UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q/A
Amendment No. 1
(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, 2002
( ) 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 July 31, 2002
------------------------------ ------------------------------------
Common Stock, $1 par value 8,862,425 Shares
Explanatory Note
This amendment to Form 10-Q is being filed to give effect to the restatement of
Stepan Company's condensed consolidated financial statements for the quarters
and six months ended June 30, 2002 and 2001, and the year ended December 31,
2001, as discussed in Note 3 to the Condensed Consolidated Financial Statements.
Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 2002 and December 31, 2001
(Dollars in thousands) Unaudited
2002 2001
As Restated* As Restated*
------------ ------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 3,073 $ 4,224
Receivables, net 118,432 103,190
Inventories (Note 4) 61,956 59,330
Deferred income taxes 8,479 8,810
Other current assets 7,206 5,233
------------ ------------
Total current assets 199,146 180,787
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Cost 682,655 666,117
Less: accumulated depreciation (476,395) (454,684)
------------ ------------
Property, plant and equipment, net 206,260 211,433
------------ ------------
LONG TERM INVESTMENTS 6,776 7,674
------------ ------------
GOODWILL, NET (Note 9) 6,187 6,100
------------ ------------
OTHER INTANGIBLE ASSETS, NET (Note 9) 12,578 13,293
------------ ------------
OTHER NON-CURRENT ASSETS 22,013 19,468
------------ ------------
Total assets $ 452,960 $ 438,755
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,644 $ 10,745
Accounts payable 63,529 62,410
Accrued liabilities 32,198 35,004
------------ ------------
Total current liabilities 105,371 108,159
------------ ------------
DEFERRED INCOME TAXES 30,345 28,603
------------ ------------
LONG-TERM DEBT, less current maturities 115,571 109,588
------------ ------------
DEFERRED COMPENSATION (Note 2) 17,899 16,653
------------ ------------
OTHER NON-CURRENT LIABILITIES 21,089 21,401
------------ ------------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative, voting without par value;
authorized 2,000,000 shares; issued 583,012 shares in 2002 and
583,252 shares in 2001 14,575 14,581
Common stock, $1 par value; authorized 30,000,000 shares;
issued 9,718,709 shares in 2002 and 9,604,003 shares in 2001 9,719 9,604
Additional paid-in capital 18,515 16,531
Accumulated other comprehensive loss (Note 7) (16,145) (15,870)
Retained earnings (approximately $34,750 unrestricted in 2002 and $48,987 in 2001) 153,053 144,658
Less: Treasury stock shares of 856,284 in 2002 and 782,232 shares in 2001, at cost (17,032) (15,153)
------------ ------------
Stockholders' equity 162,685 154,351
------------ ------------
Total liabilities and stockholders' equity $ 452,960 $ 438,755
============ ============
* See Note 3 for explanation of restatement.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 2002 and 2001
Unaudited
Three Months Ended Six Months Ended
(In thousands, except per share amounts) June 30 June 30
---------------------------- ----------------------------
2002 2001 2002 2001
As Restated* As Restated*
------------ ------------
NET SALES $ 188,795 $ 182,767 $ 369,951 $ 359,624
Cost of Sales 153,562 153,066 305,749 304,022
------------ ------------ ------------ ------------
Gross Profit 35,233 29,701 64,202 55,602
------------ ------------ ------------ ------------
Operating Expenses:
Marketing 6,746 6,005 12,877 12,246
Administrative 9,166 7,821 18,569 13,936
Research, development and technical services 5,986 5,793 11,972 11,424
------------ ------------ ------------ ------------
21,898 19,619 43,418 37,606
------------ ------------ ------------ ------------
Operating Income 13,335 10,082 20,784 17,996
Other Income (Expense):
Interest, net (1,707) (1,757) (3,498) (3,662)
Income from equity joint venture 1,166 493 1,654 620
------------ ------------ ------------ ------------
(541) (1,264) (1,844) (3,042)
------------ ------------ ------------ ------------
Income Before Income Taxes 12,794 8,818 18,940 14,954
Provision for Income Taxes 4,577 3,391 6,913 5,817
------------ ------------ ------------ ------------
NET INCOME $ 8,217 $ 5,427 $ 12,027 $ 9,137
============ ============ ============ ============
Net Income Per Common Share (Note 6):
Basic $ 0.91 $ 0.59 $ 1.31 $ 0.99
============ ============ ============ ============
Diluted $ 0.84 $ 0.56 $ 1.23 $ 0.94
============ ============ ============ ============
Shares Used to Compute Net Income Per
Common Share (Note 6):
Basic 8,859 8,850 8,847 8,839
============ ============ ============ ============
Diluted 9,803 9,746 9,772 9,743
============ ============ ============ ============
Dividends per Common Share $ 0.1825 $ 0.1750 $ 0.3650 $ 0.3500
============ ============ ============ ============
* See Note 3 for explanation of restatement.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2002 and 2001
Unaudited
(Dollars in thousands) 2002 2001
As Restated* As Restated*
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 12,027 $ 9,137
Depreciation and amortization 20,505 19,791
Deferred revenue (229) (241)
Deferred income taxes 2,150 (334)
Environmental and legal liabilities (240) 930
Other non-cash items 727 2,465
Changes in working capital:
Receivables, net (15,242) (11,355)
Inventories (2,626) 2,805
Accounts payable and accrued liabilities (1,687) (10,376)
Other current assets (1,973) (804)
------------ ------------
Net Cash Provided by Operating Activities 13,412 12,018
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (14,695) (17,180)
Other non-current assets (19) (666)
------------ ------------
Net Cash Used for Investing Activities (14,714) (17,846)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving debt and notes payable to banks, net 500 16,300
Other debt borrowings 11,719 601
Other debt repayments (7,337) (7,255)
Purchase of treasury stock, net (1,879) (3,001)
Dividends paid (3,632) (3,497)
Stock option exercises 2,095 2,751
Other (147) (4)
------------ ------------
Net Cash Provided by Financing Activities 1,319 5,895
------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (1,168) (741)
------------ ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,151) (674)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 4,224 3,536
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,073 $ 2,862
============ ============
CASH PAID DURING THE PERIOD FOR:
Interest $ 3,890 $ 4,016
============ ============
Income taxes $ 3,655 $ 5,229
============ ============
* See Note 3 for explanation of restatement.
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these financial statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2002
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the Stepan Company (the "Company"), without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission
("SEC"). Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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. In the opinion of management all normal recurring
adjustments necessary to present fairly the condensed consolidated
financial position of the Company as of June 30, 2002, and the condensed
consolidated results of operations for the three and six months then ended
and cash flows for the six months then ended have been included.
