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EX-32 - EX-32 - STEPAN COscl-ex32_7.htm
EX-31.2 - EX-31.2 - STEPAN COscl-ex312_8.htm
EX-31.1 - EX-31.1 - STEPAN COscl-ex311_6.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2017

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      No  

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      No  

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

 

(Check one): Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

Smaller reporting company

 

 

 

 

 

 

 

 

Emerging growth company

 

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes       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 April 20, 2017

Common Stock, $1 par value

 

22,469,827 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

March 31

 

 

 

2017

 

 

2016

 

Net Sales

 

$

468,269

 

 

$

445,897

 

Cost of Sales

 

 

376,171

 

 

 

352,398

 

Gross Profit

 

 

92,098

 

 

 

93,499

 

Operating Expenses:

 

 

 

 

 

 

 

 

Selling

 

 

13,485

 

 

 

13,690

 

Administrative

 

 

17,971

 

 

 

18,700

 

Research, development and technical services

 

 

13,421

 

 

 

13,782

 

Deferred compensation expense

 

 

376

 

 

 

2,720

 

 

 

 

45,253

 

 

 

48,892

 

      Business restructuring expenses (Note 14)

 

 

786

 

 

 

 

Operating Income

 

 

46,059

 

 

 

44,607

 

Other Income (Expense):

 

 

 

 

 

 

 

 

Interest, net

 

 

(2,992

)

 

 

(3,614

)

Other, net (Note 13)

 

 

1,263

 

 

 

(525

)

 

 

 

(1,729

)

 

 

(4,139

)

 

 

 

 

 

 

 

 

 

Income Before Provision for Income Taxes

 

 

44,330

 

 

 

40,468

 

Provision for Income Taxes(a)

 

 

12,418

 

 

 

12,549

 

Net Income(a)

 

 

31,912

 

 

 

27,919

 

Net (Income) Loss Attributable to Noncontrolling Interests (Note 2)

 

 

1

 

 

 

(3

)

Net Income Attributable to Stepan Company(a)

 

$

31,913

 

 

$

27,916

 

 

 

 

 

 

 

 

 

 

Net Income Per Common Share Attributable to Stepan Company

(Note 9):

 

 

 

 

 

 

 

 

Basic(a)

 

$

1.39

 

 

$

1.23

 

Diluted(a)

 

$

1.37

 

 

$

1.22

 

 

 

 

 

 

 

 

 

 

Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 9):

 

 

 

 

 

 

 

 

Basic

 

 

22,901

 

 

 

22,733

 

Diluted(a)

 

 

23,331

 

 

 

22,899

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.21

 

 

$

0.19

 

 

(a)

The 2016 amounts for the noted line items have been immaterially changed from the amounts originally reported as a result of the Company’s fourth quarter 2016 adoption of Accounting Standards Update (ASU) No. 2019-9, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

 

 

 

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

March 31

 

 

 

2017

 

 

2016

 

Net income

 

$

31,912

 

 

$

27,919

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (Note 10)

 

 

10,454

 

 

 

12,590

 

Defined benefit pension adjustments, net of tax (Note 10)

 

 

565

 

 

 

564

 

Derivative instrument activity, net of tax (Note 10)

 

 

(2

)

 

 

(21

)

Total other comprehensive income

 

 

11,017

 

 

 

13,133

 

Comprehensive income

 

 

42,929

 

 

 

41,052

 

Comprehensive income attributable to noncontrolling interests (Note 2)

 

 

(12

)

 

 

(14

)

Comprehensive income attributable to Stepan Company

 

$

42,917

 

 

$

41,038

 

 

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)

 

March 31, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

197,809

 

 

$

225,743

 

Receivables, net

 

 

287,491

 

 

 

263,408

 

Inventories (Note 6)

 

 

189,777

 

 

 

173,663

 

Other current assets

 

 

24,525

 

 

 

22,727

 

Total current assets

 

 

699,602

 

 

 

685,541

 

Property, Plant and Equipment:

 

 

 

 

 

 

 

 

Cost

 

 

1,534,929

 

 

 

1,513,478

 

Less:  Accumulated depreciation

 

 

(950,822

)

 

 

(930,764

)

Property, plant and equipment, net

 

