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EX-32 - EX-32 - STEPAN COscl-ex32_201506308.htm
EX-31.2 - EX-31.2 - STEPAN COscl-ex312_201506306.htm
EX-31.1 - EX-31.1 - STEPAN COscl-ex311_201506307.htm
EX-10.1 - EX-10.1 - STEPAN COscl-ex101_2015063012.htm

 

 

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, 2015

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM                 TO                

Commission File Number 1-4462

 

STEPAN COMPANY

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-1823834

(State or other jurisdiction

 

(I.R.S. Employer

of 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  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

(Check one): Large accelerated filer

 

x

  

Accelerated filer

 

¨

 

 

 

 

Non-accelerated filer

 

¨

  

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes   o    No  x

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 21, 2015

Common Stock, $1 par value

 

22,298,682 Shares

 

 

 

 

 


 

Part I FINANCIAL INFORMATION

 

Item 1 - Financial Statements

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

Unaudited

 

(In thousands, except per share amounts)

 

Three Months Ended

June 30

 

 

Six Months Ended

June 30

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net Sales

 

$

452,414

 

 

$

504,111

 

 

$

912,865

 

 

$

981,553

 

Cost of Sales

 

 

372,902

 

 

 

432,522

 

 

 

756,911

 

 

 

846,940

 

Gross Profit

 

 

79,512

 

 

 

71,589

 

 

 

155,954

 

 

 

134,613

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

14,265

 

 

 

13,493

 

 

 

27,262

 

 

 

27,639

 

Administrative

 

 

24,055

 

 

 

9,052

 

 

 

43,394

 

 

 

23,483

 

Research, development and technical services

 

 

12,597

 

 

 

12,130

 

 

 

24,387

 

 

 

24,054

 

 

 

 

50,917

 

 

 

34,675

 

 

 

95,043

 

 

 

75,176

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on sale of product line

 

 

 

 

 

 

 

 

2,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

28,595

 

 

 

36,914

 

 

 

63,773

 

 

 

59,437

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(2,869

)

 

 

(3,021

)

 

 

(6,923

)

 

 

(5,978

)

Loss from equity in joint ventures

 

 

(1,815

)

 

 

(1,243

)

 

 

(3,055

)

 

 

(2,694

)

Other, net (Note 13)

 

 

235

 

 

 

556

 

 

 

887

 

 

 

530

 

 

 

 

(4,449

)

 

 

(3,708

)

 

 

(9,091

)

 

 

(8,142

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Provision for Income Taxes

 

 

24,146

 

 

 

33,206

 

 

 

54,682

 

 

 

51,295

 

Provision for Income Taxes

 

 

7,205

 

 

 

8,838

 

 

 

16,455

 

 

 

13,919

 

Net Income

 

 

16,941

 

 

 

24,368

 

 

 

38,227

 

 

 

37,376

 

Net Income Attributable to Noncontrolling Interests (Note 2)

 

 

(27

)

 

 

(15

)

 

 

(43

)

 

 

(5

)

Net Income Attributable to Stepan Company

 

$

16,914

 

 

$

24,353

 

 

$

38,184

 

 

$

37,371

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income Per Common Share Attributable to Stepan Company

   (Note 9):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.74

 

 

$

1.07

 

 

$

1.68

 

 

$

1.64

 

Diluted

 

$

0.74

 

 

$

1.06

 

 

$

1.67

 

 

$

1.63

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares Used to Compute Net Income Per Common Share

   Attributable to Stepan Company (Note 9):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,742

 

 

 

22,763

 

 

 

22,731

 

 

 

22,768

 

Diluted

 

 

22,871

 

 

 

22,931

 

 

 

22,850

 

 

 

22,948

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.18

 

 

$

0.17

 

 

$

0.36

 

 

$

0.34

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

2


 

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

Unaudited

 

(In thousands)

 

Three Months Ended

June 30

 

 

Six Months Ended

June 30

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

16,941

 

 

$

24,368

 

 

$

38,227

 

 

$

37,376

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (Note 10)

 

 

5,957

 

 

 

3,718

 

 

 

(19,195

)