2. DEFERRED COMPENSATION
The Company maintains deferred compensation plans. These plans allow
management to defer receipt of their bonuses and directors to defer receipt
of director fees until retirement or departure from the Company. The plans
allow the participant to choose to invest in either Stepan common stock or
a limited variety of mutual funds. These assets are owned by the Company
and subject to the claims of general creditors of the Company. These plans
are accounted for under the requirements of the consensus reached by the
Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board ("FASB") in issue No. 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned are Held in a Rabbi Trust and Invested".
A description of the Company's deferred compensation accounting policy
follows:
The deferred compensation liability to the participants who elect deferral
is recorded after the underlying compensation is earned, and recorded as
expense. The purchase of Stepan common shares for the plans is recorded as
a regular treasury stock purchase. The purchase of mutual funds is recorded
as long term investments. Fluctuations in the value of these assets are
recorded as adjustments to the deferred compensation liability and
compensation costs included in administrative expense. The dividends,
interest and capital gains from the mutual fund assets are recorded as
investment income and included in "Other Income" as interest expense, net
of investment income. Unrealized gains and losses resulting from market
fluctuations of the mutual funds are recorded as other comprehensive income
or expense in stockholders' equity.
3. RESTATEMENT
Subsequent to the issuance of its financial statements for the three month
period ended March 31, 2002, management of the Company determined that the
accounting treatment that had previously been afforded to the deferred
compensation arrangements entered into with its managers and directors was
not in accordance with the requirements of the consensus reached by the
EITF of the FASB in issue No. 97-14, "Accounting for Deferred Compensation
Arrangements Where Amounts Earned Are Held in a Rabbi Trust and Invested".
This consensus requires that assets and liabilities of the deferred
compensation plan be presented separately on the balance sheet; that
fluctuations in asset values should result in compensation expense or
income; and that, based on the categories of assets underlying the plan,
investment income and expense should be recorded in the income statement
and unrealized market appreciation should be reported as a component of
other comprehensive income and included in stockholders' equity.
Historically, the Company had recorded the assets and liabilities related
to the plans on a net basis when the awards were made and did not recognize
changes in asset value in income.
In addition, subsequent to the issuance of it's financial statements for
the periods ended June 30, 2002, the company determined that it had not
recorded approximately $3,429,000 in deferred income taxes related to the
deferred compensation plan.
As a result, the condensed consolidated financial statements for the three
and six months ended June 30, 2002 and 2001, and the year ended December
31, 2001, have been restated from the amounts previously reported. A
summary of the significant effects of the restatement is as follows:
As of June 30, 2002:
(Dollars in thousands) As
Previously
Reported Adjustments As Restated
---------- ----------- -----------
Assets
Deferred income taxes $ 10,353 $ (1,874) $ 8,479
Liabilities
Deferred income taxes $ 35,648 $ (5,303) $ 30,345
Stockholders' Equity
Retained earnings $ 149,624 $ 3,429 $ 153,053
As of December 31, 2001:
(Dollars in thousands) As
Previously
Reported Adjustments As Restated
----------- ----------- -----------
Assets
Deferred income taxes $ 10,684 $ (1,874) $ 8,810
Long term investments - 7,674 7,674
Liabilities
Deferred income taxes $ 35,040 $ (6,437) $ 28,603
Deferred compensation - current and long-term - 17,615 17,615
Stockholders' Equity
Additional paid-in capital $ 16,893 $ (362) $ 16,531
Accumulated other comprehensive loss (14,800) (1,070) (15,870)
Retained earnings 142,110 2,548 144,658
Treasury stock (8,659) (6,494) (15,153)
For the three and six month periods ended June 30, 2001:
Three Months Ended June 30, 2001 Six Months Ended June 30, 2001
-------------------------------------- ----------------------------------------
(In thousands, except per share As As
amounts) Previously As Previously As
Reported Adjustments Restated Reported Adjustments Restated
---------- ----------- -------- ---------- ----------- ---------
Net income $ 6,173 $ (746) $ 5,427 $ 9,801 $ (664) $ 9,137
Earnings per share:
Basic $ 0.65 $ (0.06) $ 0.59 $ 1.02 $ (0.03) $ 0.99
Diluted 0.61 (0.05) 0.56 0.97 (0.03) 0.94
Shares used to compute net income per common share:
Basic 9,264 (414) 8,850 9,253 (414) 8,839
Diluted 10,160 (414) 9,746 10,157 (414) 9,743
Other comprehensive income
(loss) $ 505 $ 263 $ 768 $ (1,006) $ (143) $ (1,149)
4. INVENTORIES
Inventories consist of following amounts:
(Dollars in thousands) June 30, 2002 December 31, 2001
------------- -----------------
Inventories valued primarily on LIFO basis -
Finished products $ 40,491 $ 33,932
Raw materials 21,465 25,398
------------- ---------==------
Total inventories $ 61,956 $ 59,330
============= =================
If the first-in, first-out (FIFO) inventory valuation method had been
used for all inventories, inventory balances would have been
approximately $6.6 million and $7.5 million higher than reported at
June 30, 2002, and December 31, 2001, respectively.
5. 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 (CERCLA)
and the Superfund amendments of 1986 ("Superfund"). 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, 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 $7.2 million to $34.3 million at
June 30, 2002. At June 30, 2002 and December 31, 2001, the Company's
reserve was $17.0 million for legal and environmental matters.
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. Following are summaries of the environmental proceedings
related to the Company's Maywood, New Jersey, and Ewan and D'Imperio
environmental sites:
Maywood, New Jersey, Site
The Company's site in Maywood, New Jersey and property formerly owned
by the Company adjacent to its current site, were listed on the
National Priorities List in September 1993 pursuant to the provisions
of the CERCLA because of certain alleged chemical contamination.
Pursuant to an Administrative Order on Consent entered into between the
United States Environmental Protection Agency (USEPA) and the Company
for property formerly owned by the Company, and the issuance of an
order by USEPA to the Company for property currently owned by the
Company, the Company completed a Remedial Investigation Feasibility
Study (RI/FS) in 1994. The Company submitted the Draft Final FS for
Soil and Source Areas (Operable Unit 1) in September 2002. In addition,
the Company has also submitted additional information regarding the
remediation, most recently in October 2002. Discussions between USEPA
and the Company are continuing. The Company is awaiting the issuance of
a Record of Decision (ROD) from USEPA relating to the currently owned
and formerly owned Company property and the proposed remediation. The
final ROD will be issued sometime after the public comment period.
