UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(MARK ONE)
x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2015
OR
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ORo
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO
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Commission File Number 1-4462
STEPAN COMPANY
(Exact name of registrant as specified in its charter)
Delaware | ||||
36-1823834 | ||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) | |||
Edens and Winnetka Road, Northfield, Illinois | 60093 | |||
(Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number including area code: 847-446-7500
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class | Name of Each Exchange on Which Registered | |
Common Stock, $1 par value | New York Stock Exchange |
Securities registered pursuant to Section 12 (g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes Xx No ____o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes ____o No Xx
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 Xx 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 Xx No ____o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. [ ].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 filerNon-accelerated filer Smaller reporting company
(Check one): Large accelerated filer x | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes __o No Xx
Aggregate market value at June 30, 2013,2015, of voting and non-voting common stock held by nonaffiliates of the registrant: $1,114,938,768*$ 1,048,660,674*
Number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2014:30, 2016:
Class | Outstanding at January | |
Common Stock, $1 par value | 22,282,350 |
Documents Incorporated by Reference
Part of Form 10-K | Document Incorporated | |
Part III, Items 10-14 | Portions of the Proxy Statement for Annual Meeting of Stockholders to be held April |
* Based on reported ownership by all directors and executive officers at June 30, 2013.2015.
ANNUAL REPORT ON FORM 10-K
December 31, 20132015
Stepan Company, which was incorporated under the laws of the state of Delaware on February 19, 1959, and its subsidiaries (the “Company”) produce specialty and intermediate chemicals, which are sold to other manufacturers and used in a variety of end products. The Company has three reportable segments: surfactants, polymersSurfactants, Polymers and specialty products.Specialty Products.
Surfactants are chemical agents that affect the interaction between two surfaces; they can provide actions such as detergency (i.e., the ability of water to remove soil from another surface), wetting and foaming, dispersing, emulsification (aiding two dissimilar liquids to mix), demulsification, viscosity modifications and biocidal disinfectants. Surfactants are the basic cleaning agent in detergents for washing clothes, dishes, carpets, fine fabrics, floors and walls. Surfactants are also used for the same purpose in shampoos, body wash and conditioners, fabric softeners, toothpastes, cosmetics and other personal care products. Commercial and industrial applications include emulsifiers for agricultural products, emulsion polymers such as floor polishes and latex foams and coatings, wetting and foaming agents for wallboard manufacturing and surfactants for enhanced oil recovery. In 2015, the Company purchased select chemical manufacturing assets from The Sun Products Corporation’s (SUN) Pasadena, Texas, manufacturing site. The Company intends to redeploy the manufacturing assets as needed to reduce future capital expenditures. Separate from the purchase of selected assets, the Company signed a long-term supply agreement with SUN. Under this agreement, the Company will supply SUN’s anionic surfactant requirements for laundry in North America. In June 2015, the Company purchased Procter & Gamble do Brasil S.A.’s (P&G Brazil’s) sulfonation production facility in Bahia, Brazil. The new business complements the Company’s existing Vespasiano, Brazil, plant and provides opportunities to serve growing northeastern Brazil. Given the current and forecasted price of crude oil, the Company and Nalco Company (Nalco) decided in October 2015 to dissolve their TIORCO, LLC enhanced oil recovery and biodiesel.joint venture. The Company expects to continue to participate in the enhanced oil recovery business, but through operations within its organization.
Polymers, which includes two primary product lines,include polyurethane polyols, polyester resins and phthalic anhydride, are used in multiple typesa variety of specialty polymers.applications. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry. They are also a base for raw material base for coatings, adhesives, sealants and elastomers.elastomers (CASE) applications. Polyester resins, which include liquid and powdered products, are used in CASE and polyurethane systems house applications. Phthalic anhydride is used in polyester resins, alkyd resins, and plasticizers for applications in construction materials and components of automotive, boating, and other consumer products and internally in the Company’s polyols.
In June 2013, the Company purchased the North American polyester resins business of Bayer MaterialScience LLC (BMS). The purchase included a 21,000-ton production facility in Columbus, Georgia, and a modern research and development laboratory for customer technical support and new product development. The acquired business, which includes both liquid and powdered resins, diversifies the Company’s polyol product portfolio and is expected to accelerate Company growth in coatings, adhesives, sealants and elastomers (CASE) and polyurethane systems house (PUSH) applications.
Specialty productsProducts are chemicals used in food, flavoring, nutritional supplement and pharmaceutical applications.
MARKETING AND COMPETITION
Principal customers for surfactants are manufacturers of detergents, shampoos, lotions,body wash, fabric softeners, toothpastes and cosmetics. In addition, surfactants are sold to the producers of agricultural emulsifiersherbicides and insecticides and lubricating products. Surfactants are also sold into the enhanced oil recovery and biodiesel end markets. Polymers are used in the construction and refrigerationappliance industries, as well as in applications for the coatings, adhesives, sealants and elastomers and flexible foam industries. Polymers arePhthalic anhydride, a Polymer product, is also used by automotive, boating and other consumer product companies. Specialty products are used primarily by food, nutritional supplement and pharmaceutical manufacturers.
The Company does not sell directly to the retail market, but sells to a wide range of manufacturers in many industries and has many competitors. The principal methods of competition are product performance, price, technical assistance and adaptability to the specific needs of individual customers. These factors allow the Company to compete on a basis other than price alone, reducing the severity of competition as experienced in the sales of commodity chemicals having identical performance characteristics. The Company is one of the leading merchant producers of surfactants in the Americas.world. In the case of surfactants, much of the Company’s competition comes from several large global and regional producers and the internal divisions of larger customers. In the manufacture of polymers, the Company competes with the chemical divisions of several large companies, as well as with other small specialty chemical manufacturers. In specialty products, the Company competes with several large firms plus numerous small companies.
MAJOR CUSTOMER AND BACKLOG
The Company did not have any one customer whose business represented more than 10 percent of the Company’s consolidated revenue in 2013, 20122015, 2014 or 2011.2013. The Company has contract arrangements with certain customers, but volumes are generally contingent on purchaser requirements. Much of the Company’s business is essentially on a “spot delivery basis” and does not involve a significant backlog.
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Substantially all of the Company’s manufacturing plants operate on electricity and interruptible natural gas. During peak heating demand periods, gas service to all plants may be temporarily interrupted for varying periods ranging from a few days to several months. The plants operate on fuel oil during these periods of interruption. The Company’s operations have not experienced any plant shutdowns or adverse effects upon its business in recent years that were caused by a lack of available energy sources, other than temporary service interruptions brought on by mechanical failure.