 

 

3,812

 

Pension liability adjustment, net of tax (Note 10)

 

 

750

 

 

 

410

 

 

 

1,499

 

 

 

820

 

Derivative instrument activity, net of tax (Note 10)

 

 

16

 

 

 

1

 

 

 

(26

)

 

 

4

 

Other comprehensive income (loss)

 

 

6,723

 

 

 

4,129

 

 

 

(17,722

)

 

 

4,636

 

Comprehensive income

 

 

23,664

 

 

 

28,497

 

 

 

20,505

 

 

 

42,012

 

Comprehensive (income) loss attributable to noncontrolling interests (Note 2)

 

 

(44

)

 

 

9

 

 

 

(45

)

 

 

42

 

Comprehensive income attributable to Stepan Company

 

$

23,620

 

 

$

28,506

 

 

$

20,460

 

 

$

42,054

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

 

3


 

STEPAN COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

Unaudited

 

 

(In thousands)

 

June 30, 2015

 

 

December 31, 2014

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

82,365

 

 

$

85,215

 

Receivables, net

 

 

264,496

 

 

 

270,436

 

Inventories (Note 6)

 

 

178,582

 

 

 

183,233

 

Deferred income taxes

 

 

15,781

 

 

 

15,364

 

Other current assets

 

 

23,160

 

 

 

21,308

 

Total current assets

 

 

564,384

 

 

 

575,556

 

Property, Plant and Equipment:

 

 

 

 

 

 

 

 

Cost

 

 

1,417,600

 

 

 

1,385,851

 

Less:  accumulated depreciation

 

 

(880,763

)

 

 

(861,656

)

Property, plant and equipment, net

 

 

536,837

 

 

 

524,195

 

Goodwill, net

 

 

11,398

 

 

 

11,502

 

Other intangible assets, net

 

 

19,379

 

 

 

20,803

 

Long-term investments (Note 3)

 

 

20,273

 

 

 

20,217

 

Other non-current assets

 

 

9,289

 

 

 

9,741

 

Total assets

 

$

1,161,560

 

 

$

1,162,014

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt  (Note 12)

 

$

24,826

 

 

$

27,034

 

Accounts payable

 

 

140,047

 

 

 

156,983

 

Accrued liabilities

 

 

69,100

 

 

 

65,496

 

Total current liabilities

 

 

233,973

 

 

 

249,513

 

Deferred income taxes

 

 

15,453

 

 

 

15,804

 

Long-term debt, less current maturities  (Note 12)

 

 

235,644

 

 

 

246,897

 

Other non-current liabilities

 

 

124,528

 

 

 

112,856

 

Commitments and Contingencies  (Note 7)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock, $1 par value; authorized 30,000,000 shares;

   Issued  shares 25,685,308 in 2015 and 25,640,090  shares in 2014

 

 

25,685

 

 

 

25,640

 

Additional paid-in capital

 

 

142,286

 

 

 

139,573

 

Accumulated other comprehensive loss (Note 10)

 

 

(101,669

)

 

 

(83,945

)

Retained earnings

 

 

550,663

 

 

 

520,540

 

Less:  Common treasury stock, at cost, 3,386,626  shares in 2015

   and  3,384,443 shares in 2014

 

 

(66,446

)

 

 

(66,262

)

Total Stepan Company stockholders’ equity

 

 

550,519

 

 

 

535,546

 

Noncontrolling interests (Note 2)

 

 

1,443

 

 

 

1,398

 

Total equity

 

 

551,962

 

 

 

536,944

 

Total liabilities and equity

 

$

1,161,560

 

 

$

1,162,014

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

4


 

STEPAN COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

Unaudited

 

 

(In thousands)

 

Six Months Ended June 30

 

 

 

2015

 

 

2014

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

38,227

 

 

$

37,376

 

Adjustments to reconcile net income to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

32,859

 

 

 

32,482

 

Deferred compensation

 

 

8,150

 

 

 

(5,665

)

Realized and unrealized gains on long-term investments

 

 

(642

)

 

 

(555

)

Stock-based compensation

 

 

3,162

 

 

 