In 1985, the Company entered into a Cooperative Agreement with the
United States of America represented by the Department of Energy
(Agreement). Pursuant to this Agreement, the Department of Energy (DOE)
took title to radiological contaminated materials and was to remediate,
at its expense, all radiological waste on the Company's property in
Maywood, New Jersey. The Maywood property (and portions of the
surrounding area) were remediated by the DOE under the Formerly
Utilized Sites Remedial Action Program, a federal program under which
the U.S. Government undertook to remediate properties which were used
to process radiological material for the U.S. Government. In 1997,
responsibility for this clean-up was transferred to the United States
Army Corps of Engineers (USACE). On January 29, 1999, the Company
received a copy of a USACE Report to Congress dated January 1998 in
which the USACE expressed their intention to evaluate, with the USEPA,
whether the Company and/or other parties might be responsible for cost
recovery or contribution claims related to the Maywood site. Subsequent
to the issuance of that report, the USACE advised the Company that it
had requested legal advice from the Department of Justice as to the
impact of the Agreement.
By letter dated July 28, 2000, the Department of Justice advised the
Company that the USACE and USEPA had referred to the Justice Department
claims against the Company for response costs incurred or to be
incurred by the USACE, USEPA and the DOE in connection with the Maywood
site and the Justice Department stated that the United States is
entitled to recovery of its response costs from the Company under
CERCLA. The letter referred to both radiological and non-radiological
hazardous waste at the Maywood site and stated that the United States
has incurred unreimbursed response costs to date of $138 million. Costs
associated with radiological waste at the Maywood site, which the
Company believes represent all but a small portion of the amount
referred to in the Justice Department letter, could be expected to
aggregate substantially in excess of that amount. In the letter, the
Justice Department invited the Company to discuss
settlement of the matter in order to avoid the need for litigation. The
Company believes that its liability, if any, for such costs has been
resolved by the aforesaid Agreement. Despite the fact that the Company
continues to believe that it has no liability to the United States for
such costs, discussions with the Justice Department are currently
ongoing to attempt to resolve this matter.
The Company believes it has adequate reserves for claims associated
with the Maywood site. However, depending on the results of the ongoing
discussions regarding the Maywood site, the final cost of the
remediation could differ from the current estimates.
Ewan and D'Imperio Site
The Company has been named as a potentially responsible party (PRP) in
the case USEPA v. Jerome Lightman (92 CV 4710 D. N. J.) which involves
the Ewan and D'Imperio Superfund Sites located in New Jersey. Trial on
the issue of the Company's liability at these sites was completed in
March 2000. The Company is awaiting a decision from the court. If the
Company is found liable at either site, a second trial as to the
Company's allocated share of clean-up costs at these sites will likely
be held in 2003. The Company believes it has adequate defenses to the
issue of liability. In the event of an unfavorable outcome related to
the issue of liability, the Company believes it has adequate reserves.
Lightman Drum Site
The Company received a Section 104(e) Request for Information from
USEPA dated March 21, 2000, regarding the Lightman Drum Company Site
located in Winslow Township, New Jersey. The Company responded to this
request on May 18, 2000. In addition, the Company received a Notice of
Potential Liability and Request to Perform RI/FS dated June 30, 2000,
from USEPA. The Company has decided that it will participate in the
performance of the RI/FS. However, based on the current information
known regarding this site, the Company is unable to predict what its
liability, if any, will be for this site.
6. EARNINGS PER SHARE
Below is the computation of basic and diluted earnings per share for the
three and six months ended June 30, 2002 and 2001.
(In thousands, except per share amounts) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Computation of Basic Earnings per Share
---------------------------------------
Net income $ 8,217 $ 5,427 $ 12,027 $ 9,137
Deduct dividends on preferred stock (200) (200) (402) (401)
-------- -------- -------- --------
Income applicable to common stock $ 8,017 $ 5,227 $ 11,625 $ 8,736
======== ======== ======== ========
Weighted-average number of common
shares outstanding 8,859 8,850 8,847 8,839
Basic earnings per share $ 0.91 $ 0.59 $ 1.31 $ 0.99
======== ======== ======== ========
Computation of Diluted Earnings per Share
-----------------------------------------
Net income $ 8,217 $ 5,427 $ 12,027 $ 9,137
Weighted-average number of common
shares outstanding 8,859 8,850 8,847 8,839
Add net shares issuable from assumed exercise
of options (under treasury stock method) 278 230 259 238
Add weighted-average shares issuable from
assumed conversion of convertible preferred
stock 666 666 666 666
-------- -------- -------- --------
Shares applicable to diluted earnings 9,803 9,746 9,772 9,743
======== ======== ======== ========
Diluted earnings per share $ 0.84 $ 0.56 $ 1.23 $ 0.94
======== ======== ======== ========
7. COMPREHENSIVE INCOME
Comprehensive income includes net income and all other non-owner changes in
equity that are not reported in net income. Below is the Company's
comprehensive income for the three and six months ended June 30, 2002 and
2001.
(Dollars in thousands) Three Months Ended Six Months Ended
June 30 June 30
-------------------- --------------------
2002 2001 2002 2001
-------- -------- -------- --------
Net income $ 8,217 $ 5,427 $ 12,027 $ 9,137
Other comprehensive income/(loss):
Foreign currency translation adjustments 1,156 505 (15) (1,006)
Unrealized gain/(loss) on securities (309) 263 (260) (143)
-------- -------- -------- --------
Comprehensive income $ 9,064 $ 6,195 $ 11,752 $ 7,988
======== ======== ======== ========
At June 30, 2002, the total accumulated other comprehensive loss of
$16,145,000 was comprised of $13,831,000 of foreign currency translation
adjustments, $1,330,000 of unrealized losses on securities and $984,000 of
minimum pension liability adjustments. At December 31, 2001, the total
accumulated other comprehensive loss of $15,870,000 included $13,816,000 of
foreign currency translation adjustments, $1,070,000 of unrealized losses
on securities and $984,000 of minimum pension liability adjustments.
