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EX-32 - EX-32 - STEPAN COscl-ex32_6.htm
EX-31.2 - EX-31.2 - STEPAN COscl-ex312_8.htm
EX-31.1 - EX-31.1 - STEPAN COscl-ex311_7.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 SEPTEMBER 30, 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 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 October 19, 2017

Common Stock, $1 par value

 

   22,522,579 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

September 30

 

 

Nine Months Ended

September 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net Sales

 

$

487,814

 

 

$

445,030

 

 

$

1,451,184

 

 

$

1,345,530

 

Cost of Sales

 

 

412,212

 

 

 

361,635

 

 

 

1,193,518

 

 

 

1,075,705

 

Gross Profit

 

 

75,602

 

 

 

83,395

 

 

 

257,666

 

 

 

269,825

 

Operating Expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling

 

 

13,740

 

 

 

13,990

 

 

 

40,484

 

 

 

42,252

 

Administrative

 

 

18,557

 

 

 

18,958

 

 

 

54,376

 

 

 

55,350

 

Research, development and technical services

 

 

12,699

 

 

 

14,268

 

 

 

40,416

 

 

 

42,306

 

Deferred compensation expense

 

 

(129

)

 

 

7,441

 

 

 

5,263

 

 

 

12,595

 

 

 

 

44,867

 

 

 

54,657

 

 

 

140,539

 

 

 

152,503

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Business restructuring expenses (Note 14)

 

 

426

 

 

 

 

 

 

1,798

 

 

 

1,061

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Income

 

 

30,309

 

 

 

28,738

 

 

 

115,329

 

 

 

116,261

 

Other Income (Expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest, net

 

 

(2,763

)

 

 

(2,824

)

 

 

(8,618

)

 

 

(9,855

)

Other, net (Note 13)

 

 

1,766

 

 

 

1,229

 

 

 

3,994

 

 

 

401

 

 

 

 

(997

)

 

 

(1,595

)

 

 

(4,624

)

 

 

(9,454

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income Before Provision for Income Taxes

 

 

29,312

 

 

 

27,143

 

 

 

110,705

 

 

 

106,807

 

Provision for Income Taxes(a)

 

 

7,459

 

 

 

5,776

 

 

 

29,044

 

 

 

29,020

 

Net Income(a)

 

 

21,853

 

 

 

21,367

 

 

 

81,661

 

 

 

77,787

 

Net (Income) Loss Attributable to

Noncontrolling Interests (Note 2)

 

 

46

 

 

 

(5

)

 

 

33

 

 

 

(13

)

Net Income Attributable to Stepan Company(a)

 

$

21,899

 

 

$

21,362

 

 

$

81,694

 

 

$

77,774

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic(a)

 

$

0.95

 

 

$

0.94

 

 

$

3.56

 

 

$

3.42

 

Diluted(a)

 

$

0.94

 

 

$

0.92

 

 

$

3.50

 

 

$

3.38

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

22,971

 

 

 

22,819

 

 

 

22,941

 

 

 

22,771

 

Diluted(a)

 

 

23,374

 

 

 

23,148

 

 

 

23,361

 

 

 

23,017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.21

 

 

$

0.19

 

 

$

0.62

 

 

$

0.57

 

 

(a)

The 2016 amounts for the noted 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. 2016-9, 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

September 30

 

 

Nine Months Ended

September 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

21,853

 

 

$

21,367

 

 

$

81,661

 

 

$

77,787

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments (Note 10)

 

 

9,837

 

 

 

(2,213

)

 

 

26,288

 

 

 

7,685

 

Pension liability adjustment, net of tax (Note 10)

 

 

539

 

 

 

497

 

 

 

1,671

 

 

 

1,626

 

Derivative instrument activity, net of tax (Note 10)

 

 

(2

)

 

 

 

 

 

(7

)

 

 

(27

)

Other comprehensive income (loss)

 

 

10,374

 

 

 

(1,716

)

 

 

27,952

 

 

 

9,284

 

Comprehensive income

 

 

32,227

 

 

 

19,651

 

 

 

109,613

 

 

 

87,071

 

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

 

 

20

 

 

 

(1

)

 

 

(26

)

 

 

24

 

Comprehensive income attributable to Stepan Company

 

$

32,247

 

 

$

19,650

 

 

$

109,587

 

 

$

87,095

 

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)

 

September 30, 2017

 

 

December 31, 2016

 

Assets

 

 

 

 

 

 

 

 

Current Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

264,100

 

 

$

225,743

 

Receivables, net

 

 

314,125

 

 

 

263,408

 

Inventories (Note 6)

 

 

163,716

 

 

 

173,663

 

Other current assets

 

 

23,718

 

 

 

22,727

 

Total current assets

 

 

765,659

 

 

 

685,541

 

Property, Plant and Equipment:

 

