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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED 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
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
2001
2002 As Restated*
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,073 $ 4,224
Receivables, net 118,432 103,190
Inventories (Note 3) 64,277 61,863
Deferred income taxes 10,353 10,684
Other current assets 7,206 5,233
------------ ------------
Total current assets 203,341 185,194
------------ ------------
PROPERTY, PLANT AND EQUIPMENT:
Cost 683,655 667,117
Less: Accumulated depreciation (476,395) (454,684)
------------ ------------
Property, plant and equipment, net 207,260 212,433
------------ ------------
LONG TERM INVESTMENTS 6,776 7,674
------------ ------------
GOODWILL, NET (Note 8) 6,187 6,100
------------ ------------
OTHER INTANGIBLE ASSETS, NET (Note 8) 12,578 13,293
------------ ------------
OTHER NON-CURRENT ASSETS 21,013 18,468
------------ ------------
Total assets $ 457,155 $ 443,162
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 9,644 $ 10,745
Accounts payable 63,529 62,410
Accrued liabilities 33,557 36,575
------------ ------------
Total current liabilities 106,730 109,730
------------ ------------
DEFERRED INCOME TAXES 35,648 33,906
------------ ------------
LONG-TERM DEBT, less current maturities 115,571 109,588
------------ ------------
DEFERRED COMPENSATION (Note 2) 18,861 17,615
------------ ------------
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 14,575 14,581
583,252 shares in 2001
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 6) (16,145) (15,870)
Retained earnings (approximately $34,595 unrestricted in 2002 and $49,138 in 2001) 149,624 141,229
Less: Treasury stock, at cost (17,032) (15,153)
------------ ------------
Stockholders' equity 159,256 150,922
------------ ------------
Total liabilities and stockholders' equity $ 457,155 $ 443,162
============ ============
* See Note 2 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 9,131 7,773 18,498 13,837
Research, development and technical services 5,986 5,793 11,972 11,424
------------ ------------ ------------ ------------
21,863 19,571 43,347 37,507
------------ ------------ ------------ ------------
Operating Income 13,370 10,130 20,855 18,095
Other Income (Expense):
Interest, net (1,742) (1,805) (3,569) (3,761)
Income from equity joint venture 1,166 493 1,654 620
------------ ------------ ------------ ------------
(576) (1,312) (1,915) (3,141)
------------ ------------ ------------ ------------
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 5):
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 5):
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 2 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) 2001
2002 As Restated*
------------ ------------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 12,027 $ 9,137
Depreciation and amortization 20,505 19,791
Deferred revenue recognition (229) (241)
Deferred income taxes 2,150 (334)
Environmental and legal liabilities (240) 930
Other non-cash items 727 2,527
Changes in Working Capital:
Receivables, net (15,242) (11,355)
Inventories (2,414) 3,370
Accounts payable and accrued liabilities (1,897) (11,003)
Other (1,973) (804)
------------ ------------
Net Cash Provided by Operating Activities 13,414 12,018
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (14,695) (17,180)
Other non-current assets (20) (666)
------------ ------------
Net Cash Used for Investing Activities (14,715) (17,846)
------------ ------------
CASH FLOWS FROM FINANCING AND OTHER RELATED 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 (3,787) (3,644)
Stock option exercises 2,095 2,751
------------ ------------
Net Cash Provided by Financing and Other Related Activities 1,311 5,752
------------ ------------
EFFECT OF EXCHANGE RATE ON CASH (1,161) (598)
------------ ------------
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 2 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 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 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. 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, 2001. In the opinion of management all adjustments, consisting of the
correction for an accounting error explained in Note 2, below, and normal
recurring adjustments, necessary to present fairly the consolidated
financial position of Stepan Company (the "company") as of June 30, 2002,
and the consolidated results of operations for the three and six months
then ended and cash flows for the six months then ended, have been
included.
2. 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
Emerging Issues Task Force of the Financial Accounting Standards Board 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.
As a result, the accompanying condensed consolidated financial statements
as of December 31, 2001 and for the three and six month periods ended June
30, 2001 have been restated from the amounts previously reported to give
effect to the correction of this accounting error. A summary of the
significant effects of the restatement is as follows:
(In thousands) AS PREVIOUSLY
REPORTED ADJUSTMENTS AS RESTATED
------------- ----------- -----------
ASSETS
Long term investments - $ 7,674 $ 7,674
LIABILITIES
Deferred income tax $ 35,040 (1,134) 33,906
Deferred compensation - 17,615 17,615
EQUITY
Additional paid-in capital 16,893 (362) 16,531
Accumulated other comprehensive loss (14,800) (1,070) (15,870)
Retained earnings 142,110 (881) 141,229
Treasury stock (8,659) (6,494) (15,153)
For the three and six months ended June 30, 2001:
THREE MONTHS ENDED JUNE 30, 2001 SIX MONTHS ENDED JUNE 30, 2001
------------------------------------- -------------------------------------
AS AS
(In thousands, except per share PREVIOUSLY AS PREVIOUSLY AS
amounts) 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 $ 505 $ 263 $ 768 $ (1,006) $ (143) $ (1,149)
The Annual Report on Form 10-K covering the 2001, 2000 and 1999 financial
statements will be amended and refiled with the SEC upon completion of an audit
of those financial statements by Deloitte & Touche. The company's loan
agreements require audited financial statements and pending completion of the
reaudit, the lenders have provided a 120 day waiver from this debt covenant.