8. SEGMENT REPORTING
The Company has three reportable segments: surfactants, polymers and
specialty products. There is no intersegment revenue and all intercompany
transactions are eliminated from segments' revenue. Financial results of
the Company's operating segments for the three and six months ended June
30, 2002 and 2001, are summarized below:
(Dollars in thousands) Specialty Segment
Surfactants Polymers Products Totals
----------- -------- -------- ------
For the quarter ended June 30, 2002
Net sales $150,880 $31,183 $ 6,732 $188,795
Operating income 14,690 4,241 3,208 22,139
For the quarter ended June 30, 2001
Net sales $140,408 $35,904 $ 6,455 $182,767
Operating income 10,435 5,770 2,203 18,408
For the six months ended June 30, 2002
Net sales $297,696 $60,050 $12,205 $369,951
Operating income 26,979 8,394 4,320 39,693
For the six months ended June 30, 2001
Net sales $280,786 $66,737 $12,101 $359,624
Operating income 20,351 9,692 3,183 33,226
Below are reconciliations of segment operating income to consolidated
income before income taxes:
Three Months Ended Six Months Ended
June 30 June 30
------------------ ---------------------
2002 2001 2002 2001
------- ------- ------- --------
Operating income segment totals $22,139 $18,408 $39,693 $ 33,226
Unallocated corporate expenses/(a)/ (8,804) (8,326) (18,909) (15,230)
Interest expense (1,707) (1,757) (3,498) (3,662)
Equity in earnings of joint venture 1,166 493 1,654 620
------- ------- ------- --------
Consolidated income before income taxes $12,794 $ 8,818 $18,940 $ 14,954
======= ======= ======= ========
/(a)/ Includes corporate administrative and corporate manufacturing
expenses, which are not included in segment operating income and not
used to evaluate segment performance.
9. GOODWILL AND OTHER INTANGIBLE ASSETS
On January 1, 2002, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 142, "Goodwill and Other Intangible Assets," which is
effective for fiscal years beginning after December 15, 2001. This standard
establishes new accounting and reporting requirements for goodwill and
intangible assets including no amortization of goodwill, separate
identification of certain identifiable intangible assets, and an annual
assessment for impairment of all goodwill and intangible assets. The
following is a reconciliation of the Company's reported net income, basic
earnings per share and diluted earnings per share to the amounts that would
have been reported had the new accounting rules been in effect at January
1, 2001:
Three Months Ended Six Months Ended
(In thousands, except per share data) June 30 June 30
----------------------- ------------------------
2002 2001 2002 2001
---------- ----------- ---------- -----------
Reported net income $ 8,217 $ 5,427 $ 12,027 $ 9,137
Add back: Goodwill amortization - 115 - 226
---------- ----------- ---------- -----------
Adjusted net income $ 8,217 $ 5,542 $ 12,027 $ 9,363
========== =========== ========== ===========
Basic earnings per share:
Reported basic earnings per share $ 0.91 $ 0.59 $ 1.31 $ 0.99
Add back: Goodwill amortization - 0.01 - 0.03
--------- ---------- --------- ----------
Adjusted basic earnings per share $ 0.91 $ 0.60 $ 1.31 $ 1.02
========= ========== ========= ==========
Diluted earnings per share:
Reported diluted earnings per share $ 0.84 $ 0.56 $ 1.23 $ 0.94
Add back: Goodwill amortization - 0.01 - 0.02
--------- ---------- --------- ----------
Adjusted diluted earnings per share $ 0.84 $ 0.57 $ 1.23 $ 0.96
========= ========== ========= ==========
The Company's net carrying values of goodwill were $6,187,000 and
$6,100,000 as of June 30, 2002 and December 31, 2001, respectively. The
entire amount of goodwill relates to the surfactants' reporting unit.
SFAS No. 142 required the Company to complete a transition goodwill
impairment test by comparing the fair value of the reporting unit with its
net carrying value, including goodwill. The Company has completed this test
and the results of that test indicated that goodwill was not impaired at
January 1, 2002.
The following table reflects the components of all other intangible assets,
which have finite lives, as of June 30, 2002 and December 31, 2001.
(In thousands) Gross Carrying Amount Accumulated Amortization
----------------------------- ------------------------------
June 30, 2002 Dec. 31, 2001 June 30, 2002 Dec. 31, 2001
------------- ------------- ------------- -------------
Other Intangible Assets:
Patents $ 2,000 $ 2,000 $ 533 $ 466
Trademarks, customer lists, know-how 17,095 17,095 5,984 5,386
Non-compete Agreements 1,000 1,000 1,000 950
------------- ------------- ------------- -------------
Total $ 20,095 $ 20,095 $ 7,517 $ 6,802
============= ============= ============= =============
Aggregate amortization expenses for the three and six months ended June 30,
2002, were $332,000 and $715,000, respectively. Aggregate amortization
expenses for the three and six months ended June 30, 2001, were $402,000
and $805,000, respectively. Amortization expense is recorded based on
useful lives ranging from 5 to 15 years. Estimated amortization expense for
identifiable intangibles assets, other than goodwill, for each of the
succeeding fiscal years are as follows:
(In thousands)
For year ending 12/31/03 $1,330
For year ending 12/31/04 $1,330
For year ending 12/31/05 $1,330
For year ending 12/31/06 $1,330
For year ending 12/31/07 $1,086
10. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations,"
effective for fiscal years beginning after December 15, 2001. It requires
the use of the purchase method of accounting for all transactions initiated
after June 30, 2001. The Company applied the provisions of SFAS No. 141 to
the September 2001 acquisition of Manro Performance Chemicals Limited. No
acquisitions took place during the first six months of 2002.
In April 2001, the EITF released Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's
Products." Issue No. 00-25 provides guidance regarding the reporting of
consideration given by a vendor to a reseller of the vendor's products.
This issue requires certain considerations from vendor to a reseller of the
vendor's products be viewed: (a) as a reduction of the selling prices of
the vendor's products and, therefore, be recorded as a reduction of revenue
when recognized in the vendor's income statement, or (b) as a cost incurred
by the vendor for assets or services received from the reseller and,
therefore, be recorded as a cost or an expense when recognized in the
vendor's income statement. Issue No. 00-25 is effective
for fiscal years beginning after December 15, 2001. The Company's
accounting policies were consistent with the guidance provided in this
issue. Therefore, the adoption of Issue No.00-25 did not have an impact on
the Company's financial position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143, which is effective for fiscal years
beginning after June 15, 2002, supersedes previous guidance for financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
statement applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction,
development and/or the normal operation of a long-lived asset. The Company
is evaluating the effect of this standard on its financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". This statement addresses
financial accounting and reporting for the impairment or disposal of
long-lived assets and supersedes SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." SFAS No. 144 was effective January 1, 2002. Adoption of this standard
did not have an impact on the Company's financial position or results of
operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The standard requires
companies to recognize costs associated with exit or disposal activities
when they are incurred rather than at the date of a commitment to an exit
or disposal plan. SFAS No. 146 is to be applied prospectively to exit or
disposal activities initiated after December 31, 2002. Based on the
information currently available, adoption of this standard is not expected
to have an impact on the Company's financial position or results of
operations.