 

584,107

 

 

 

582,714

 

Goodwill, net

 

 

25,802

 

 

 

25,308

 

Other intangible assets, net

 

 

21,716

 

 

 

22,339

 

Long-term investments (Note 3)

 

 

25,560

 

 

 

24,055

 

Other non-current assets

 

 

13,645

 

 

 

13,933

 

Total assets

 

$

1,370,432

 

 

$

1,353,890

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt  (Note 12)

 

$

27,848

 

 

$

28,154

 

Accounts payable

 

 

163,751

 

 

 

158,316

 

Accrued liabilities

 

 

80,011

 

 

 

110,795

 

Total current liabilities

 

 

271,610

 

 

 

297,265

 

Deferred income taxes

 

 

15,190

 

 

 

12,497

 

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

 

 

288,898

 

 

 

288,859

 

Other non-current liabilities

 

 

120,177

 

 

 

119,353

 

Commitments and Contingencies  (Note 7)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Common stock, $1 par value; authorized 60,000,000 shares;

   Issued 25,970,037 shares in 2017 and 25,894,782 shares in 2016

 

 

25,970

 

 

 

25,895

 

Additional paid-in capital

 

 

161,113

 

 

 

158,042

 

Accumulated other comprehensive loss (Note 10)

 

 

(116,461

)

 

 

(127,465

)

Retained earnings

 

 

676,377

 

 

 

649,070

 

Less:  Common treasury stock, at cost, 3,501,313 shares in 2017

   and 3,470,084 shares in 2016

 

 

(73,766

)

 

 

(70,938

)

Total Stepan Company stockholders’ equity

 

 

673,233

 

 

 

634,604

 

Noncontrolling interests (Note 2)

 

 

1,324

 

 

 

1,312

 

Total equity

 

 

674,557

 

 

 

635,916

 

Total liabilities and equity

 

$

1,370,432

 

 

$

1,353,890

 

 

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)

 

Three Months Ended March 31

 

 

 

2017

 

 

2016

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

31,912

 

 

$

27,919

 

Adjustments to reconcile net income to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

18,707

 

 

 

18,070

 

Deferred compensation

 

 

376

 

 

 

2,720

 

Realized and unrealized (gains) losses on long-term investments

 

 

(1,645

)

 

 

306

 

Stock-based compensation

 

 

1,385

 

 

 

2,423

 

Deferred income taxes

 

 

2,543

 

 

 

2,683

 

Other non-cash items

 

 

721

 

 

 

20

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(20,263

)

 

 

(36,263

)

Inventories

 

 

(14,396

)

 

 

(5,274

)

Other current assets

 

 

(1,694

)

 

 

(315

)

Accounts payable and accrued liabilities

 

 

(14,184

)

 

 

(14,846

)

Pension liabilities

 

 

(127

)

 

 

156

 

Environmental and legal liabilities

 

 

24

 

 

 

837

 

Deferred revenues

 

 

(81

)

 

 

(282

)

Net Cash (Used In) Provided By Operating Activities(a)

 

 

3,278

 

 

 

(1,846

)

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(20,396

)

 

 

(19,340

)

Business acquisition (Note 15)

 

 

(4,339

)

 

 

 

Other, net

 

 

(1,887

)

 

 

(3,119

)

Net Cash Used In Investing Activities

 

 

(26,622

)

 

 

(22,459

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Revolving debt and bank overdrafts, net

 

 

 

 

 

(3,588

)

Other debt repayments

 

 

(441

)

 

 

(159

)

Dividends paid

 

 

(4,606

)

 

 

(4,237

)

Company stock repurchased

 

 

(1,500

)

 

 

(908

)

Stock option exercises

 

 

835

 

 

 

258

 

Other, net

 

 

(1,486

)

 

 

(235

)

Net Cash Used In Financing Activities(a)

 

 

(7,198

)

 

 

(8,869

)

Effect of Exchange Rate Changes on Cash

 

 

2,608

 

 

 

2,700

 

Net Decrease in Cash and Cash Equivalents

 

 

(27,934

)

 

 

(30,474

)

Cash and Cash Equivalents at Beginning of Period

 

 

225,743

 

 

 

176,143

 