3. INVENTORIES
Inventories consist of the following amounts:
(Dollars in thousands) June 30, 2002 December 31, 2001
-------------- -----------------
Inventories valued primarily on LIFO basis -
Finished products $ 42,723 $ 36,319
Raw materials 21,554 25,544
-------------- -----------------
Total inventories $ 64,277 $ 61,863
============== =================
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.
4. CONTINGENCIES
There are a variety of legal proceedings pending or threatened against the
company. Some of these proceedings may result in fines, penalties,
judgments or costs being assessed against the company at some future time.
The company's operations are subject to extensive local, state and federal
regulations, including the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("Superfund") and the Superfund
amendments of 1986. The company, and others, have been named as potentially
responsible parties at affected geographic sites. 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:
As reported previously, 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 Liabilities 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 has
also submitted additional information regarding the remediation, most
recently in February 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 Sites:
As reported previously, 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.
5. 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
As Restated As Restated
------------ ------------ ------------ ------------
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
============ ============ ============ ============
6 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
As Restated As Restated
------------ ------------ ------------ ------------
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.
7. SEGMENT REPORTING
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Financial results of Stepan 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
AS RESTATED AS RESTATED
------------ ------------ ------------ ------------
Operating income segment totals $ 22,139 $ 18,408 $ 39,693 $ 33,226
Unallocated corporate expenses/(a)/ (8,769) (8,278) (18,838) (15,131)
Interest expense (1,742) (1,805) (3,569) (3,761)
Income from equity 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.
8. 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
As Restated As Restated
----------- ----------- ----------- ------------
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. 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 ended 12/31/03 $1,330
For year ended 12/31/04 $1,330
For year ended 12/31/05 $1,330
For year ended 12/31/06 $1,330
For year ended 12/31/07 $1,086
9. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board 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
provision 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 Emerging Issues Task Force (EITF) issued EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products." EITF 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 considered: (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.
EITF Issue No. 00-25 was effective for the company beginning January 1,
2002. The company's accounting policies were already consistent with the
guidance provided in this EITF. Therefore, adoption of this standard did
not have an impact on the company's statements of income or financial
position.
In August 2001, Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets," was
issued. 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 financial position or
results of operations of the company.
The Financial Accounting Standards Board recently 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.
10. 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 Condition and Results
of Operations
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.
As discussed in Note 2 to the unaudited, condensed, consolidated financial
statements, the Company has restated its financial statements for the three and
six month periods ended June 30, 2001 and for the year ended December 31, 2001.
The accompanying Management's Discussion and Analysis gives effect to the
restatement.
CRITICAL ACCOUNTING POLICIES
We prepare our financial statements in accordance with accounting principles
generally accepted in the United States. 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. The following paragraph discusses a critical area
where estimates are required.
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, at least 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. Because reported
liabilities are recorded based on estimates, actual amounts could differ from
those estimates.
LIQUIDITY AND CAPITAL RESOURCES
Net cash from operations 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 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 $19.8 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 $2.4
million, prepaid expenses up by $2.0 million and accounts payable and accrued
liabilities down by $1.9 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 42.1 percent, the
same as December 31, 2001.
The company's change in accounting for deferred compensation plans, discussed
previously, will require financial restatement and independent audit for 1999,
2000, and 2001 and the first quarter of 2002. While the company is presently not
in compliance with domestic loan agreements, because they require audited
financial statements, the company's banks and insurance company lenders have
waived for 120 days those debt covenants pending completion of the audit
process.
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. 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, 2001.
RESULTS OF OPERATIONS
Three Months Ended June 30, 2002 and 2001
Net income for the second quarter ended June 30, 2002, increased 51 percent from
$5.4 million, or $0.56 per share (diluted), in 2001 to $8.2 million, or $0.84
per share (diluted), 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 $1.4 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 equity income
generated by higher sales volume.
Six Months Ended June 30, 2002 and 2001
Net income for the first six months ended June 30, 2002, was $12.0 million, or
$1.23 per share (diluted), up $2.9 million, or 32 percent, from $9.1 million, or
$0.94 per share (diluted), 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 16 percent, to $43.3 million in the
first half of 2002 from $37.5 million for the same period of 2001.
Administrative expenses increased $4.7 million, or 34 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 $1.6 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 five 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 equity 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 Financial Accounting Standards Board 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 provision 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 Emerging Issues Task Force (EITF) issued EITF Issue No.
00-25, "Vendor Income Statement Characterization of Consideration Paid to a
Reseller of the Vendor's Products." EITF 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 considered: (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. EITF Issue No. 00-25 was effective for the company
beginning January 1, 2002. The company's accounting policies were already
consistent with the guidance provided in this EITF. Therefore, adoption of this
standard did not have an impact on the company's statements of income or
financial position.
In August 2001, Statement of Financial Accounting Standards (SFAS) No. 144,
"Accounting for the Impairment of Disposal of Long-Lived Assets," was issued.
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 financial position or results of operations of the
company.
The Financial Accounting Standards Board recently 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.
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.
Part II OTHER INFORMATION
Item 1 - Legal Proceedings
As reported previously, 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 Liabilities 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 has also submitted additional information regarding
the remediation, most recently in February 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.
As reported previously, 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
$434,405.53 and alleged natural resource damages in the amount of $529,584.00
(as of November 3, 2000). The NJDEP settled such claims against the alleged
responsible parties, resulting in the company paying its portion of $83,061.00
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.
As reported previously, 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) None
(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: August 14, 2002