent of these systems are complete and implementation of the
remaining non-"IT" systems are expected to be complete by the end of November,
1999.
The company has initiated formal communications with suppliers and service
providers to determine the extent of their efforts in resolving Year 2000
issues. The assessment phase, which includes evaluation of responses and
meetings with significant suppliers, is essentially complete and discussions
with suppliers will continue through the end of the year. Contingency plans
will be developed if responses indicate a probability of non-compliance with
Year 2000 requirements.
Costs for the Year 2000 project are currently estimated to be $2.6 million with
$2.3 million expended to date. Of the total estimated cost, $1.6 million will
be capitalized and the remaining will be expensed as incurred. These costs are
not material to the overall IT budget and no projects have been deferred due to
Year 2000 efforts. The company's actual cost to achieve Year 2000 compliance
could differ significantly from amounts disclosed above due to new issues which
have not yet been identified.
The company projects that the "most reasonable likely worst case scenario" is
the temporary interruption of public utilities during the transition to the new
year. Contingency planning for year end transition management has begun.
Additional staff will be on site at each location and a central communication
center will be established to coordinate Year 2000 rollover efforts.
Although the company is in the process of implementing its Year 2000 project
plan, there can be no assurance that all phases of the plan will be completed
prior to the Year 2000 or that if completed prior to the Year 2000 that
disruption will not occur. In addition, there can be no assurance that the
company's customers, suppliers and service providers will successfully resolve
their own Year 2000 issues in a manner which would not cause material impact to
the company's operations and financial results.
<PAGE>
OTHER
- -----
Except for the historical information contained herein, the matters discussed in
this document are forward looking statements that involve risks and
uncertainties. The results achieved this quarter are not necessarily an
indication of future prospects for the company. Actual results in future
quarters may differ materially. Potential risks and uncertainties include,
among others, fluctuations in the volume and timing of product orders, changes
in demand for the company's products, changes in technology, continued
competitive pressures in the marketplace, outcome of environmental
contingencies, availability of raw materials, foreign currency fluctuations and
the general economic conditions.
<PAGE>
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
In an action entitled Gilberg v. Stepan et al. now known as Accurso v. Stepan et
al. (CA 98-139 Middlesex County, New Jersey), the company has reached a
preliminary agreement with plaintiffs' counsels for the 550 plaintiffs in this
mass tort action. Final settlement is scheduled to occur on December 1, 1999.
All terms of the settlement are confidential pursuant to a court order.
Reference is made to the company's Form 8-K filing dated October 22, 1999, where
it was stated that the company, as a result of this settlement, took a $6.3
million dollar after-tax charge to earnings as a result of this settlement.
Reference is made to USEPA v. Jerome Lightman (92 CV4710) (JVS) which involves
the Ewan and D'Imperio Superfund sites located in New Jersey and at which the
company has been named as a PRP. Trial on the company's issue of liability at
these sites is scheduled for December 13, 1999. Should the company lose, then
there would be a trial as to the company's allocated share for clean-up costs at
these sites. This latter trial would occur, if at all, in the first quarter of
2000. While the company believes it has adequate defenses to the issue of
liability, the company cannot at this time, indicate what its liability, if any,
will be at these sites but believes adequate recovery has been set in the event
it should lose at either or both sites. On a related matter, the company has
filed an Appeal to the United States Third Circuit Court of Appeals objecting to
the lodging of a Partial Consent Decree in favor of the United States
Government. Under the Partial Consent Decree, the Government recovered past
costs at the site from all PRPs including the company. The company paid its
assessed share but by objecting to the Partial Consent Decree, the company is
seeking to recover back the sums it paid.
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(27) Financial Data Schedule
(B) Reports on Form 8-K
A report on Form 8-K was filed on October 22, 1999, regarding the company's
earnings for the third quarter of 1999.
<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: November 23, 1999
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<PAGE>
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