RAW MATERIALS
The most important raw materials used by the Company are petroleum or plant based. For 2014,2016, the Company has contracts with suppliers that cover the majority of its forecasted requirements for major raw materials and is not substantially dependent upon any one supplier.
RESEARCH AND DEVELOPMENT
The Company maintains an active research and development program to assist in the discovery and commercialization of new knowledge with the intent that such efforts will be useful in developing a new product or in bringing about a significant improvement to an existing product or process. Total expenses for research and development during 2015, 2014 and 2013 2012 and 2011 were $28.8$30.3 million, $28.0$27.2 million, and $25.1$28.8 million, respectively. The remainder of
research, development and technical service expenses reflected in the consolidated statements of income relates to technical services, which include routine product testing, analytical methods development and sales support service.
ENVIRONMENTAL COMPLIANCE
Compliance with applicable country, state and local regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, resulted in capital expenditures by the Company of approximately $4.7$1.7 million during 2013.2015. These expenditures represented approximately 51 percent of the Company’s total 20132015 capital expenditures. Capitalized environmental expenditures are depreciated and charged on a straight-line basis to pretax earnings over their estimated useful lives, which are typically 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing locations were approximately $18.7$22.1 million in 2013.2015. Compliance with such regulations is not expected to have a material adverse effect on the Company’s earnings and competitive position in the foreseeable future.
EMPLOYMENT
At December 31, 20132015 and 2012,2014, the Company employed 2,0152,073 and 1,9202,024 persons, respectively. The Company has collective bargaining agreements with employees at some of its manufacturing locations. While the Company has experienced occasional work stoppages as a result of the collective bargaining process and may experience some work stoppages in the future, management believes that it will be able to negotiate all labor agreements on satisfactory terms. Past work stoppages have not had a significant impact on the Company’s operating results. Overall, the Company believes it has good relationships with its employees. In 2013, the Company negotiated a new four-year contract at its largest manufacturing site.
FOREIGN OPERATIONS AND REPORTING SEGMENTS
See Note 18,17, Segment Reporting, of the Consolidated Financial Statements (Item 8 of this Form 10-K).
WEBSITE
The Company’s website address is www.stepan.com. The Company makes available free of charge on or through its website its code of conduct, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission. The website also includes the Company’s corporate governance guidelines and the charters for the audit, nominating and corporate governance and compensation and development committees of the Board of Directors.
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ExecutiveExecutive Officers of the Registrant
The Company’s executive officers are elected annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders to serve through the next annual meeting of the Board and until their respective successors are duly elected and qualified.
The executive officers of the Company, their ages and certain other information as of February 26, 2014,24, 2016, are as follows:
Name |
| Age |
| Title |
| Year First Elected Officer | ||||||||||
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|
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Name | Age | Title | Year First Elected | |||||||||||||
F. Quinn Stepan | 76 | Chairman | 1967 |
| 78 |
| Chairman |
| 1967 | |||||||
F. Quinn Stepan, Jr. | 53 | President and Chief Executive Officer | 1997 |
| 55 |
| President and Chief Executive Officer |
| 1997 | |||||||
John V. Venegoni | 55 | Vice President and General Manager – Surfactants | 1999 | |||||||||||||
Robert J. Wood | 56 | Vice President and General Manager – Polymers | 2001 | |||||||||||||
Frank Pacholec | 58 | Vice President, Research and Development and Corporate Sustainability Officer | 2003 |
| 60 |
| Vice President, Research and Development and Corporate Sustainability Officer |
| 2003 | |||||||
Gregory Servatius | 54 | Vice President, Human Resources | 2006 |
| 56 |
| Vice President, Human Resources |
| 2006 | |||||||
H. Edward Wynn | 53 | Vice President, General Counsel and Secretary | 2007 | |||||||||||||
Scott C. Mason | 55 | Vice President, Supply Chain | 2010 |
| 57 |
| Vice President, Supply Chain |
| 2010 | |||||||
Scott D. Beamer | 42 | Vice President and Chief Financial Officer | 2013 |
| 44 |
| Vice President and Chief Financial Officer |
| 2013 | |||||||
Arthur W. Mergner |
| 52 |
| Vice President and General Manager – Polymers |
| 2014 | ||||||||||
Scott R. Behrens |
| 46 |
| Vice President and General Manager – Surfactants |
| 2014 | ||||||||||
Debra A. Stefaniak |
| 54 |
| Vice President, Business Transformation |
| 2015 | ||||||||||
Jennifer A. Hale |
| 54 |
| Vice President, General Counsel and Secretary |
| 2016 | ||||||||||
F. Quinn Stepan is an executive officer of the Company and Chairman of the Company’s Board of Directors. He served the Company as Chairman and Chief Executive Officer from October 1984 through December 2005. He served as President from 1973 until February 1999.
F. Quinn Stepan, Jr., has served the Company as President and Chief Executive Officer since January 2006. He served the Company as President and Chief Operating Officer from 1999 through 2005. From January 1997 until February 1999 he served as Vice President and General Manager – Surfactants. From May 1996 until January 1997 he served as Vice President – Global Laundry and Cleaning Products. From May 1992 until May 1996 he served as Director – Business Management.
John V. Venegoni has served the Company as Vice President and General Manager – Surfactants since February 1999. From May 1996 until February 1999 he served as Director – Global Personal Care. From May 1992 until May 1996 he served as Senior Business Manager – Consumer Products.
Robert J. Wood has served the Company as Vice President and General Manager – Polymers since January 2001. From March 1996 until January 2001, he served as Director – Polyols. From April 1988 until March 1996, he served as Business Manager – Polyols. Mr. Wood has announced his intention to retire effective April 4, 2014. Arthur W. Mergner, currently Vice President, North America Polymers, is expected to serve as Vice President and General Manager – Polymers effective upon Mr. Wood’s retirement.
Frank Pacholec has served the Company as Vice President, Research and Development since April 2003. In May 2010 he was also appointed as the Company’s Corporate Sustainability Officer.
Gregory Servatius has served the Company as Vice President, Human Resources since February 2006. From April 2003 until January 2006, he served as Vice President, Surfactant Sales. From October 2001 until April 2003, he served as Vice President Functional Products. From 1998 to 2001, he served as the Managing Director of Stepan’sthe Company’s European operation.
H. Edward Wynn has served the Company as Vice President, General Counsel and Secretary since January 9, 2007.operations.
Scott C. Mason has served the Company as Vice President, Supply Chain since March 10, 2010. From January 2006 until December 2009, he served as Senior Vice President Global Supply Chain and President, Alternative Channels of Nalco Company.
Scott D. Beamer has served the Company as Vice President and Chief Financial Officer since August 15, 2013. From January 2012 until July 2013, he served as Assistant Corporate Controller at PPG Industries, Inc. From June 2008 until December 2011 he served as Chief Financial Officer and Director of Finance – PPG Europe at PPG Industries, Inc.