 

 

 

 

 

 

 

Cost

 

 

1,588,996

 

 

 

1,513,478

 

Less:  accumulated depreciation

 

 

(997,122

)

 

 

(930,764

)

Property, plant and equipment, net

 

 

591,874

 

 

 

582,714

 

Goodwill, net

 

 

25,724

 

 

 

25,308

 

Other intangible assets, net

 

 

19,810

 

 

 

22,339

 

Long-term investments (Note 3)

 

 

26,335

 

 

 

24,055

 

Other non-current assets

 

 

13,429

 

 

 

13,933

 

Total assets

 

$

1,442,831

 

 

$

1,353,890

 

Liabilities and Equity

 

 

 

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

 

 

 

Current maturities of long-term debt  (Note 12)

 

$

21,165

 

 

$

28,154

 

Accounts payable

 

 

172,384

 

 

 

158,316

 

Accrued liabilities

 

 

96,421

 

 

 

110,795

 

Total current liabilities

 

 

289,970

 

 

 

297,265

 

Deferred income taxes

 

 

19,729

 

 

 

12,497

 

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

 

 

283,261

 

 

 

288,859

 

Other non-current liabilities

 

 

113,600

 

 

 

119,353

 

Commitments and Contingencies  (Note 7)

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

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

   Issued  shares 26,063,641 in 2017 and 25,894,782  shares in 2016

 

 

26,064

 

 

 

25,895

 

Additional paid-in capital

 

 

168,548

 

 

 

158,042

 

Accumulated other comprehensive loss (Note 10)

 

 

(99,572

)

 

 

(127,465

)

Retained earnings

 

 

716,923

 

 

 

649,070

 

Less:  Common treasury stock, at cost, 3,542,333 shares in 2017

   and 3,470,084  shares in 2016

 

 

(77,030

)

 

 

(70,938

)

Total Stepan Company stockholders’ equity

 

 

734,933

 

 

 

634,604

 

Noncontrolling interests (Note 2)

 

 

1,338

 

 

 

1,312

 

Total equity

 

 

736,271

 

 

 

635,916

 

Total liabilities and equity

 

$

1,442,831

 

 

$

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)

 

Nine Months Ended September 30

 

 

 

2017

 

 

2016

 

Cash Flows From Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

81,661

 

 

$

77,787

 

Adjustments to reconcile net income to net cash

   provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

57,121

 

 

 

55,196

 

Deferred compensation

 

 

5,263

 

 

 

12,595

 

Realized and unrealized gains on long-term investments

 

 

(3,677

)

 

 

(720

)

Stock-based compensation

 

 

6,248

 

 

 

8,055

 

Deferred income taxes

 

 

7,132

 

 

 

4,169

 

Other non-cash items

 

 

3,738

 

 

 

292

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Receivables, net

 

 

(37,713

)

 

 

(30,270

)

Inventories

 

 

14,789

 

 

 

(12,485

)

Other current assets

 

 

(631

)

 

 

(308

)

Accounts payable and accrued liabilities

 

 

(5,872

)

 

 

5,142

 

Pension liabilities

 

 

(2,141

)

 

 

415

 

Environmental and legal liabilities

 

 

(392

)

 

 

498

 

Deferred revenues

 

 

(843

)

 

 

(846

)

Net Cash Provided By Operating Activities (a)

 

 

124,683

 

 

 

119,520

 

Cash Flows From Investing Activities

 

 

 

 

 

 

 

 

Expenditures for property, plant and equipment

 

 

(57,902

)

 

 

(69,761

)

Business acquisition (Note 15)

 

 

(4,339

)

 

 

 

Other, net

 

 

(759

)

 

 

(2,788

)

Net Cash Used In Investing Activities

 

 

(63,000

)

 

 

(72,549

)

Cash Flows From Financing Activities

 

 

 

 

 

 

 

 

Revolving debt and bank overdrafts, net

 

 

(7,309

)

 

 

1,014

 

Other debt repayments

 

 

(5,714

)

 

 

(6,193

)

Dividends paid

 

 

(13,841

)

 

 

(12,732

)

Company stock repurchased

 

 

(4,500

)

 

 

(2,408

)

Stock option exercises

 

 

3,127

 

 

 

3,290

 

Other, net

 

 

(1,649

)

 

 

(275

)

Net Cash Used In Financing Activities (a)

 

 

(29,886

)

 

 

(17,304

)

Effect of Exchange Rate Changes on Cash

 

 

6,560

 

 

 

1,190

 

Net Increase in Cash and Cash Equivalents

 

 

38,357

 

 

 

30,857

 

Cash and Cash Equivalents at Beginning of Period

 

 

225,743

 

 

 

176,143

 

Cash and Cash Equivalents at End of Period

 

$

264,100

 

 

$

207,000

 

Supplemental Cash Flow Information

 