770

 

Deferred income taxes

 

 

(1,953

)

 

 

1,735

 

Other non-cash items

 

 

508

 

 

 

3,234

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(679

)

 

 

(39,083

)

Inventories

 

 

(245

)

 

 

(30,614

)

Other current assets

 

 

(2,438

)

 

 

1,288

 

Accounts payable and accrued liabilities

 

 

3,386

 

 

 

16,505

 

Pension liabilities

 

 

358

 

 

 

(970

)

Environmental and legal liabilities

 

 

(1,408

)

 

 

(510

)

Deferred revenues

 

 

(781

)

 

 

(366

)

Excess tax benefit from stock options and awards

 

 

(236

)

 

 

(580

)

Net Cash Provided By Operating Activities

 

 

78,268

 

 

 

15,047

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(54,021

)

 

 

(39,063

)

Business acquisition (Note 16)

 

 

(5,133

)

 

 

 

Proceeds from sale of product line (Note14)

 

 

3,262

 

 

 

 

Sale of mutual funds

 

 

823

 

 

 

890

 

Other, net

 

 

(2,569

)

 

 

(4,277

)

Net Cash Used In Investing Activities

 

 

(57,638

)

 

 

(42,450

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Revolving debt and bank overdrafts, net

 

 

(9,435

)

 

 

2,090

 

Other debt repayments

 

 

(2,503

)

 

 

(1,371

)

Dividends paid

 

 

(8,061

)

 

 

(7,592

)

Company stock repurchased

 

 

 

 

 

(4,924

)

Stock option exercises

 

 

359

 

 

 

1,449

 

Excess tax benefit from stock options and awards

 

 

236

 

 

 

580

 

Other, net

 

 

(275

)

 

 

(133

)

Net Cash (Used In) Financing Activities

 

 

(19,679

)

 

 

(9,901

)

Effect of Exchange Rate Changes on Cash

 

 

(3,801

)

 

 

405

 

Net Decrease in Cash and Cash Equivalents

 

 

(2,850

)

 

 

(36,899

)

Cash and Cash Equivalents at Beginning of Period

 

 

85,215

 

 

 

133,347

 

Cash and Cash Equivalents at End of Period

 

$

82,365

 

 

$

96,448

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Cash payments of income taxes, net of refunds

 

$

6,873

 

 

$

16,753

 

Cash payments of interest

 

$

6,046

 

 

$

6,221

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.

 

 

5


 

STEPAN COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2015

Unaudited

 

 

1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein have been prepared by Stepan Company (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 (US GAAP) 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 adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of June 30, 2015, and its results of operations for the three and six months ended June 30, 2015 and 2014, and cash flows for the six months ended June 30, 2015 and 2014, have been included.  These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company’s 2014 Form 10-K.

 

 

2.

RECONCILIATIONS OF EQUITY

Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the six months ended June 30, 2015 and 2014:

 

(In thousands)

 

Total Equity

 

 

Stepan

Company

Equity

 

 

Noncontrolling Interests’

Equity (3)

 

Balance at January 1, 2015

 

$

536,944

 

 

$

535,546

 

 

$

1,398

 

Net income

 

 

38,227

 

 

 

38,184

 

 

 

43

 

Dividends

 

 

(8,061

)

 

 

(8,061

)

 

 

 

Common stock purchases (1)

 

 

(273

)

 

 

(273

)

 

 

 

Stock option exercises

 

 

359

 

 

 

359

 

 

 

 

Defined benefit pension adjustments, net of tax

 

 

1,499

 

 

 

1,499

 

 

 

 

Translation adjustments

 

 

(19,195

)

 

 

(19,197

)

 

 

2

 

Derivative instrument activity, net of tax

 

 

(26

)

 

 

(26

)

 

 

 

Other (2)

 

 

2,488

 

 

 

2,488

 

 

 

 

Balance at June 30, 2015

 

$

551,962

 

 

$

550,519

 

 

$

1,443

 

 

(In thousands)

 

Total Equity

 

 

Stepan

Company

Equity

 

 

Noncontrolling Interests’

Equity (3)

 