James E. Hurlbutt, whoArthur W. Mergner has served the Company as Vice President and Chief Financial officer fromGeneral Manager - Polymers since April 2014. From June 2013 until April 2014, he served as Vice President - North America Polymers. From July 2008 through June 2013 he served as Vice President, Procurement.
Scott R. Behrens has served the Company as Vice President and General Manager - Surfactants since September 2014. From January 2010 to September 2014 he served as Vice President – Business Management. From November 2008 to January 2010 he served as Vice President – Functional Products.
Debra A. Stefaniak has served the Company as Vice President, Business Transformation since February 2008 until August2014. From May 2009 to February 2014, she served as Vice President, Global Logistics. From July 2006 to May 2009, she served as Director, Global Logistics.
Jennifer A. Hale has served the Company as Vice President, General Counsel and Secretary since January 2016. From 2013 retired in Novemberthrough 2015, she served as Vice President, Global General Counsel and Strategic Business Consultant at Vita-Mix Holdings Company. From 2007 to 2013, following a period to transfer his responsibilities to Scott D. Beamer.
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The following discussion identifies the most significant factors that may materially and adversely affect the Company’s business, financial condition, results of operations and cash flows. These and other factors, many of which are beyond the Company’s control, may cause future results of operations to differ materially from past results or those results currently expected or desired. The following information should be read in conjunction with Part II, Item 7, ManagementManagement’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this Form 10-K.
Disruptions in production at our manufacturing facilities, both planned and unplanned, may have a material impact on our business, financial position, results of operations and cash flows.
Manufacturing facilities in the Company’s industry are subject to planned and unplanned production shutdowns, turnarounds and outages. Unplanned production disruptions may occur for external reasons including natural disasters, weather, disease, strikes, transportation interruption, government regulation, political unrest or terrorism, or internal reasons, such as fire, unplanned maintenance or other manufacturing problems. Alternative facilities with sufficient capacity may not be available, may cost substantially more or may take a significant amount of time to increase production or qualify with Company customers, each of which could negatively impact the Company’s business, financial position, results of operations and cash flows. Long-term production disruptions may cause Company customers to seek alternative supply, which could further adversely affect Company profitability.
Some of the Company’s products cannot currently be made, or made in the volume required, at more than one of the Company’s locations. For some of these products, the Company has access to external market suppliers, but the Company cannot guarantee that these products will be available to it in amounts sufficient to meet its requirements or at a cost that is competitive with the Company’s cost of manufacturing these products.
While the Company maintains insurance coverage, some of these manufacturing issues may not be insurable, and when they are insurable, there can be no assurance that itthe insurance coverage would be sufficient to cover any or all losses resulting from the occurrence of any of these events or that insurance carriers would not deny coverage for these losses even if they are insured. There is also a risk, beyond the reasonable control of the Company, that an insurance carrier may not have the financial resources to cover an insurable loss. As a result, the occurrence of any of these events could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.
The Company faces significant global competition in each of its operating segments. If the Company cannot successfully compete in the marketplace, its profitability, business, financial position, results of operations and cash flows may be materially and adversely affected.
The Company faces significant competition from numerous global companies as well as national, regional and local companies in the markets it serves. In addition, some of the Company’s customers have internal manufacturing capabilities that allow them to achieve
make-versus-buy economics, which may result at times in the Company gaining or losing business with these customers in volumes that could adversely affect its profitability.
To achieve expected profitability levels, the Company must, among other things, maintain the service levels, product quality and performance and competitive pricing necessary to retain existing customers and attract new customers. The Company’s inability to do so could place it at a competitive disadvantage relative to its competitors, and if the Company cannot successfully compete in the marketplace, its business, financial position, results of operations and cash flows may be materially and adversely affected.
The volatility of raw material, natural gas and electricity costs as well as any disruption in their supply may materially and adversely affect the Company’s business, financial position, results of operations and cash flows.flows.
The costs of raw materials, natural gas and electricity represent a substantial portion of the Company’s operating costs. The principal raw materials used in the Company’s products are petroleum-based or plant-based. Natural gas is used in the Company’s manufacturing sites primarily to generate steam for its manufacturing processes. The prices of many of these raw materials have recently been very volatile. These fluctuations in prices may be affected by supply and demand factors, such as general economic conditions, manufacturers’ ability to meet demand, restrictions on the transport of raw material (some of which may be viewed as hazardous), currency exchange rates, political instability and terrorist attacks, all of which are beyond the Company’s control. The Company may not be able to pass increased raw material and natural gas pricesenergy costs on to customers through increases in product prices as a result of arrangements the Company has with certain customers and competitive pressures in the market. If the Company is unable to minimize the effects of increased raw material and energy costs or pass such increased costs on to customers, its business, financial position, results of operations and cash flows may be materially and adversely affected.
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The Company relies heavily on third party transportation to deliver raw materials to Company manufacturing facilities and ship products to Company customers. Disruptions in transportation or significant changes in transportation costs could affect the Company’s operating results.
The Company relies heavily on railroads, barges and other over-the-road shipping methods to transport raw materials to its manufacturing facilities and to ship finished product to customers. Transport operations are exposed to various risks, such as extreme weather conditions, work stoppages and operating hazards, as well as interstate transportation regulations. If the Company is unable to ship finished product or unable to obtain raw materials due to transportation problems, or if there are significant changes in the cost of these services, the Company may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship product, which could result in an adverse effect on Company revenues, costs and operating results.
Customer product reformulations or new technologies can reduce the demand for the Company’s products.
The Company’s products are used in a broad range of customer product applications. Customer product reformulations or development and use of new technologies may lead to reduced consumption of Company-produced products or make some Company products unnecessary. It is imperative that the Company develops new products to replace the sales of products that mature and decline in use. The Company’s business, financial position, results of operations and cash flows could be materially and adversely affected if the Company is unable to manage successfully the maturation of existing products and the introduction of new products.
If the Company is unable to keep and protect its intellectual property rights, the Company’s ability to compete may be negatively impacted.impacted.
The Company relies on intellectual property rights for the manufacture, distribution and sale of its products in all three of its reportable segments. Although most of the Company’s intellectual property rights are registered in the United States and in the foreign countries in which it operates, the Company may not be able to assert these rights successfully in the future or guarantee that they will not be invalidated, circumvented or challenged. Other parties may infringe on the Company’s intellectual property rights, which may dilute the value of such rights. Any infringement onInfringement of the Company’s intellectual property rights wouldcould also likely result in diversion of management’s time and the Company’s resources to protect these rights through litigation or otherwise. In addition, the laws of some foreign countries may not protect the Company’s intellectual property rights to the same extent as the laws of the United States. Any loss of protection of these intellectual property rights could adversely affect the future financial position, results of operations and cash flows of the Company.