11. NEW CREDIT AND BANK TERM LOANS
During March 2002, the Company's Stepan Europe subsidiary completed an
$11.7 million (denominated in euros) bank term loan as long-term financing
for a portion of the Manro acquisition. This loan will mature in seven
years and bears interest at rates set quarterly, based on 90-day EURIBOR.
The U.S. parent does not guaranty this loan.
In May 2002, the Company replaced its existing U.S. bank revolver with a
new loan agreement. The new revolver will provide up to $60 million of
committed funding for general corporate purposes and may be drawn upon as
needed through May 2, 2007. This arrangement provides for borrowings at
various interest rates based, at the Company's option, on LIBOR plus a
margin or at the bank's prime rate.
12. RECLASSIFICATIONS
Certain amounts in the 2001 financial statements have been reclassified to
conform to the 2002 presentation.
Item 2 - Management's Discussion and Analysis of Financial Conditions and
Results of Operations
As discussed in Note 3 to the unaudited condensed consolidated financial
statements, the Company has restated its financial statements for the three and
six months periods ended June 30, 2002 and 2001 and for the year ended December
31, 2001. The accompanying Management's Discussion and Analysis gives effect to
the restatement.
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
CRITICAL ACCOUNTING POLICIES
Estimates
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States of America. Preparing our financial
statements in accordance with generally accepted accounting principles requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Critical areas where estimates are required are
noted below:
Environmental Liabilities:
It is the Company's accounting policy to record environmental liabilities 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, the minimum is accrued. Some
of the factors on which the Company bases its estimates include information
provided by feasibility studies, potentially responsible party negotiations and
the development of remedial action plans.
Reserves for Doubtful Accounts:
Accounts receivable are reported net of reserves for doubtful accounts. The
Company determines the reserve requirement based upon the estimated
collectibility of specific delinquent accounts, the Company's historical loss
experience and the level of non-delinquent accounts receivable.
Reserves for Obsolete and Slow Moving Inventories:
The Company provides reserves for obsolete and slow moving inventory items. The
reserve requirement is estimated based upon a review of specific inventory items
that are identified as slow moving and consideration of potential salvage value
and disposal costs.
Because the foregoing liabilities and reserves are recorded based on estimates,
actual amounts could differ from these estimates.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers. The Company records
shipping and handling billed to a customer in a sales transaction as revenue.
Costs incurred for shipping and handling are recorded in cost of sales. Volume
discounts due customers are recognized as earned and reported as reductions of
revenue in the statement of income.
Deferred Compensation
The Company maintains deferred compensation plans. These plans allow management
to defer receipt of their bonuses and directors to defer receipt of director
fees until retirement or departure from the Company. The plans allow the
participant to choose to invest in either Stepan common stock or a limited
variety of mutual funds. These assets are owned by the Company and subject to
the claims of general creditors of the Company. Beginning in 2002, these plans
are accounted for under the requirements of the consensus reached by the
Emerging Issues Task Force ("EITF") of the Financial Accounting Standards Board
("FASB") in issue No. 97-14, "Accounting for Deferred Compensation Arrangements
Where Amounts Earned are Held in a Rabbi Trust and Invested". As described in
Note 3, prior period financial statements have been restated to correctly
present the accounting for the Company's deferred compensation plans in
accordance with EITF No. 97-14. A description of the Company's deferred
compensation accounting policy follows:
The deferred compensation liability to the participants who elect deferral is
recorded after the underlying compensation is earned, and recorded as expense.
The purchase of Stepan common shares for the plans is recorded as a regular
treasury stock purchase. The purchase of mutual funds is recorded as long term
investments. Fluctuations in the value of these assets are recorded as
adjustments to the deferred compensation liability and compensation costs
included in administrative expense. The dividends, interest and capital gains
from the mutual fund assets are recorded as investment income and included in
"Other Income" as interest expense, net of investment income. Unrealized gains
and losses resulting from market fluctuations of the mutual funds are recorded
as other comprehensive income or expense in stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operating activities for the first six months of 2002 totaled
$13.4 million, an increase of $1.4 million compared to $12.0 million for the
same period in 2001. A $2.9 million increase in net income during the period was
partially offset by increased working capital. For the first six months of 2002,
seasonal working capital demands consumed $21.5 million compared to a use of
$19.7 million for the same period last year. Working capital changes for the
current year period include: accounts receivable up by $15.2 million,
inventories up by $2.6 million, other current assets up by $2.0 million and
accounts payable and accrued liabilities down by $1.7 million.
Capital spending totaled $14.7 million for the first half of 2002, compared to
$17.2 million for the same period in 2001. Expenditures for property, plant and
equipment are expected to be higher for the second half of 2002.
Consolidated debt increased by $4.9 million during the first six months of 2002,
from $120.3 million to $125.2 million. As of June 30, 2002, the ratio of
long-term debt to long-term debt plus shareholders' equity was 41.5 percent,
unchanged from December 31, 2001.
The Company maintains contractual relationships with its domestic banks that
provide for revolving credit of up to $60 million, which may be drawn upon as
needed for general corporate purposes through May 2, 2007 under a new revolving
credit agreement dated May 3, 2002. The Company also meets short-term liquidity
requirements through uncommitted domestic bank lines of credit.
On May 3, 2002 the Company signed a new 5-year revolving credit agreement with
three U.S. banks, including Bank One, N.A, Harris Trust and Savings Bank and
Bank of America, N.A. This new facility replaces the previous revolving credit
agreement and provides committed, unsecured funding of up to $60 million for
working capital, capital expenditures, acquisitions and other corporate
purposes. The new agreement contains provisions substantially equivalent to the
previous agreement, including limitations on additional debt, investments and
payment of dividends.
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. During March
2002, the Company's Stepan Europe subsidiary completed an $11.7 million
(denominated in euros) bank term loan as long-term financing for a portion of
the Manro acquisition. This loan will mature in 7 years and bears interest at
rates set quarterly, based on 90-day EURIBOR. The U.S. parent does not guaranty
this loan.