Balance at January 1, 2014

 

$

553,741

 

 

$

552,286

 

 

$

1,455

 

Net income

 

 

37,376

 

 

 

37,371

 

 

 

5

 

Dividends

 

 

(7,592

)

 

 

(7,592

)

 

 

 

Common stock purchases (1)

 

 

(5,058

)

 

 

(5,058

)

 

 

 

Stock option exercises

 

 

1,449

 

 

 

1,449

 

 

 

 

Defined benefit pension adjustments, net of tax

 

 

820

 

 

 

820

 

 

 

 

Translation adjustments

 

 

3,812

 

 

 

3,859

 

 

 

(47

)

Derivative instrument activity, net of tax

 

 

4

 

 

 

4

 

 

 

 

Other (2)

 

 

1,825

 

 

 

1,825

 

 

 

 

Balance at June 30, 2014

 

$

586,377

 

 

$

584,964

 

 

$

1,413

 

 

(1)

Includes the value of Company shares purchased in the open market and the value of Company common shares tendered by employees to settle minimum statutory withholding taxes related to the receipt of performance awards and deferred compensation distributions.

(2)

Primarily comprised of activity related to stock-based compensation, deferred compensation and excess tax benefits.

(3)

Reflects the noncontrolling interest in the Company’s China joint venture.

 

 

6


 

3.

FAIR VALUE MEASUREMENTS

The following describe the financial instruments held by the Company at June 30, 2015, and December 31, 2014, and the methods and assumptions used to estimate the instruments’ fair values:

Cash and cash equivalents

Carrying value approximates fair value because of the short maturity of the instruments.

Derivative assets and liabilities

Derivative assets and liabilities include the foreign currency exchange and interest rate contracts discussed in Note 4.  Fair value and carrying value were the same because the contracts were recorded at fair value.  The fair values of the foreign currency contracts were calculated as the difference between the applicable forward foreign exchange rates at the reporting date and the contracted foreign exchange rates multiplied by the contracted notional amounts.  The fair values of the interest rate swaps were calculated as the difference between the contracted swap rate and the current market replacement swap rate multiplied by the present value of one basis point for the notional amount of the contract.  See the table that follows the financial instrument descriptions for the reported fair values of derivative assets and liabilities.

Long-term investments

Long-term investments include the mutual fund assets the Company holds to fund a portion of its deferred compensation liabilities and all of its non-qualified supplemental executive defined contribution obligations (see the defined contribution plans section of Note 9).  Fair value and carrying value were the same because the mutual fund assets were recorded at fair value in accordance with the fair value option rules established by the Financial Accounting Standards Board (FASB).  Fair values for the mutual funds were calculated using the published market price per unit at the reporting date multiplied by the number of units held at the reporting date.  See the table that follows the financial instrument descriptions for the reported fair value of long-term investments.

Debt obligations

The fair value of debt with original maturities greater than one year comprised the combined present values of scheduled principal and interest payments for each of the various loans, individually discounted at rates equivalent to those which could be obtained by the Company for new debt issues with durations equal to the average life to maturity of each loan.  The fair values of the remaining Company debt obligations approximated their carrying values due to the short-term nature of the debt.  The Company’s fair value measurements for debt fall in level 2 of the fair value hierarchy.

At June 30, 2015, and December 31, 2014, the fair value of debt and the related carrying values, including current maturities, were as follows:

 

(In thousands)

 

June 30,

2015

 

 

December 31,

2014

 

Fair value

 

$

269,705

 

 

$

285,441

 

Carrying value

 

 

260,470

 

 

 

273,931

 

 

The following tables present financial assets and liabilities measured on a recurring basis at fair value as of June 30, 2015, and December 31, 2014, and the level within the fair value hierarchy in which the fair value measurements fall:

 

(In thousands)

 

June

2015

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Mutual fund assets

 

$

20,273

 

 

$

20,273

 

 

$

 

 

$

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

59

 

 

 

 

 

 

59

 

 

 

 

Total assets at fair value

 

$

20,332

 

 

$

20,273

 

 

$

59

 

 

$

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

149

 

 

$

 

 