The Company is subject to risks related to its operations outside the U.S.
The Company has substantial operations outside the U.S. In the year ended December 31, 2013,2015, the Company’s sales outside of the U.S. constituted approximately 40 percent of the Company’s net sales. In addition to the risks described in this Annual Report on Form10-K 10‑K that are common to both the Company’s U.S. and non-U.S. operations, the Company faces, and will continue to face, risks related to the Company’s foreign operations such as:
· | variability of intellectual property laws outside the U.S. may impact enforceability and consistency of protection of intellectual property assets; |
· | high levels of inflation; |
· | fluctuations in foreign currency exchange rates may affect product demand and may adversely affect the profitability in U.S. Dollars of products and services we provide in international markets where payment for our products and services is made in the local currency; |
· | political, economic, financial and market conditions may be unstable; |
· | changes in labor conditions and difficulties in staffing and managing international operations; |
· | trade and currency restrictions, including currency exchange controls imposed by foreign countries; |
· | changes in foreign laws and tax rates or U.S. laws and tax rates with respect to foreign income may unexpectedly increase the rate at which our income is taxed, impose new and additional taxes on remittances, repatriation or other payments by subsidiaries, or cause the loss of previously recorded tax benefits; |
· | greater difficulty enforcing contracts and collecting accounts receivable; |
· | enforceability and compliance with U.S. laws affecting operations outside of the U.S.; |
· | adverse changes in foreign laws and regulations; and |
· | restrictions on repatriating foreign profits back to the U.S. |
The actual occurrence of any or all of the U.S., such as the Foreign Corrupt Practices Act;
foreign currency fluctuations;
unstable political, economic, financial and market conditions;
import and export license requirements;
trade restrictions;
increases in tariffs and taxes;
high levels of inflation;
restrictions on repatriating foreign profits back to the U.S.;
greater difficulty collecting accounts receivable and longer payment cycles;
less favorable intellectual property laws;
changes in foreign laws and regulations; and
changes in labor conditions and difficulties in staffing and managing international operations.
All of these risks have affected the Company’s business in the past and mayforegoing could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows in the future.
Fluctuations in foreign currency exchange rates could affect Company financial results.
The Company is also exposed to fluctuations in exchange rates. The Company’s results of operations are reported in U.S. dollars. However, outside the U.S., the Company’s sales and costs are denominated in a variety of currencies including the European euro, British pound, Canadian dollar, Mexican peso, Colombian peso, Philippine peso, Brazilian real, Polish zloty, Singapore dollar and Chinese RMB. Fluctuations in exchange rates may materially and adversely affect the Company’s business, financial position, results of operations and cash flows.
In all jurisdictions in which the Company operates, the Company is also subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions. These laws and regulations may limit the Company’s ability to repatriate cash as dividends or otherwise to the U.S. and may limit the Company’s ability to convert foreign currency cash flows into U.S. dollars. A weakening of the currencies in which the Company generates sales relative to the foreign currencies in which the Company’s costs are denominated may lower the Company’s operating profits and cash flows.
The Company is subject to a variety of environmental, health and safety and product registration laws that expose it to potential financial liability and increased operating costs.costs.
The Company’s operations are regulated under a number of federal, state, local and foreign environmental, health and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air, soil and water as well as the use, handling, storage and disposal of these materials. These laws and regulations include, but are not limited to, the U.S. Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state, local and foreign laws, and the Registration, Evaluation, Authorization and Restriction of Chemical Substances Act (REACH). Compliance with these environmental laws and regulations is a major consideration for the Company because the Company uses hazardous materials in some of the Company’s manufacturing processes. In addition, compliance with environmental laws could restrict the Company’s ability to expand its facilities or require the Company to acquire additional costly pollution control equipment, incur other significant expenses or modify its manufacturing processes. The Company has incurred and will continue to incur capital expenditures and operating costs in complying with these laws and regulations. In addition, because the Company generates hazardous wastes during some of its manufacturing processes, the Company, along with any other entity that
disposes or arranges for the disposal of the Company’s wastes, may be subject to financial exposure for costs associated with any investigation and remediation of sites at which the Company has disposed or arranged for the disposal of hazardous wastes if those sites become contaminated, even if the Company fully complied with applicable environmental laws at the time of disposal. In the event that new contamination is discovered, the Company may become subject to additional requirements with respect to existing contamination or the Company’s clean-up obligations.
The transportation of certain raw materials is highly regulated and is subject to increased regulation or restrictions, which may restrict or prohibit transport of these raw materials, resulting in these raw materials not being available to the Company and restricting or substantially limiting the Company’s manufacturing operations.
The Company is also subject to numerous federal, state, local and foreign laws that regulate the manufacture, storage, distribution and labeling of many of the Company’s products, including some of the Company’s disinfecting, sanitizing and antimicrobial products. Some of these laws require the Company to have operating permits for the Company’s production facilities, warehouse facilities and operations. Various federal, state, local and foreign laws and regulations also require the Company to register the Company’s products and to comply with specified requirements with respect to those products. If the Company fails to comply with any of these laws and regulations, it may be liable for damages and the costs of remedial actions in excess of the Company’s recorded liabilities, and may also be subject to fines, injunctions or criminal sanctions or to revocation, non-renewal or modification of the Company’s operating permits and revocation of the Company’s product registrations. Any such revocation, modification or non-renewal may require the Company to cease or limit the manufacture and sale of its products at one or more of the Company’s facilities, which may limit or prevent the Company’s ability to meet product demand or build new facilities and may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows. Any such revocation, non-renewal or modification may also result in an event of default under the indenture for the Company’s notes or under the Company’s credit facilities, which, if not cured or waived, may result in the acceleration of all the Company’s indebtedness.
In addition to the costs of complying with environmental, health and safety requirements, the Company has incurred and may incur in the future costs defending against environmental litigation and/or investigations brought by government agencies and private parties. The Company may be a defendant in lawsuits brought by parties in the future alleging environmental damage, personal injury
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or property damage. A significant judgment or settlement, to the extent not covered by existing insurance policies, against the Company could harm its business, financial position, results of operations and cash flows. Although the Company has insurance that may cover some of these potential losses, there is always uncertainty as to whether such insurance may be available to the Company based on case-specific factors and the specific provisions of the Company’s insurance policies.