Cash and Cash Equivalents at End of Period

 

$

197,809

 

 

$

145,669

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Cash payments (refunds) of income taxes, net of payments/refunds

 

$

5,603

 

 

$

(733

)

Cash payments of interest

 

$

2,164

 

 

$

2,124

 

(a)

The amounts for the first quarter of 2016 have been immaterially changed from the originally reported amounts as a result of the Company’s fourth quarter 2016 adoption of ASU No. 2019-9, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

 

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

March 31, 2017

Unaudited

 

 

 

1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The condensed consolidated financial statements included herein have been prepared by Stepan Company (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (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 March 31, 2017, and its results of operations and cash flows for the three months ended March 31, 2017 and 2016, 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 2016 Annual Report on Form 10-K.

 

 

2.

RECONCILIATIONS OF EQUITY

Below are reconciliations of total equity, Company equity and equity attributable to noncontrolling interests for the three months ended March 31, 2017 and 2016:

 

(In thousands)

 

Total Equity

 

 

Stepan

Company

Equity

 

 

Noncontrolling Interests’

Equity (3)

 

Balance at January 1, 2017

 

$

635,916

 

 

$

634,604

 

 

$

1,312

 

Net income

 

 

31,912

 

 

 

31,913

 

 

 

(1

)

Dividends

 

 

(4,606

)

 

 

(4,606

)

 

 

 

Common stock purchases (1)

 

 

(2,991

)

 

 

(2,991

)

 

 

 

Stock option  exercises

 

 

835

 

 

 

835

 

 

 

 

Defined benefit pension adjustments, net of tax

 

 

565

 

 

 

565

 

 

 

 

Translation adjustments

 

 

10,454

 

 

 

10,441

 

 

 

13

 

Derivative instrument activity, net of tax

 

 

(2

)

 

 

(2

)

 

 

 

Other (2)

 

 

2,474

 

 

 

2,474

 

 

 

 

Balance at March 31, 2017

 

$

674,557

 

 

$

673,233

 

 

$

1,324

 

 

(In thousands)

 

Total Equity

 

 

Stepan

Company

Equity

 

 

Noncontrolling Interests’

Equity (3)

 

Balance at January 1, 2016

 

$

558,384

 

 

$

556,984

 

 

$

1,400

 

Net income(4)

 

 

27,919

 

 

 

27,916

 

 

 

3

 

Dividends

 

 

(4,237

)

 

 

(4,237

)

 

 

 

Common stock purchases (1)

 

 

(1,143

)

 

 

(1,143

)

 

 

 

Stock option exercises

 

 

258

 

 

 

258

 

 

 

 

Defined benefit pension adjustments, net of tax

 

 

564

 

 

 

564

 

 

 

 

Translation adjustments

 

 

12,590

 

 

 

12,579

 

 

 

11

 

Derivative instrument activity, net of tax

 

 

(21

)

 

 

(21

)

 

 

 

Other (2) (4)

 

 

1,929

 

 

 

1,929

 

 

 

 

Balance at March 31, 2016

 

$

596,243

 

 

$

594,829

 

 

$

1,414

 

 

(1)

Includes the value of Company shares purchased in the open market and the value of Company common shares tendered by employees to settle statutory withholding taxes related to distributions of deferred performance awards and deferred management incentive compensation and to exercises of stock appreciation rights.

 

 

(2)

Primarily comprised of activity related to stock-based compensation and deferred compensation.

 

(3)

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

 

(4)

Amounts for the noted line items have been immaterially changed from the amounts originally reported as a result of the Company’s fourth quarter 2016 adoption of ASU No. 2016-9, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.

 

 

 

6


3.

FAIR VALUE MEASUREMENTS

The following were the financial instruments held by the Company at March 31, 2017, and December 31, 2016, and the methods and assumptions used to estimate the instruments’ fair values:

Cash and cash equivalents

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

Derivative assets and liabilities

Derivative assets and liabilities included the foreign currency exchange 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. 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 included the mutual fund assets the Company held 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 8).  Fair value and carrying value were the same because the mutual fund assets were recorded at fair value. 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 within level 2 of the fair value hierarchy.