$

149

 

 

$

 

Interest rate contracts

 

 

30

 

 

 

 

 

 

30

 

 

 

 

Total liabilities at fair value

 

$

179

 

 

$

 

 

$

179

 

 

$

 

 

 

7


 

(In thousands)

 

December

2014

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Mutual fund assets

 

$

20,217

 

 

$

20,217

 

 

$

 

 

$

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

73

 

 

 

 

 

 

73

 

 

 

 

Total assets at fair value

 

$

20,290

 

 

$

20,217

 

 

$

73

 

 

$

 

Derivative liabilities :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

628

 

 

 

 

 

$

628

 

 

 

 

 

 

 

4.

DERIVATIVE INSTRUMENTS

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by the use of derivative instruments is foreign currency exchange risk.  The Company holds forward foreign currency exchange contracts that are not designated as any type of accounting hedge as defined by U.S. GAAP.  The Company uses these contracts to manage its exposure to exchange rate fluctuations on certain Company subsidiary cash, accounts receivable, accounts payable and other obligation balances that are denominated in currencies other than the entities’ functional currencies. The forward foreign exchange contracts are recognized on the balance sheet as either an asset or a liability measured at fair value. Gains and losses arising from recording the foreign exchange contracts at fair value are reported in earnings as offsets to the losses and gains reported in earnings arising from the re-measurement of the asset and liability balances into the applicable functional currencies. At June 30, 2015, and December 31, 2014, the Company had open forward foreign currency exchange contracts, all with settlement dates of less than one month, to buy or sell foreign currencies with U.S. dollar equivalent amounts of $45,601,000 and $51,623,000, respectively.

The Company is exposed to volatility in short-term interest rates and mitigates certain portions of that risk by using interest rate swaps.  The interest rate swaps are recognized on the balance sheet as either an asset or a liability measured at fair value.  The Company held an interest rate swap contract with a notional value of $4,138,000   at June 30, 2015, which is designated as a cash flow hedge.  At December 31, 2014, the Company held no significant interest rate swap contracts.  Period-to-period changes in the fair value of interest rate swap contracts are recognized as gains or losses in other comprehensive income, to the extent effective.  As each interest rate swap hedge contract is settled, the corresponding gain or loss is reclassified out of accumulated other comprehensive income (AOCI) into earnings in that settlement period. The latest date through which the Company expects to hedge its exposure to the volatility of short-term interest rates is December 1, 2021.

The fair values of the derivative instruments held by the Company on June 30, 2015, and December 31, 2014, and derivative instrument gains and losses for the three and six month periods ending June 30, 2015 and 2014, were immaterial.  For amounts reclassified out of AOCI into earnings for the three and six month periods ended June 30, 2015 and 2014, see Note 10.

 

 

5.

STOCK-BASED COMPENSATION

On June 30, 2015 the Company had stock options outstanding under its 2000 Stock Option Plan, stock options and stock awards outstanding under its 2006 Incentive Compensation Plan and stock options, stock awards and stock appreciation rights (SARs) outstanding under its 2011 Incentive Compensation Plan.

Compensation expense recorded for all stock options, stock awards and SARs was as follows:

(In thousands)

 

Three Months Ended

June 30

 

 

Six Months Ended

June 30

 

2015

 

 

2014

 

 

2015

 

 

2014

 

$

2,364

 

 

$

544

 

 

$

3,162

 

 

$

770

 

 

The period-over-period increases in stock-based compensation expenses were primarily attributable to increases in the fair values of the Company’s cash-settled SARs, which are marked to fair value at each reporting period. A significant increase in the market value of Company common stock in the 2015 reporting periods led to the increase in SARs fair value.  Additionally, in the first quarter of 2014, management assessed that the profitability performance targets on which the compensation expenses for stock awards vesting on December 31, 2014, were based would not be achieved. Consequently, the resulting adjustment lowered the overall stock-based compensation expense for the six months ended June 30, 2014.  