The potential cost to the Company relating to environmental, health and safety and product registration matters, including the cost of complying with the foregoing legislation and remediating contamination, is uncertain due to factors such as the unknown magnitude and type of possible contamination and clean-up costs, the complexity and evolving nature of laws and regulations relating to the environment, health and safety and product registration, including those outside of the U.S., and the timing, variable costs and effectiveness of clean-up and compliance methods. Environmental and product registration laws may also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, as well as restricting or prohibiting the sale of existing or new
products, which may also negatively impact the Company’s operating results. Without limiting the foregoing, these laws or regulations may restrict or prohibit the use of non-renewable or carbon-based substances, or impose fees or penalties for the use of these substances. Accordingly, the Company may become subject to additional liabilities and increased operating costs in the future under these laws and regulations. The impact of any such changes, which are unknown at this time, may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.
Other laws and regulations that apply to the Company may be changed to impose additional requirements beyond those that apply under current laws and regulations, and/or impose additional costs or have negative financial effects on the Company. Such changes, which are unknown at this time and beyond the Company’s reasonable control, could have a material impact on the Company.
The Company’s inability to estimate and maintain appropriate levels of recorded liabilities for existing and future contingencies may materially and adversely affect the Company’s business, financial position, results of operations and cash flows.
The liabilities recorded by the Company for pending and threatened legal proceedings are estimates based on various assumptions. An adverse ruling or external forces, such as changes in the rate of inflation, the regulatory environment and other factors that could prove such assumptions to be no longer appropriate, may affect the accuracy of these estimates. Given the uncertainties inherent in such estimates, the Company’s actual liabilities could differ significantly from the estimated amounts the Company records in its financial statements with respect to existing and future contingencies. If the Company’s actual liability is higher than estimated or any new legal proceeding is initiated, it could materially and adversely affect the Company’s business, financial position, results of operations and cash flows.
The Company has a significant amount of indebtedness and may incur additional indebtedness, or need to refinance existing indebtedness, in the future, which may adversely affect the Company’s business, financial position, results of operations and cash flows.flows.
The Company has a significant amount of indebtedness and may incur additional indebtedness in the future. As of December 31, 2013,2015, the Company had $270.6$332.6 million of debt on its balance sheet. U.S. debt included $242.1$322.1 million in unsecured promissory notes with maturities extending from 20142016 until 2025. In addition, to provide liquidity, the Company has a $125.0 million revolving credit facility.2027.
The Company’s foreign subsidiaries also maintain bank term loans and short-term bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. As of December 31, 2013,2015, the Company’s foreign subsidiaries’ aggregate outstanding debt totaled $28.5$10.5 million.
The Company’s current indebtedness and any additional indebtedness incurred in the future may materially and adversely affect its business, financial position, results of operations and cash flows. For example, it could:
require the Company to dedicate a substantial portion of cash flow from operations to pay principal and interest on the Company’s debt, which would reduce funds
· | require the Company to dedicate a substantial portion of cash flow from operations to pay principal and interest on the Company’s debt, which would reduce funds available to fund future working capital, capital expenditures and other general operating requirements; |
· | limit the Company’s ability to borrow funds that may be needed to operate and expand its business; |
· | limit the Company’s flexibility in planning for or reacting to changes in the Company’s business and the industries in which the Company operates; |
· | increase the Company’s vulnerability to general adverse economic and industry conditions or a downturn in the Company’s business; and |
· | place the Company at a competitive disadvantage compared to its competitors that have less debt. |
limit the Company’s flexibility in planning for or reacting to changes in the Company’s business and the industries in which the Company operates;
increase the Company’s vulnerability to general adverse economic and industry conditions or a downturn in the Company’s business; and
place the Company at a competitive disadvantage compared to its competitors that have less debt.
The Company’s loan agreements contain provisions, which, among others, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. Failure to comply with these loan agreements would require debt restructuring that could be materially adverse to the Company’s financial position, results of operations and cash flows. Additionally, any future disruptions in the credit and financial markets may reduce the availability of debt financing or refinancing and
7
increase the costs associated with such financing. If the Company is unable to secure financing on satisfactory terms, or at all, its business financial position, results of operations and cash flows may be materially and adversely affected.
Downturns in certain industries and general economic downturns may have an adverse effect on the Company’s business, financial position, results of operations and cash flows.
Economic downturns may adversely affect users of some end products that are manufactured using the Company’s products and the industries in which such end products are used. These users may reduce their volume of purchases of such end products during economic downturns, which would reduce demand for the Company’s products. Additionally, uncertain conditions in the credit markets pose a risk to the overall economy that may impact consumer and customer demand of some of the Company’s products, as well as the Company’s ability to manage normal commercial relationships with its customers, suppliers and creditors. Some of the Company’s customers may not be able to meet the terms of sale and suppliers may not be able to fully perform their contractual obligations due to tighter credit markets or a general slowdown in economic activity.
In the event that economic conditions worsen or result in a prolonged downturn or recession, the Company’s business, financial position, results of operations and cash flows may be materially and adversely affected.
Cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects could adversely affect the Company’s business, financial position, results of operations and cash flows.
From time to time, the Company initiates expansion and other significant capital projects. Projects of this type are subject to risks of delay or cost overruns inherent in any large construction project resulting from numerous factors, including the following: shortages of equipment, materials or skilled labor; work stoppages; unscheduled delays in the delivery of ordered materials and equipment; unanticipated cost increases; difficulties in obtaining necessary permits or in meeting permit conditions; difficulties in meeting regulatory requirements or obtaining regulatory approvals; availability of suppliers to certify equipment for existing and enhanced regulations; design and engineering problems; and failure or delay of third party service providers, civil unrest and labor disputes. Significant cost overruns or delays in completing a project could have a material adverse effect on the Company’s return on investment, results of operations and cash flows. In addition, if the Company miscalculates its anticipated capacity needs, this too could negatively impact its operations, financial condition and results of operations.
The Company relies extensively on information technology (IT) systems to operate most aspects ofconduct its business. Interruption of, damage to or compromise of Companythe Company’s IT systems could have an adverse effect on the Company’s business, financial position, results of operations and cash flows.
The Company relies on IT systems for most areas of operations, including production, supply chain, research and development, finance, human resource regulatory and various otherregulatory functions. The Company’s ability to effectively manage its business depends on the security, reliability and adequacy of these systems. IT system failures due to events including but not limited to network disruptions, orprogramming errors, computer viruses and security breaches (e.g., cyber attacks)cyber-attacks) could impact production activities, impede shipment of products, cause delays or cancellations of customer orders, or hamper the processing of transactions or reporting of financial resultsresults. The theft, unauthorized use or make sensitive, private publication of our intellectual property and/or proprietaryconfidential business information public. could harm our competitive position, reduce the value of our investment in research and development and other strategic initiatives or otherwise adversely affect our business. The Company may be required to expend additional resources to continue to enhance its information privacy and security measures and/or to investigate and remediate any information security vulnerabilities. While the Company has a comprehensive program for continuously reviewing, maintaining, testing and upgrading its IT systems and security, there can be no assurance that such efforts will prevent breakdowns or breaches in Company systems that could adversely affect the Company’s business, financial position, results of operations and cash flows.