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, 2001.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
Net income for the quarter ended June 30, 2002, increased 51 percent from $5.4
million, or $0.56 per diluted share in 2001 to $8.2 million, or $0.84 per
diluted share in 2002. Net sales increased three percent to $188.8 million in
the second quarter of 2002 from $182.8 million a year ago. Net sales by segment
were:
(Dollars in thousands) Three Months
Ended June 30
-----------------------------------------
2002 2001 % Change
---- ---- --------
Net Sales:
Surfactants $ 150,880 $ 140,408 +7
Polymers 31,183 35,904 -13
Specialty Products 6,732 6,455 +4
--------- ---------
Total $ 188,795 $ 182,767 +3
========= =========
Surfactants net sales rose seven percent between years. Foreign operations
accounted for the increase reporting an $11.7 million, or 33 percent, increase
in net sales due to a 44 percent growth in sales volume. Approximately $11.2
million of the increase was due to the fourth quarter 2001 acquisition of Stepan
UK. European operations, excluding Stepan UK, reported higher net sales due to
increased sales volume and the favorable impact of a stronger euro. Canadian
operations reported improved net sales due to increased sales volume coupled
with higher average selling prices. Latin American operations posted decreased
net sales due to lower sales volume and average selling prices.
Net sales for domestic U.S. operations, which accounted for 68 percent of total
surfactant revenues, fell $1.3 million, or one percent, to $103.1 million in
2002 from $104.4 million in 2001. A five percent drop in sales volume led to the
net sales decline. Sales volumes for laundry and cleaning and distribution
customers were down from quarter to quarter. The lower laundry and cleaning
volumes were somewhat offset by increased personal care business.
Surfactants gross profit increased 29 percent to $25.5 million in the second
quarter of 2002 from $19.9 million in the second quarter of 2001. Domestic
operations reported a $2.9 million, or 18 percent, increase in gross profit. The
increase was due to higher margins, which more than offset the five percent drop
in sales volume. Margins improved due to price decreases for major raw
materials. Foreign operations' gross profit increased $2.8 million, or 68
percent, from quarter to quarter. Stepan Europe contributed $2.3 million to the
improvement, of which $1.7 million related to the previously noted Stepan UK
acquisition. Canadian operations reported higher gross profit due to increased
sales volume and improved margins, while Latin American operations reported
lower gross profit primarily due to decreased sales volume.
Polymers net sales decreased $4.7 million, or 13 percent, to $31.2 million in
the second quarter of 2002 from $35.9 million in the second quarter of 2001.
Phthalic Anhydride (PA) net sales increased $1.4 million, or 17 percent, from
quarter to quarter. A 50 percent rise in sales volume, due primarily to new
business, accounted for the improvement. The increase was partially offset by a
decline in average selling prices. Global polyurethane polyols net sales fell 22
percent to $17.1 million for the second quarter of 2002 from $22.0 million for
the same period a year ago. Domestic operations accounted for most of the
decline, reporting a $5.1 million, or 26 percent, decrease in net sales due
primarily to a 22 percent drop in sales volume. The volume drop
reflected a sluggish commercial roofing industry. Polyurethane systems net sales
dropped 25 percent to $4.0 million in the second quarter 2002 from $5.3 million
a year ago. Sales volume fell 26 percent due primarily to lost business.
Polymers second quarter 2002 gross profit was $6.2 million, which was $1.2
million, or 16 percent, below the $7.4 million reported a year ago. Global
polyurethane polyols' gross profit fell $0.7 million, or 14 percent, to $4.5
million in the second quarter of 2002 from $5.2 million for the same period of
2001. Domestic operations gross profit declined $0.9 million, or 17 percent, on
a 22 percent decrease in sales volume. Improved margins partially offset the
effect of the lower volume. Polyurethane systems gross profit decreased $0.5
million, or 38 percent, from quarter to quarter. Lower sales volume and margins
led to the decline. Higher unit overhead costs resulting from decreased
production volumes led to the decreased average margin. PA's gross profit
remained almost unchanged between quarters. The effect of increased sales volume
was offset by decreased average margins.
Specialty products net sales rose four percent between years to $6.7 million in
the second quarter of 2002 from $6.5 million in the second quarter of 2001.
Increased sales to the pharmaceutical industry led to the improvement. Gross
profit rose 41 percent to $3.5 million in the second quarter of 2002 from $2.5
million reported a year ago. Higher sales volume of higher margin products led
to the growth.
Operating expenses for the second quarter of 2002 increased 12 percent to $21.9
million from $19.6 million for the same period a year ago. Administrative
expenses increased $1.3 million, or 17 percent, from quarter to quarter. The
increase reflected $1.9 million of expense related to the implementation of an
enterprise resource planning system. The inclusion of $0.6 million of expense
related to Stepan UK, which was first consolidated in the fourth quarter of
2001, also contributed to the increase. A decline of $0.9 million of deferred
compensation expenses partially offset the increase. Marketing expenses rose
$0.7 million, or 12 percent, between quarters. The addition of Stepan UK
marketing expenses coupled with an increase in domestic operations' bad debt
provision accounted for most of the increase.
Interest expenses declined three percent from quarter to quarter due to lower
overall borrowing rates, partially offset by higher debt levels.
Income from the Philippines equity joint venture increased to $1.2 million in
the second quarter of 2002 from $0.5 million in the second quarter of 2001. The
rise was due to increased royalty income and to increased income generated by
higher sales volume.
Six Months Ended June 30, 2002 and 2001
Net income for the six months ended June 30, 2002, was $12.0 million, or $1.23
per diluted share, up $2.9 million, or 32 percent, from $9.1 million, or $0.94
per diluted share, for the same period in 2001. Net sales increased three
percent to $370.0 million from $359.6 million reported last year. Net sales by
segment were:
(Dollars in thousands) Six Months
Ended June 30
--------------------------------------------------
2002 2001 % Change
---- ---- --------
Net Sales:
Surfactants $ 297,696 $ 280,786 +6
Polymers 60,050 66,737 -10
Specialty Products 12,205 12,101 +1
----------- ---------
Total $ 369,951 $ 359,624 +3
=========== =========
Surfactants net sales increased $16.9 million, or six percent, to $297.7 million
in 2002 from $280.8 million in 2001. Net sales for foreign operations rose $21.2
million, or 31 percent, to $89.9 million in the first half of 2002 from $68.8
million in 2001. A 42 percent increase in sales volume caused the net sales
growth. Approximately $19.0 million of the increase was due to the fourth
quarter 2001 acquisition of Stepan UK. Canadian operations reported a $1.2
million, or six percent, rise in net sales due to improved sales volume, and
Latin American operations posted a $1.0 million, or six percent, increase in net
sales due to higher average selling prices. European operations, excluding
Stepan UK, reported almost unchanged net sales.