8


 

Unrecognized compensation costs for stock options, stock awards and SARs were as follows:

(In thousands)

 

June 30, 2015

 

 

December 31, 2014

 

Stock options

 

$

1,390

 

 

$

774

 

Stock awards

 

 

3,400

 

 

 

1,365

 

SARs

 

 

2,855

 

 

 

693

 

 

The increases in unrecognized compensation costs for stock options, stock awards and SARs reflected the 2015 grants of:

 

 

Shares

 

Stock options

 

 

84,672

 

Stock awards

 

 

74,712

 

SARs

 

 

187,527

 

 

The unrecognized compensation costs at June 30, 2015, are expected to be recognized over weighted-average periods of 1.4 years, 2.2 years and 1.4 years for stock options, stock awards and SARs, respectively.

 

 

6.

INVENTORIES

The composition of inventories was as follows: 

 

(In thousands)

 

June 30, 2015

 

 

December 31, 2014

 

Finished goods

 

$

128,113

 

 

$

126,157

 

Raw materials

 

 

50,469

 

 

 

57,076

 

Total inventories

 

$

178,582

 

 

$

183,233

 

 

Inventories are priced primarily using the last-in, first-out inventory valuation method.  If the first-in, first-out inventory valuation method had been used for all inventories, inventory balances would have been approximately $31,655,000 and $34,340,000 higher than reported at June 30, 2015, and December 31, 2014, respectively.

 

 

7.

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 U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund).  Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party (PRP) at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA 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.

As of June 30, 2015, the Company estimated a range of possible environmental and legal losses of $20.7 million to $41.1 million.  At June 30, 2015, and December 31, 2014, the Company’s accrued liability for such losses, which represented the Company’s best estimate within the estimated range of possible environmental and legal losses, was $20.7 million and $22.0  million, respectively. During the first six months of 2015 and 2014, cash outlays related to legal and environmental matters approximated $1.9 and $0.5 million, respectively.  

For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Given the information available, management believes the Company has no liability at these sites. However, in the event of one or more adverse determinations with respect to such sites in any annual or interim period, the effect on the Company’s cash flows and results of operations for those periods could be material.  Based upon the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for

9


 

cleanup, and the extended period over which any costs would be incurred, the Company believes that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position.

Following are summaries of the material contingencies at June 30, 2015:

Maywood, New Jersey Site

The Company’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of certain alleged chemical contamination.  Pursuant to an Administrative Order on Consent entered into between 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 has completed various Remedial Investigation Feasibility Studies (RI/FS), and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated soil. USEPA has not yet issued a ROD for chemically-contaminated groundwater for the Maywood site. Based on the most current information available, the Company recorded a $0.6 million increase in its remediation liability for this site in the three months ended March 31, 2015. The Company believes its recorded liability represents its best estimate of the cost of remediation for the Maywood site. The best estimate of the cost of remediation for the Maywood site could change as the Company continues to hold discussions with USEPA, as the design of the remedial action progresses or if other PRPs are identified. The ultimate amount for which the Company is liable could differ from the Company’s current recorded liability.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil.  Based on the Company’s review and analysis of this order, no changes to the Company’s current recorded liability for claims associated with soil remediation of chemical contamination were required.  

In addition, under the terms of a settlement agreement reached on November 12, 2004, the United States Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985 under which the United States will take title to and responsibility for radioactive waste removal at the Maywood site, including past and future remediation costs incurred by the United States.  As such, the Company recorded no liability related to this settlement agreement.

D’Imperio Property Site

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances at several sites in New Jersey.  The Company was named as a PRP in the case United States v. Lightman (1:92-cv-4710 D.N.J.), which involved the D’Imperio Property Site located in New Jersey.  In 2012, the PRPs approved certain changes to remediation cost estimates which were considered in the Company’s determination of its range of estimated possible losses and liability balance.  The changes in range of possible losses and liability balance were immaterial.  Remediation work is continuing at this site.  Based on current information, the Company believes that its recorded liability for claims associated with the D’Imperio site is adequate.  However, actual costs could differ from current estimates.

Wilmington Site

The Company is currently contractually obligated to contribute to the response costs associated with the Company’s formerly-owned site at 51 Eames Street, Wilmington, Massachusetts.  Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980.  Under the agreement, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. To date, the Company has paid the current owner $2.3 million for the Company’s portion of environmental response costs. The Company has recorded a liability for its portion of the estimated remediation costs for the site.  Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

The Company and other prior owners also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site.  While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed.