Various liability claims could materially and adversely affect the Company’s financial position, operating results and cash flows.
The Company may be required to pay for losses or injuries purportedly caused by its products. The Company faces an inherent exposure to various types of claims including general liability, product liability, product recall, toxic tort and environmental (“claims”), among others, if its products, or the end products that are manufactured with the Company’s products, result in property damage, injury or death. In addition, because the Company conducts business in multiple jurisdictions, the Company also faces an inherent exposure to other general claims based on its operations in those jurisdictions and the laws of those jurisdictions, including but not limited to claims arising from its relationship with employees, distributors, agents and customers, and other parties with whom it has a business relationship, directly or indirectly. Many of these claims may be made against the Company even if there is no evidence of a loss from that claim, and these claims may be either made by individual entities, or potentially a group of plaintiffs in a class action. Defending these claims could result in significant legal expenses relating to defense costs and/or damage awards and diversion of management’s time and the Company’s resources. Any claim brought against the Company, net of potential insurance recoveries, could materially and adversely affect the Company’s business financial position, results of operations and cash flows.
8
The Company’s forecasts and other forward-looking statements are based on a variety of assumptions and estimates that are subject to significant uncertainties.The Company’s performance may not be consistent with these forecasts or forward-looking statements.
From time to time in press releases and other documents filed with the SEC, the Company publishes forecasts or other forward-looking statements regarding its future results, including estimated revenues, net earnings and other operating and financial metrics.
Any forecast or forward-looking statement related to the Company’s future performance reflects various assumptions and estimates, which are subject to significant uncertainties, and the achievement of any forecast or forward-looking statement depends on numerous risks and other factors, including those described in this Annual Report onForm 10-K, many of which are beyond the Company’s control. If these assumptions and estimates prove to be incorrect, or any of the risks or other factors occur, then the Company’s performance may not be consistent with these forecasts or forward-looking statements.
You are cautioned not to rely solely on such forward-looking statements, but instead are encouraged to utilize the entire mix of publicly available historical and forward-looking information, as well as other available information affecting the Company, the Company’s services and the Company’s industry, when evaluating the Company’s forecasts and other forward-looking statements relating to the Company’s operations and financial performance.
Item 1B. Unresolved Staff Comments
None
9
The following are the Company’s principal plants and other important physical properties. Unless otherwise noted, the listed properties are owned by the Company. Management believes that the facilities are suitable and adequate for the Company’s current operations.
Name of Facility | Location |
|
|
| ||||
1. | Millsdale | Millsdale (Joliet), Illinois | 492 acres | Surfactants/Polymers | ||||
2. | Fieldsboro | Fieldsboro, New Jersey | 45 acres | Surfactants | ||||
3. | Anaheim | Anaheim, California | 8 acres | Surfactants | ||||
4. | Winder | Winder, Georgia | 202 acres | Surfactants | ||||
5. | Maywood | Maywood, New Jersey | 19 acres | Surfactants / Specialty Products | ||||
6. | Columbus | Columbus, Georgia | 29.8 acres | Polymers | ||||
7. | Stepan France | Voreppe, France | 20 acres | Surfactants | ||||
8. | Stepan Mexico | Matamoros, Mexico | 13 acres | Surfactants | ||||
9. | Stepan Germany | Wesseling, Germany | 12 acres | Surfactants/Polymers | ||||
10. | Stepan UK | Stalybridge, United Kingdom | 11 acres | Surfactants | ||||
11. | Stepan Colombia | Manizales, Colombia | 5 acres | Surfactants | ||||
12. | Stepan Canada | Longford Mills, Canada | 70 acres (leased) | Surfactants | ||||
13. | Stepan China | Nanjing, China (Nanjing Chemical Industrial Park) | 13 acres (right of use arrangement) | Polymers | ||||
14. | Stepan Brazil | Vespasiano, Minas Gerais, Brazil | 27 acres | Surfactants | ||||
15. | Stepan Brazil | Simoes Filho, Bahia, Brazil | 29 acres | Surfactants | ||||
16. | Stepan Philippines | Bauan, Batangas, Philippines | 9 acres (leased) | Surfactants | ||||
17. | Stepan Poland | Brzeg Dolny, Poland | 4 acres (perpetual use right) | Polymers | ||||
18. | Stepan Asia | Jurong Island, Singapore | 8 acres (leased) | Surfactants | ||||
19. | Company Headquarters and Central Research Laboratories | Northfield, Illinois | 8 acres | N/A | ||||
20. | Company Corporate Supply Chain, Human Resources, Legal and Finance Functions | Northbrook, Illinois | 3.25 acres | N/A |
10
There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company’s business, the majority of which relate to environmental matters. 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 relative to or has been named by the government as a potentially responsible party at a number of 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. For most of these sites, the involvement of the Company is expected to be minimal. The most significant sites are described below:
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 has recorded a liability based on its best estimate of the remediation costs.
On August 23, 2013,September 24, 2014, USEPA issued its Record of Decision (“ROD”) for chemically-contaminated soil. USEPA has not yet issued a Feasibility Study and a Proposed Plan selecting remediesROD for soil remediation which, in some cases, may be different from thosechemically-contaminated groundwater for the Maywood site. Based on the most current information available, the Company used in determiningbelieves its best estimate. The Company submitted comments to USEPA on the Proposed Plan in December 2013. Those comments raised significant issues with both the Proposed Plan’s remedy selections and cost estimates. As a result, the Proposed Plan has had no impact on the Company’s recorded liability at this time. Until such time as USEPA completes its remedy selection process, the Company does not know the scope of remediation that may be required. At this time, based on its current review and analysis of the Proposed Plan, the Company’s recorded liability for claims associated with remediation of chemical contamination at the Maywood site represents its best estimate of the cost of remediation for the Maywood site. The estimatedbest estimate of the cost of such 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 example, if the Proposed Plan is adopted without any changes or based on the availabilityclaims associated with soil remediation of additional information.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 potentially responsible party (PRP) in the caseUnited States v. Lightman (1:92-cv-4710 D.N.J.), which involved the D’Imperio Property Site located in New Jersey. In 2012,2016, the PRPs approved certain changes towere 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 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 $2.2$2.4 million for the Company’s portion of environmental response costs through the third quarter of 2013 (the current owner of the site bills the Company one calendar quarter in arrears).2015. 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
11
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 it has adequate reserves for the claims related to this site. 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.