Domestic U.S. operations, which accounted for 70 percent of total surfactant
revenues, reported a $4.2 million, or two percent, decline in net sales to
$207.8 million in 2002 from $212.0 million in 2001. A four percent drop in sales
volume accounted for the decline. Volumes to laundry and cleaning and
distribution customers were down from year to year.
Surfactants gross profit increased $8.2 million, or 21 percent, to $47.2 million
in the first half of 2002 from $39.0 million for the same period of 2001.
Domestic operations reported a $4.6 million, or 15 percent, increase in gross
profit due to improved margins, which more than offset the impact of decreased
volume. Decreased raw material costs led to the higher margins. Gross profit for
foreign operations rose $3.5 million, or 42 percent, to $11.9 million in 2002
from $8.4 million in 2001. Stepan Europe contributed $3.1 million to the
improvement, of which $2.9 million related to the previously noted Stepan UK
acquisition. Latin America operations reported higher gross profit due to
improved margins.
Polymers net sales decreased $6.7 million, or 10 percent, to $60.1 million in
2002 from $66.8 million in 2001. Phthalic anhydride (PA) net sales increased 18
percent to $19.9 million in 2002 from $17.0 million in 2001. A 37 percent gain
in sales volume, due primarily to new business, more than offset a drop in
average selling prices. Lower raw material costs, which were passed on to
customers, led to the average selling price decline. Global polyurethane polyols
net sales fell 17 percent to $32.7 million for the first half of 2002 from $39.2
million for the same period of 2001. A 12 percent drop in sales volume led to
the decline. Domestic operations accounted for most of the decline as net sales
decreased $6.5 million, or 19 percent, on a 16 percent drop in
sales volume. The volume drop reflected a sluggish economy. Urethane systems net
sales fell 30 percent to $7.4 million for the first half of 2002 from $10.6 for
the first half of 2001. A 29 percent drop in sales volume, due largely to lost
business, caused the decrease.
Polymers gross profit was $12.0 million for the first half of 2002, which was
$0.9 million, or seven percent, lower than gross profit for the same period of
2001. PA's gross profit increased $0.6 million, or 31 percent, between years to
$2.6 million in 2002 from $2.0 million in 2001. A 37 percent rise in sales
volume more than offset a five percent drop in average margins. Global
polyurethane polyols gross profit fell $0.3 million, or four percent, to $9.4
million in 2002 from $9.7 million in 2001. Domestic operations gross profit
declined $0.7 million between years due to lower sales volume, partially offset
by higher average margins. European gross profit increased $0.5 million largely
due to lower raw material costs. Polyurethane systems gross profit dropped 41
percent to $1.5 million in 2002 from $2.5 million in 2001. Lower sales volume
and average margins led to the decrease. Higher unit overhead costs resulting
from lower production volumes contributed to the decreased average margins.
Specialty products net sales increased $0.1 million, or one percent, from year
to year. The increase was primarily due to higher sales volume in the
pharmaceutical industry. Gross profit rose $1.4 million, or 37 percent, between
years due to increased sales of higher margin products.
Operating expenses rose $5.8 million, or 15 percent, to $43.4 million in the
first half of 2002 from $37.6 million for the same period of 2001.
Administrative expenses increased $4.6 million, or 33 percent, between years.
The increase reflected $3.7 million of expense related to the implementation of
an enterprise resource planning system. In addition, administrative expenses
included deferred compensation expense of $1.7 million, which was $0.5 million
higher than that of a year ago. The increase also reflected $0.9 million of
expense for Stepan UK, which was first consolidated in the fourth quarter of
2001. Salaries and related payroll costs fell $1.3 million between years,
partially offsetting the overall increase. Marketing expenses increased $0.6
million, or five percent, between years. Research and development expenses
increased $0.5 million, or five percent, between years.
Interest expenses decreased four percent from year to year due to lower overall
borrowing rates, partially offset by increased debt levels.
Income from the Philippines equity joint venture increased $1.0 million between
years due to increased royalty income and to increased income generated by
higher sales volume.
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
2002, Company
expenditures for capital projects related to the environment were $0.7 million
and should approximate $1.2 million for the full year 2002. 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 $3.7 million for the first six months of 2002.
The Company has been named by the government as a potentially responsible party
at 17 waste disposal sites where cleanup costs have been or may be incurred
under the federal Comprehensive Environmental Response, Compensation and
Liability Act and similar state statutes. In addition, damages are being claimed
against the Company in general liability actions for alleged personal injury or
property damage in the case of some disposal and plant sites. The Company
believes that it has made adequate provisions for the costs it may incur with
respect to these sites. The Company has estimated a range of possible
environmental and legal losses from $7.2 million to $34.3 million at June 30,
2002. At June 30, 2002 and December 31, 2001, the Company's reserve was $17.0
million for legal and environmental matters. During the first six months of
2002, expenditures related to legal and environmental matters approximated $1.5
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.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 141, "Business Combinations," effective
for fiscal years beginning after December 15, 2001. It requires the use of the
purchase method of accounting for all transactions initiated after June 30,
2001. The Company applied the provisions of SFAS No. 141 to the September 2001
acquisition of Manro Performance Chemicals Limited. No acquisitions took place
during the first six months of 2002.
In April 2001, the EITF released Issue No. 00-25, "Vendor Income Statement
Characterization of Consideration Paid to a Reseller of the Vendor's Products."
Issue No. 00-25 provides guidance regarding the reporting of consideration given
by a vendor to a reseller of the vendor's products. This issue requires certain
considerations from vendor to a reseller of the vendor's products be viewed: (a)
as a reduction of the selling prices of the vendor's products and, therefore, be
recorded as a reduction of revenue when recognized in the vendor's income
statement, or (b) as a cost incurred by the vendor for assets or services
received from the reseller and, therefore, be recorded as a cost or an expense
when recognized in the vendor's income statement. Issue No. 00-25 is effective
for fiscal years beginning after December 15, 2001. The Company's accounting
policies were consistent with the guidance provided in this issue. Therefore,
the adoption of Issue No.00-25 did not have an impact on the Company's financial
position or results of operations.
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143, which is effective for fiscal years beginning after
June 15, 2002, supersedes previous guidance for financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. The statement applies to legal
obligations associated with the retirement of long-lived assets that result from
the acquisition, construction, development and/or the normal operation of a
long-lived asset. The Company is evaluating the effect of this standard on its
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets and supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 144 was effective January 1,
2002. Adoption of this standard did not have an impact on the Company's
financial position or results of operations.