At March 31, 2017, and December 31, 2016, the fair values and related carrying values of debt, including current maturities, were as follows (the fair value and carrying value amounts are presented without regard to unamortized debt issuance costs of $1,102,000 and $1,141,000 as of March 31, 2017 and December 31, 2016, respectively):

 

(In thousands)

 

March 31,

2017

 

 

December 31,

2016

 

Fair value

 

$

316,207

 

 

$

316,364

 

Carrying value

 

 

317,848

 

 

 

318,154

 

                                  

The following tables present financial assets and liabilities measured on a recurring basis at fair value as of March 31, 2017, and December 31, 2016, and the level within the fair value hierarchy in which the fair value measurements fall:

 

(In thousands)

 

March 31,

2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Mutual fund assets

 

$

25,560

 

 

$

25,560

 

 

$

 

 

$

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

671

 

 

 

 

 

 

671

 

 

 

 

Total assets at fair value

 

$

26,231

 

 

$

25,560

 

 

$

671

 

 

$

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

185

 

 

$

 

 

$

185

 

 

$

 

 

 

7


(In thousands)

 

December 31,

2016

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Mutual fund assets

 

$

24,055

 

 

$

24,055

 

 

$

 

 

$

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

453

 

 

 

 

 

 

453

 

 

 

 

Total assets at fair value

 

$

24,508

 

 

$

24,055

 

 

$

453

 

 

$

 

Derivative liabilities :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

469

 

 

$

 

 

$

469

 

 

$

 

 

 

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 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 March 31, 2017, and December 31, 2016, the Company had open forward foreign currency exchange contracts, all with durations of one to three months, to buy or sell foreign currencies with U.S. dollar equivalent amounts of $32,021,000 and $33,372,000, respectively.

The fair values of the derivative instruments held by the Company on March 31, 2017, and December 31, 2016, are disclosed in Note 3. Derivative instrument gains and losses for the three-month periods ended March 31, 2017 and 2016, were immaterial.  For amounts reclassified out of accumulated other comprehensive income (loss) (AOCI) into earnings for the three-month periods ended March 31, 2017 and 2016, see Note 10.

 

 

5.

STOCK-BASED COMPENSATION

On March 31, 2017, the Company had 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. SARs granted prior to 2015 are cash-settled, and SARs granted after 2014, including the 2017 grant, are stock-settled.  Stock options and SARs granted prior to 2017 generally cliff vested after two years. Stock options and SARs granted in 2017 have a three-year graded vesting feature, with one-third of the awards vesting each year. The Company has elected the straight-line method of expense attribution for the stock options and SARs with the graded vesting feature.

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

(In thousands)

 

Three Months Ended

March 31

 

2017

 

 

2016

 

$

1,385

 

 

$

2,423

 

 

The year-over-year decline in stock-based compensation expense was primarily attributable to cash-settled SARs. SARs compensation expense decreased due to a decline in the fair values of cash-settled SARs that resulted from a decrease in the market value of Company common stock during the first quarter of 2017. The market value of Company common stock increased during the first quarter of 2016.

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

(In thousands)

 

March 31, 2017

 

 

December 31, 2016

 

Stock options

 

$

2,163

 

 

$

895

 

Stock awards

 

 

7,569

 

 

 

5,514

 

SARs

 

 

4,495

 

 

 

1,859

 

8


 

The increases in unrecognized compensation costs for stock options, stock awards and SARs reflected the 2017 grants of:

 

 

Shares

 

Stock options

 

 

71,434

 

Stock awards (at target)

 

 

44,599

 

SARs

 

 

148,723

 

 

The unrecognized compensation costs at March 31, 2017, are expected to be recognized over weighted-average periods of 2.3 years, 2.0 years and 2.3 years for stock options, stock awards and SARs, respectively.

 

 

6.

INVENTORIES

The composition of inventories at March 31, 2017, and December 31, 2016, was as follows: 

 

(In thousands)

 

March 31, 2017

 

 

December 31, 2016

 

Finished goods

 

$

129,244

 

 

$

127,597

 

Raw materials

 

 

60,533

 

 

 

46,066

 

Total inventories

 

$

189,777

 

 

$

173,663

 

 

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 $28,835,000 and $25,872,000 higher than reported at March 31, 2017, and December 31, 2016, 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 March 31, 2017, the Company estimated a range of possible environmental and legal losses of $25.6 million to $46.3 million.  At March 31, 2017, and December 31, 2016, 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 $25.8 million. Cash outlays related to legal and environmental matters approximated $0.4 million and $0.3 million for the three-month periods ended March 31, 2017 and 2016, 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 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.