Other Matters
The Company has been named as a de minimis PRP at other sites, and as such the Company believes that a resolution of its liability will not have a material impact on the financial position, results of operations or cash flows of the Company.
Item 4. Mine Safety Disclosures
Not Applicable.
12
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
All 2012 share and per share data in Item 5 have been retroactively adjusted to reflect the two-for-one common stock split that was effective on December 14, 2012.
(a)
The Company’s common stock is listed and traded on the New York Stock Exchange. See table below for New York Stock Exchange quarterly market price information. |
Quarterly Stock Data | Quarterly Stock Data | Quarterly Stock Data |
| |||||||||||||||||||||||||||||
| Stock Price Range | ||||||||||||||||||||||||||||||||
| 2013 | 2012 |
| Stock Price Range |
| ||||||||||||||||||||||||||||
| 2015 |
|
| 2014 |
| |||||||||||||||||||||||||||
Quarter | High | Low | High | Low |
| High |
|
| Low |
|
| High |
|
| Low |
| ||||||||||||||||
First | $ | 64.99 | $ | 55.43 | $ | 46.00 | $ | 38.05 |
| $ | 41.80 |
|
| $ | 37.20 |
|
| $ | 65.14 |
|
| $ | 59.49 |
| ||||||||
Second | $ | 63.27 | $ | 52.34 | $ | 47.25 | $ | 41.35 |
| $ | 55.22 |
|
| $ | 41.34 |
|
| $ | 66.47 |
|
| $ | 51.17 |
| ||||||||
Third | $ | 59.98 | $ | 55.51 | $ | 50.43 | $ | 42.72 |
| $ | 55.67 |
|
| $ | 40.49 |
|
| $ | 53.91 |
|
| $ | 44.38 |
| ||||||||
Fourth | $ | 67.20 | $ | 56.06 | $ | 55.90 | $ | 44.89 |
| $ | 54.87 |
|
| $ | 40.72 |
|
| $ | 46.85 |
|
| $ | 36.34 |
| ||||||||
Year | $ | 67.20 | $ | 52.34 | $ | 55.90 | $ | 38.05 |
| $ | 55.67 |
|
| $ | 37.20 |
|
| $ | 66.47 |
|
| $ | 36.34 |
| ||||||||
On June 12, 2013, the Company announced that on August 9, 2013 (redemption date) it would redeem any remaining outstanding shares of its 5 1/2 percent Convertible Preferred Stock without par value (preferred stock). At the time of the redemption announcement, there were 61,735 shares of preferred stock outstanding. Prior to the redemption date, preferred shareholders converted 60,900 shares of preferred stock into 139,029 shares of Company common stock. In accordance with the Certificate of Designation, Preferences and Rights of the 5 1/2% Convertible Preferred Stock (Preferred Shareholders Agreement), the Company redeemed 835 shares of unconverted shares of Company preferred stock for an aggregate redemption price of $25.26354 per share ($25.00 per share plus accrued and unpaid dividends of $0.26354 per share). There are no longer any issued and outstanding shares of preferred stock (see also Note 11, Stockholders’ Equity, of the consolidated financial statements).
On February 19, 2013, the Board of Directors of Stepan Company authorized the Company to repurchase up to 1,000,000 shares of its outstanding common stock. This repurchase authorization replaced the previous authorization of February 11, 2009, and the remaining unutilized 2009 repurchase authorization of 170,542 shares was cancelled. During 2013, 41,6882015, 41,915 shares of Company common stock were purchased in the open market 1,562 shares of common stock were received in lieu of cash from employees exercising stock options and 17,3452,183 shares of common stock were received to settle employees’ minimum statutory withholding taxes related to performance stock awards and deferred compensation distribution. The purchased and received shares were recorded as treasury stock in the Company’s balance sheet. At December 31, 2013, 958,3122015, 761,764 shares remained available for repurchase under the February 19, 2013,
authorization. The timing and amount of the repurchases are determined by the Company’s management based on its evaluation of market conditions and share price. Shares will be repurchased with cash in open market or private transactions in accordance with applicable securities and stock exchange rules.
In October 2012, the Board of Directors declared a two-for-one stock split on the Company’s common stock in the form of a 100 percent stock dividend, which was paid on December 14, 2012.
(b) | On January 31, |
(c) |
|
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||
October | — | — | — | — | ||||||||
November | 1,562 | (a) | $ | 58.80 | — | — | ||||||
December | — | — | — | — | ||||||||
|
See table below for quarterly dividend information. |
Dividends Declared Per Common Share
Quarter | 2013 | 2012 |
| 2015 |
|
| 2014 |
| ||||||||
First | $ | 0.16 | $ | 0.14 |
| $ | 0.18 |
|
| $ | 0.17 |
| ||||
Second | $ | 0.16 | $ | 0.14 |
| $ | 0.18 |
|
| $ | 0.17 |
| ||||
Third | $ | 0.16 | $ | 0.14 |
| $ | 0.18 |
|
| $ | 0.17 |
| ||||
Fourth | $ | 0.17 | $ | 0.16 |
| $ | 0.19 |
|
| $ | 0.18 |
| ||||
Year | $ | 0.65 | $ | 0.58 |
| $ | 0.73 |
|
| $ | 0.69 |
| ||||
The Company has material debt agreements that restrict the payment of dividends. See the Liquidity and Financial Condition section of Part II, Item 7, Management’s Discussion and Analysis, for a description of the restrictions. See also Note 7,6, Debt, of the consolidated financial statements (Item 8 of this Form 10-K) for the amount of retained earnings available for dividend distribution at December 31, 2013.
13
The following stock performance graph compares the yearly change since December 31, 2008,2010, in cumulative return on the common stock of the Company on a dividend reinvested basis to the Dow Jones Chemical Industry Index and the Russell 2000 Index. The Dow Jones Chemical Industry Index is a market-capitalization weighted grouping of 3235 chemical companies, including major manufacturers of both basic and specialty products. The Company is not included in the Dow Jones Chemical Industry Index. The Russell 2000 Index is a market-capitalization weighted grouping of 2,000 small to medium sized companies in a broad range of industries. The Company has been included in the Russell 2000 Index since 1992. The graph assumes $100 was invested on December 31, 2008,2010, and shows the cumulative total return as of each December 31 thereafter.