In June 2002, The FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The standard requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December
31, 2002. Based on the information currently available, adoption of this
standard is not expected to have an impact on the Company's financial position
or results of operations.
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.
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
For information regarding our exposure to market risk, see the caption entitled
"Liquidity and Capital Resources" in "Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations," which is
incorporated herein by reference.
Part II OTHER INFORMATION
--------------------------------------------------------------------------------
Item 1 - Legal Proceedings
The Company's site in Maywood, New Jersey and property formerly owned by the
Company adjacent to its current site, were listed on the National Priorities
List in September 1993 pursuant to the provisions of the Comprehensive
Environmental Response Compensation and Liability Act (CERCLA) because of
certain alleged chemical contamination. Pursuant to an Administrative Order on
Consent entered into between the United States Environmental Protection Agency
(USEPA) and the Company for property formerly owned by the Company, and the
issuance of an order by USEPA to the Company for property currently owned by the
Company, the Company completed a Remedial Investigation Feasibility Study
(RI/FS) in 1994. The Company submitted the Draft Final FS for Soil and Source
Areas (Operable Unit 1) in September 2002. In addition, the Company has also
submitted additional information regarding the remediation, most recently in
October 2002. Discussions between USEPA and the Company are continuing. The
Company is awaiting the issuance of a Record of Decision (ROD) from USEPA
relating to the currently owned and formerly owned Company property and the
proposed remediation. The final ROD will be issued sometime after the public
comment period.
In 1985, the Company entered into a Cooperative Agreement with the United States
of America represented by the Department of Energy (Agreement). Pursuant to this
Agreement, the Department of Energy (DOE) took title to radiological
contaminated materials and was to remediate, at its expense, all radiological
waste on the Company's property in Maywood, New Jersey. The Maywood property
(and portions of the surrounding area) were remediated by the DOE under the
Formerly Utilized Sites Remedial Action Program, a federal program under which
the U.S. Government undertook to remediate properties which were used to process
radiological material for the U.S. Government. In 1997, responsibility for this
clean-up was transferred to the United States Army Corps of Engineers (USACE).
On January 29, 1999, the Company received a copy of a USACE Report to Congress
dated January 1998 in which the USACE expressed their intention to evaluate,
with the USEPA, whether the Company and/or other parties might be responsible
for cost recovery or contribution claims related to the Maywood site. Subsequent
to the issuance of that report, the USACE advised the Company that it had
requested legal advice from the Department of Justice as to the impact of the
Agreement.
By letter dated July 28, 2000, the Department of Justice advised the Company
that the USACE and USEPA had referred to the Justice Department claims against
the Company for response costs incurred or to be incurred by the USACE, USEPA
and the DOE in connection with the Maywood site and the Justice Department
stated that the United States is entitled to recovery of its response costs from
the Company under CERCLA. The letter referred to both radiological and
non-radiological hazardous waste at the Maywood site and stated that the United
States has incurred unreimbursed response costs to date of $138 million. Costs
associated with radiological waste at the Maywood site, which the Company
believes represent all but a small portion of the amount referred to in the
Justice Department letter, could be expected to aggregate substantially in
excess of that amount. In the letter, the Justice Department invited the Company
to discuss settlement of the matter in order to avoid the need for litigation.
The Company believes that its
liability, if any, for such costs has been resolved by the aforesaid Agreement.
Despite the fact that the Company continues to believe that it has no liability
to the United States for such costs, discussions with the Justice Department are
currently ongoing to attempt to resolve this matter.
The Company believes it has adequate reserves for claims associated with the
Maywood site. However, depending on the results of the ongoing discussions
regarding the Maywood site, the final cost of the remediation could differ from
the current estimates.
The Company has been named as a potentially responsible party (PRP) in the case
USEPA v. Jerome Lightman (92 CV 4710 D. N. J.) which involves the Ewan and
D'Imperio Superfund Sites located in New Jersey. Trial on the issue of the
Company's liability at these sites was completed in March 2000. The Company is
awaiting a decision from the court. If the Company is found liable at either
site, a second trial as to the Company's allocated share of clean-up costs at
these sites will likely be held in 2003. The Company believes it has adequate
defenses to the issue of liability. In the event of an unfavorable outcome
related to the issue of liability, the Company believes it has adequate
reserves. 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 in this action. 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.
Regarding the D'Imperio Superfund Site, USEPA has indicated it will seek penalty
claims against the Company based on the Company's alleged noncompliance with the
modified Unilateral Administrative Order. The Company is currently negotiating
with USEPA to settle its proposed penalty against the Company but does not
believe that a settlement, if any, will have a material impact on the financial
condition of the Company. In addition, the Company also received notice from the
New Jersey Department of Environmental Protection (NJDEP) dated March 21, 2001,
that NJDEP has indicated it will pursue cost recovery against the alleged
responsible parties, including the Company. The NJDEP's claims include costs
related to remediation of the D'Imperio Superfund Site in the amount of $434,406
and alleged natural resource damages in the amount of $529,584 (as of November
3, 2000). The NJDEP settled such claims against the alleged responsible parties,
resulting in the Company paying its portion of $83,061 in July 2002. This
payment is subject to reallocation after the allocation phase of the
above-identified trial, if any. The payment did not have a material impact on
the financial condition of the Company.
The Company received a Section 104(e) Request for Information from USEPA dated
March 21, 2000, regarding the Lightman Drum Company Site located in Winslow
Township, New Jersey. The Company responded to this request on May 18, 2000. In
addition, the Company received a Notice of Potential Liability and Request to
Perform RI/FS dated June 30, 2000, from USEPA. The Company has decided that it
will participate in the performance of the RI/FS. However, based on the current
information known regarding this site, the Company is unable to predict what its
liability, if any, will be for this site.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 - Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Form 8-K reporting the effects of a change in accounting for deferred
compensation plan as a correction of an error with restatement of the
Company's three prior year financial statements has been filed on August 1,
2002.
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/ James E. Hurlbutt
James E. Hurlbutt
Vice President and Corporate Controller
Date: December 23, 2002
CERTIFICATIONS
I, F. Quinn Stepan, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Stepan Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: December 23, 2002 /s/ F. Quinn Stepan
---------------------------------------
F. Quinn Stepan
Chairman, Chief Executive Officer
CERTIFICATIONS
I, James E. Hurlbutt, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Stepan Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: December 23, 2002 /s/ James E. Hurlbutt
---------------------------------------
James E. Hurlbutt
Vice President & Corporate Controller