 

 

 

 

 

 

 

Cash payments of income taxes, net of refunds

 

$

22,377

 

 

$

18,577

 

Cash payments of interest

 

$

9,113

 

 

$

9,592

 

 

(a)

The amounts for the nine months ended September 30, 2016 have been immaterially changed from the originally reported amounts as a result of the Company’s fourth quarter 2016 adoption of ASU No.2016-09, 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

September 30, 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 September 30, 2017, results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 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 Annual Report on Form 10-K for the year ended December 31, 2016 (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 nine months ended September 30, 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

 

 

81,661

 

 

 

81,694

 

 

 

(33

)

Dividends

 

 

(13,841

)

 

 

(13,841

)

 

 

 

Common stock purchases (1)

 

 

(6,255

)

 

 

(6,255

)

 

 

 

Stock option exercises

 

 

3,127

 

 

 

3,127

 

 

 

 

Defined benefit pension adjustments, net of tax

 

 

1,671

 

 

 

1,671

 

 

 

 

Translation adjustments

 

 

26,288

 

 

 

26,229

 

 

 

59

 

Derivative instrument activity, net of tax

 

 

(7

)

 

 

(7

)

 

 

 

Other (2)

 

 

7,711

 

 

 

7,711

 

 

 

 

Balance at September 30, 2017

 

$

736,271

 

 

$

734,933

 

 

$

1,338

 

 

(In thousands)

 

Total Equity

 

 

Stepan

Company

Equity

 

 

Noncontrolling Interests’

Equity (3)

 

Balance at January 1, 2016

 

$

558,384

 

 

$

556,984

 

 

$

1,400

 

Net income

 

 

77,787

 

 

 

77,774

 

 

 

13

 

Dividends

 

 

(12,732

)

 

 

(12,732

)

 

 

 

Common stock purchases (1)

 

 

(2,643

)

 

 

(2,643

)

 

 

 

Stock option exercises

 

 

3,290

 

 

 

3,290

 

 

 

 

Defined benefit pension adjustments, net of tax

 

 

1,626

 

 

 

1,626

 

 

 

 

Translation adjustments

 

 

7,685

 

 

 

7,722

 

 

 

(37

)

Derivative instrument activity, net of tax

 

 

(27

)

 

 

(27

)

 

 

 

Other (2)(4)

 

 

6,362

 

 

 

6,362

 

 

 

 

Balance at September 30, 2016

 

$

639,732

 

 

$

638,356

 

 

$

1,376

 

 

(1)

Includes the value of shares of the Company’s common stock purchased in the open market and tendered by employees to settle statutory withholding taxes related to the receipt of performance awards, the receipt of deferred compensation distributions and the exercises of stock appreciation rights (SARs).

 

 

(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 describe the financial instruments held by the Company at September 30, 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 are 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. 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 in level 2 of the fair value hierarchy.

At September 30, 2017, and December 31, 2016, the fair values of debt and the related carrying values, including current maturities, were as follows (the fair value and carrying value amounts are presented without regard to unamortized debt issuance costs of $1,025,000  and $1,141,000 as of September 30, 2017 and December 31, 2016, respectively):

 

(In thousands)

 

September 30,

2017

 

 

December 31,

2016

 

Fair value

 

$

309,587

 

 

$

316,364

 

Carrying value

 

 

305,451

 

 

 

318,154

 

 

The following tables present financial assets and liabilities measured on a recurring basis at fair value as of September 30, 2017, and December 31, 2016, and the level within the fair value hierarchy in which the fair value measurements fall:

 

(In thousands)

 

September 30,

2017

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Mutual fund assets

 

$

26,335

 

 

$

26,335

 

 

$

 

 

$

 

Derivative assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

 

161

 

 

 

 

 

 

161

 

 

 

 

Total assets at fair value

 

$

26,496

 

 

$

26,335

 

 

$

161

 

 

$

 

Derivative liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency contracts

 

$

342

 

 

$

 

 

$

342

 

 

$

 

 

 

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 September 30, 2017, and December 31, 2016, the Company had open forward foreign currency exchange contracts, all with durations of approximately one to three months, to buy or sell foreign currencies with U.S. dollar equivalent amounts of $39,220,000 and $33,372,000, respectively.

The fair values of the derivative instruments held by the Company on September 30, 2017, and December 31, 2016, are disclosed in Note 3. Derivative instrument gains and losses for the three- and nine-month periods ended September 30, 2017 and 2016, were immaterial.  For amounts reclassified out of accumulated other comprehensive income (loss) (AOCI) into earnings for the three- and nine-month periods ended September 30, 2017 and 2016, see Note 10.

 

 

5.