9


Following are summaries of the material contingencies at March 31, 2017:

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 the U.S. 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 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 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, if a groundwater ROD is issued 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 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 U. S. 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 a lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Property Site located in New Jersey.  In 2016, the PRPs were provided with updated 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 represents its best estimate of the cost of remediation for the D’Imperio 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.

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 $2.5 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


Other U.S. Sites

Through the regular environmental monitoring of its plant production sites, the Company discovered levels of chemical contamination that were above thresholds allowed by law at two of its U.S plants. The Company voluntarily reported its results to the applicable state environmental agencies. As a result, the Company is required to perform self-remediation of the affected areas. In the fourth quarter of 2016, the Company recognized a charge for the estimated cost of remediating the sites. Based on current information, the Company believes that its recorded liability for the remediation is adequate. However, actual costs could differ from current estimates.  

 

 

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

 

 

UNITED KINGDOM

 

(In thousands)

 

Three Months Ended

March 31

 

 

Three Months Ended

March 31

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest cost

 

$

1,661

 

 

$

1,729

 

 

$

143

 

 

$

193

 

Expected return on plan assets

 

 

(2,321

)

 

 

(2,254

)

 

 

(192

)

 

 

(238

)

Amortization of net actuarial loss

 

 

788

 

 

 

882

 

 

 

92

 

 

 

20

 

Net periodic benefit cost (income)

 

$

128

 

 

$

357

 

 

$

43

 

 

$

(25

)

 

Employer Contributions

U.S. Plans

As a result of pension funding relief provisions included in the Highway and Transportation Funding Act of 2014, the Company expects to make no 2017 contributions to the funded U.S. qualified defined benefit plans. Approximately $312,000 is expected to be paid related to the unfunded non-qualified plans in 2017.  Of such amount, $143,000 had been paid related to the non-qualified plans as of March 31, 2017.

U.K. Plan

The Company’s U. K. subsidiary expects to contribute approximately $300,000 to its defined benefit pension plan in 2017.  Of such amount, $123,000 had been contributed to the plan as of March 31, 2017.

Defined Contribution Plans

The Company sponsors retirement savings defined contribution plans that cover U.S. and U.K. employees. The Company also sponsors a qualified profit sharing plan for its U.S. employees. The retirement savings and profit sharing defined contribution plans include a qualified plan and a non-qualified supplemental executive plan.

Defined contribution plan expenses for the Company’s retirement savings and profit sharing plans were as follows:

(In thousands)

 

Three Months Ended

March 31

 

 

 

2017

 

 

2016

 

Retirement savings plans

 

$

1,259

 

 

$

1,291

 

Profit sharing plan

 

 

1,843

 

 

 

1,717

 

Total  defined contribution expense

 

$

3,102

 

 

$

3,008

 

 

The Company funds the obligations of its non-qualified supplemental executive defined contribution plans (supplemental plans) through a rabbi trust. The trust comprises various mutual fund investments selected by the participants of the supplemental plans. In accordance with the accounting guidance for rabbi trust arrangements, the assets of the trust and the obligations of the supplemental plans are reported on the Company’s consolidated balance sheets.  The Company elected the fair

11


value option for the mutual fund investment assets so that offsetting changes in the mutual fund values and defined contribution plan obligations would be recorded in earnings in the same period. Therefore, the mutual funds are reported at fair value with any subsequent changes in fair value recorded in the consolidated statements of income. The liabilities related to the supplemental plans increase (i.e., supplemental plan expense is recognized) when the value of the trust assets appreciates and decrease when the value of the trust assets declines (i.e., supplemental plan income is recognized). At March 31, 2017, the balance of the trust assets was $1,846,000, which equaled the balance of the supplemental plan liabilities (see the long-term investments section in Note 3 for further information regarding the Company’s mutual fund assets).