The Company believes that based on current information its recorded liability for the claims related to this site is adequate.  However, depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

10


 

Unclaimed Property Examination

The Company is undergoing an unclaimed property examination by the state of Delaware (the Company’s state of incorporation) and seven other states for the period covering 1981 through 2010. The types of unclaimed property under examination include certain un-cashed payroll and accounts payable checks and certain accounts receivable credits.  Generally, unclaimed property must be reported and remitted to the state of the rightful owner.  In cases where the rightful owner cannot be identified, the property must be reported and remitted to the unclaimed property holder’s state of incorporation. The examination of un-cashed payroll and accounts payable checks has been completed, and no significant adjustments to the Company’s unclaimed property liability were required. The examination of accounts receivable credits is ongoing. On the basis of currently available information, the Company believes its liability for unclaimed property is adequate. Because the audit is not final, the Company’s ultimate actual obligation could differ from the recorded liability.

Customer Claims

From time to time in the normal course of business, customers make claims against the Company for issues such as product performance and liability, contract disputes, delivery errors and other various concerns. Frequently, such claims are subject to extensive investigation, discussion and negotiation prior to settlement or resolution. On the basis of the most current information available, the Company’s liability for such claims was $784,000 at June 30, 2015 compared to $4,016,000 at March 31, 2015, and $3,475,000 at December 31, 2014. The decline in the claims balance was attributable to a favorable 2015 second quarter settlement of a previously recorded potential claim. The actual amounts ultimately paid, if any, to settle the remaining claims balance could differ from the amounts currently recorded.

Mexico Value-Added Tax

During an examination of the Company’s 2009 and 2010 Mexico subsidiary financial records, local tax authority auditors determined that the Company’s treatment of value-added tax (VAT) for purchase transactions with a certain vendor was incorrect. As a result, the tax authorities concluded that the Company owed past VAT from 2009 -2010 along with assessed inflation, penalty and interest charges. Consequently, the Company recorded a liability and corresponding income statement charge for the VAT inflation, penalty and interest charges. The liability included the 2009 – 2010 assessment of inflation, penalty and interest charges plus an estimated amount for the potential exposure for 2011 – 2014. The amount recorded was not material to the Company’s results of operations. No charge was recorded for the past unpaid VAT because the Company believes the amount will be recoverable through the normal VAT process. Depending on negotiations with Mexico’s tax authorities, the accuracy of the estimates for 2011 - 2014 and the actual amount of the past VAT that is recovered by the Company, the actual settlement could differ from the current recorded liability.  

 

 

8.

POSTRETIREMENT BENEFIT PLANS

Defined Benefit Pension Plans

The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations.  The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued.

Components of Net Periodic Benefit Cost

 

 

UNITED STATES

 

(In thousands)

 

Three Months Ended

June 30

 

 

Six Months Ended

June 30

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Interest cost

 

$

1,702

 

 

$

1,723

 

 

$

3,403

 

 

$

3,446

 

Expected return on plan assets

 

 

(2,393

)

 

 

(2,378

)

 

 

(4,786

)

 

 

(4,756

)

Amortization of net actuarial loss

 

 

1,149

 

 

 

661

 

 

 

2,298

 

 

 

1,323

 

Net periodic benefit cost

 

$

458

 

 

$

6

 

 

$

915

 

 

$

13

 

11


 

 

 

 

UNITED KINGDOM

 

(In thousands)

 

Three Months Ended

June 30

 

 

Six Months Ended

June 30

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Interest cost

 

$

198

 

 

$

247

 

 

$

393

 

 

$

490

 

Expected return on plan assets

 

 

(265

)

 

 

(333

)

 

 

(527

)

 

 

(661

)

Amortization of net actuarial loss

 

 

46

 

 

 

 

 

 

91

 

 

 

 

Net periodic benefit (income) cost

 

$

(21

)

 

$

(86

)

 

$

(43

)