STOCK-BASED COMPENSATION

On September 30, 2017, the Company had stock options outstanding under its 2006 Incentive Compensation Plan and stock options, stock awards and SARs outstanding under its 2011 Incentive Compensation Plan.  SARs granted prior to 2015 are cash-settled, and SARs granted in 2015 and thereafter are settled in shares of Company common stock.  Stock options and SARs granted prior to 2017 cliff vest 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

September 30

 

 

Nine Months Ended

September 30

 

2017

 

 

2016

 

 

2017

 

 

2016

 

$

1,697

 

 

$

3,607

 

 

$

6,248

 

 

$

8,055

 

 

The decrease in stock-based compensation expense between the three-month periods ended September 30, 2017 and 2016, was primarily attributable to a decrease in cash-settled SARs compensation resulting from a decrease in the market price of Company common stock in the third quarter of 2017 versus an increase in the stock price of Company common stock in the third quarter of 2016. The above decrease in cash-settled SARs compensation was also the primary reason for the decline in stock-based compensation expense between the nine-month periods ended September 30, 2017 and 2016.

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

(In thousands)

 

September 30,

2017

 

 

December 31,

2016

 

Stock options

 

$

1,533

 

 

$

895

 

Stock awards

 

 

4,632

 

 

 

5,514

 

SARs

 

 

3,178

 

 

 

1,859

 

 

The unrecognized compensation costs at September 30, 2017, are expected to be recognized over weighted-average periods of 2.0 years, 1.6 years and 2.0 years for stock options, stock awards and SARs, respectively.

8


 

Grants of the following awards were made during the nine months ended September 30, 2017:

 

 

Shares

 

Stock options

 

 

71,434

 

Stock awards (at target)

 

 

44,599

 

SARs

 

 

148,723

 

 

 

6.

INVENTORIES

The composition of inventories at September 30, 2017, and December 31, 2016, was as follows: 

 

(In thousands)

 

September 30, 2017

 

 

December 31, 2016

 

Finished goods

 

$

106,881

 

 

$

127,597

 

Raw materials

 

 

56,835

 

 

 

46,066

 

Total inventories

 

$

163,716

 

 

$

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, total inventory balances would have been approximately $33,606,000  and $25,872,000 higher than reported at September 30, 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) and similar laws in the other countries in which the Company does business.  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 September 30, 2017, the Company estimated a range of possible environmental and legal losses of $25.0 million to $46.1 million.  At September 30, 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 $25.0 million and $25.8 million, respectively. During the nine-month period ended September 30, 2017, cash outlays related to legal and environmental matters approximated $1.4 million compared to $1.0 million for the same period in 2016.

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.  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.  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.

Following are summaries of the material contingencies at September 30, 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 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

9


Company has completed various Remedial Investigation Feasibility Studies, 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 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.  The Company believes that based on current information its recorded liability represents the best estimate of its share of the remediation costs at this 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 recorded liability.

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.

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 established a liability for the estimated cost of remediating the sites.  Based on current information, the Company believes that its recorded liability represents its best estimate of the cost of remediation for these sites.  The ultimate cost of the remediation at this site could differ from the Company’s current recorded liability.

 

 

10


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

September 30

 

 

Nine Months Ended

September 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest cost

 

$

1,665

 

 

$

1,741

 

 

$

4,988

 

 

$

5,200

 

Expected return on plan assets

 

 

(2,323

)

 

 

(2,251

)

 

 

(6,966

)

 

 

(6,759

)

Amortization of net actuarial loss

 

 

738

 

 

 

776

 

 

 

2,314

 

 

 

2,540

 

Net periodic benefit cost

 

$

80

 

 

$

266

 

 

$

336

 

 

$

981

 

 

 

 

UNITED KINGDOM

 

(In thousands)

 

Three Months Ended

September 30

 

 

Nine Months Ended

September 30

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Interest cost

 

$

151

 

 

$

177

 

 

$

441

 

 

$

564

 

Expected return on plan assets

 

 

(203

)

 

 

(218

)

 

 

(593

)

 

 

(694

)

Amortization of net actuarial loss

 

 

97

 

 

 

18

 

 

 

284

 

 

 

58

 

Net periodic benefit (income) cost

 

$

45

 

 

$

(23

)

 

$

132

 

 

$

(72

)

 

Employer Contributions

U.S. Plans

The Company made a $2,100,000 voluntary contribution to its funded U.S. qualified defined benefit plans in the three- and nine-month periods ended September 30, 2017. No other contributions are expected to be made to the funded plans in 2017. Approximately $312,000 is expected to be paid related to the unfunded non-qualified plans in 2017. Of such amount, $256,000 had been paid as of September 30, 2017.

U.K. Plan

The Company’s U.K. subsidiary expects to contribute approximately $360,000 to its defined benefit pension plan in 2017.  Of such amount, $281,000 had been contributed as of September 30, 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

September 30

 

 

Nine Months Ended

September 30

 

 

 

2017

 

 

2016