 

 

9.

EARNINGS PER SHARE

Below are the computations of basic and diluted earnings per share for the three months ended March 31, 2017 and 2016:

 

 

(In thousands, except per share amounts)

 

Three Months Ended

March 31

 

 

 

2017

 

 

2016

 

Computation of Basic Earnings per Share

 

 

 

 

 

 

 

 

Net income attributable to Stepan Company

 

$

31,913

 

 

$

27,916

 

Weighted-average number of common shares outstanding

 

 

22,901

 

 

 

22,733

 

Basic earnings per share

 

$

1.39

 

 

$

1.23

 

 

 

 

 

 

 

 

 

 

Computation of Diluted Earnings per Share

 

 

 

 

 

 

 

 

Net income attributable to Stepan Company

 

$

31,913

 

 

$

27,916

 

Weighted-average number of shares outstanding

 

 

22,901

 

 

 

22,733

 

Add weighted-average net shares from assumed

   exercise of options (under treasury stock method) (1)

 

 

183

 

 

 

133

 

Add weighted-average net shares related to unvested

   stock awards (under treasury stock method)

 

 

8

 

 

 

4

 

Add weighted-average net shares from assumed

   exercise of SARs (under treasury stock method) (1)

 

 

142

 

 

 

––

 

Add weighted-average contingently issuable net shares

   related to performance stock awards (under treasury stock method)

 

 

97

 

 

 

29

 

Weighted-average shares applicable to diluted earnings

 

 

23,331

 

 

 

22,899

 

Diluted earnings per share

 

$

1.37

 

 

$

1.22

 

(1) Options/SARs to acquire 74,521 and 89,617 shares of Company common stock were excluded from the computations of diluted earnings per share for the three months ended March 31, 2017 and March 31, 2016, because the effect of including the instruments would have been antidilutive.

 

 

10.

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Below is the change in the Company’s AOCI balance by component (net of income taxes) for the three months ended March 31, 2017 and 2016:

 

(In thousands)

 

Foreign

Currency

Translation

Adjustments

 

 

Defined

Benefit

Pension Plan

Adjustments

 

 

Cash Flow

Hedge

Adjustments

 

 

Total

 

Balance at December 31, 2015

 

$

(88,337

)

 

$

(36,825

)

 

$

74

 

 

$

(125,088

)

Other comprehensive income before reclassifications

 

 

12,579

 

 

 

 

 

 

(23

)

 

 

12,556

 

Amounts reclassified from AOCI

 

 

 

 

 

564

 

 

 

2

 

 

 

566

 

Net current-period other comprehensive income

 

 

12,579

 

 

 

564

 

 

 

(21

)

 

 

13,122

 

Balance at March 31, 2016

 

$

(75,758

)

 

$

(36,261

)

 

$

53

 

 

$

(111,966

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2016

 

$

(96,775

)

 

$

(30,790

)

 

$

100

 

 

$

(127,465

)

Other comprehensive income before reclassifications

 

 

10,441

 

 

 

 

 

 

 

 

 

10,441

 

Amounts reclassified from AOCI

 

 

 

 

 

565

 

 

 

(2

)

 

 

563

 

Net current-period other comprehensive income

 

 

10,441

 

 

 

565

 

 

 

(2

)

 

 

11,004

 

Balance at March 31, 2017

 

$

(86,334

)

 

$

(30,225

)

 

$

98

 

 

$

(116,461

)

12


 

 

Information regarding the reclassifications out of AOCI for the three month periods ended March 31, 2017 and 2016, is displayed below:

 

(In thousands)

 

Amount Reclassified from AOCI (a)

 

AOCI Components

 

Three Months Ended

March 31

 

 

Affected Line Item in

Consolidated Statements

of Income

 

 

2017

 

 

2016

 

 

 

Amortization of defined benefit pension actuarial losses

 

$

(880

)

 

$

(902

)

 

(b)

 

 

 

315

 

 

 

338

 

 

Tax benefit

 

 

$

(565

)

 

$

(564

)

 

Net of tax

Gains and losses on cash flow hedges:

 

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

$

 

 

$

(6

)

 

Interest, net

Foreign exchange contracts

 

 

2

 

 

 

2