14
ItemItem 6. Selected Financial Data
(In thousands, except per share data)
| For the Year | 2013 | 2012 | 2011 | 2010 | 2009 | |||||||||||||||
Net Sales | $ | 1,880,786 | $ | 1,803,737 | $ | 1,843,092 | $ | 1,431,122 | $ | 1,276,382 | ||||||||||
Operating Income | 109,153 | 128,716 | 118,456 | 107,897 | 104,888 | |||||||||||||||
Percent of Net Sales | 5.8% | 7.1% | 6.4% | 7.5% | 8.2% | |||||||||||||||
Income Before Provision for Income Taxes | 95,630 | 115,722 | 104,894 | 101,479 | 97,131 | |||||||||||||||
Percent of Net Sales | 5.1% | 6.4% | 5.7% | 7.1% | 7.6% | |||||||||||||||
Provision for Income Taxes | 23,293 | 36,035 | 32,292 | 35,888 | 34,028 | |||||||||||||||
Net Income Attributable to Stepan Company | 72,828 | 79,396 | 71,976 | 65,427 | 63,049 | |||||||||||||||
Per Diluted Share(a) | 3.18 | 3.49 | 3.21 | 2.95 | 2.92 | |||||||||||||||
Percent of Net Sales | 3.9% | 4.4% | 3.9% | 4.6% | 4.9% | |||||||||||||||
Percent to Total Stepan Company Stockholders’ Equity(b) | 14.1% | 18.0% | 19.2% | 20.5% | 25.3% | |||||||||||||||
Cash Dividends Paid | 14,474 | 12,757 | 11,513 | 10,570 | 9,557 | |||||||||||||||
Per Common Share(a) | 0.6500 | 0.5800 | 0.5300 | 0.4900 | 0.4500 | |||||||||||||||
Depreciation and Amortization | 56,400 | 51,294 | 47,099 | 40,351 | 37,171 | |||||||||||||||
Capital Expenditures | 92,865 | 83,159 | 83,166 | 73,748 | 42,631 | |||||||||||||||
Weighted-average Common Shares Outstanding (Diluted)(a) | 22,924 | 22,730 | 22,440 | 22,180 | 21,592 | |||||||||||||||
As of Year End | ||||||||||||||||||||
Working Capital | $339,557 | $275,911 | $246,516 | $222,199 | $186,297 | |||||||||||||||
Current Ratio | 2.3 | 2.1 | 2.1 | 2.1 | 2.1 | |||||||||||||||
Property, Plant and Equipment, net | 494,042 | 422,022 | 383,983 | 353,585 | 248,618 | |||||||||||||||
Total Assets | 1,167,202 | 985,478 | 901,118 | 811,431 | 634,203 | |||||||||||||||
Long-term Debt Obligations, Less Current Maturities | 235,246 | 149,564 | 164,967 | 159,963 | 93,911 | |||||||||||||||
Total Stepan Company Stockholders’ Equity | 552,286 | 478,985 | 401,211 | 349,491 | 289,285 | |||||||||||||||
For the Year |
| 2015 |
|
| 2014 |
|
| 2013 |
|
| 2012 |
|
| 2011 |
| |||||
Net Sales |
| $ | 1,776,167 |
|
| $ | 1,927,213 |
|
| $ | 1,880,786 |
|
| $ | 1,803,737 |
|
| $ | 1,843,092 |
|
Operating Income |
|
| 122,790 |
|
|
| 90,694 |
|
|
| 109,153 |
|
|
| 128,716 |
|
|
| 118,456 |
|
Percent of Net Sales |
|
| 6.9 | % |
|
| 4.7 | % |
|
| 5.8 | % |
|
| 7.1 | % |
|
| 6.4 | % |
Income Before Provision for Income Taxes |
|
| 102,856 |
|
|
| 75,535 |
|
|
| 95,630 |
|
|
| 115,722 |
|
|
| 104,894 |
|
Percent of Net Sales |
|
| 5.8 | % |
|
| 3.9 | % |
|
| 5.1 | % |
|
| 6.4 | % |
|
| 5.7 | % |
Provision for Income Taxes |
|
| 26,819 |
|
|
| 18,454 |
|
|
| 23,293 |
|
|
| 36,035 |
|
|
| 32,292 |
|
Net Income Attributable to Stepan Company |
|
| 75,968 |
|
|
| 57,101 |
|
|
| 72,828 |
|
|
| 79,396 |
|
|
| 71,976 |
|
Per Diluted Share |
|
| 3.32 |
|
|
| 2.49 |
|
|
| 3.18 |
|
|
| 3.49 |
|
|
| 3.21 |
|
Percent of Net Sales |
|
| 4.3 | % |
|
| 3.0 | % |
|
| 3.9 | % |
|
| 4.4 | % |
|
| 3.9 | % |
Percent to Total Stepan Company Stockholders’ Equity (a) |
|
| 13.9 | % |
|
| 10.5 | % |
|
| 14.1 | % |
|
| 18.0 | % |
|
| 19.2 | % |
Cash Dividends Paid |
|
| 16,300 |
|
|
| 15,387 |
|
|
| 14,474 |
|
|
| 12,757 |
|
|
| 11,513 |
|
Per Common Share |
|
| 0.7300 |
|
|
| 0.6900 |
|
|
| 0.6500 |
|
|
| 0.5800 |
|
|
| 0.5300 |
|
Depreciation and Amortization |
|
| 66,985 |
|
|
| 63,804 |
|
|
| 56,400 |
|
|
| 51,294 |
|
|
| 47,099 |
|
Capital Expenditures |
|
| 119,349 |
|
|
| 101,819 |
|
|
| 92,865 |
|
|
| 83,159 |
|
|
| 83,166 |
|
Weighted-average Common Shares Outstanding (Diluted) |
|
| 22,858 |
|
|
| 22,917 |
|
|
| 22,924 |
|
|
| 22,730 |
|
|
| 22,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of Year End |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working Capital |
| $ | 376,329 |
|
| $ | 326,043 |
|
| $ | 339,557 |
|
| $ | 275,911 |
|
| $ | 246,516 |
|
Current Ratio |
|
| 2.5 |
|
|
| 2.3 |
|
|
| 2.3 |
|
|
| 2.1 |
|
|
| 2.1 |
|
Property, Plant and Equipment, Net |
|
| 555,463 |
|
|
| 524,195 |
|
|
| 494,042 |
|
|
| 422,022 |
|
|
| 383,983 |
|
Total Assets |
|
| 1,239,661 |
|
|
| 1,162,014 |
|
|
| 1,167,202 |
|
|
| 985,478 |
|
|
| 901,118 |
|
Long-term Debt Obligations, Less Current Maturities |
|
| 313,817 |
|
|
| 246,897 |
|
|
| 235,246 |
|
|
| 149,564 |
|
|
| 164,967 |
|
Total Stepan Company Stockholders’ Equity |
|
| 556,984 |
|
|
| 535,546 |
|
|
| 552,286 |
|
|
| 478,985 |
|
|
| 401,211 |
|
(a) |
|
Based on average equity. |
15
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the annual periods included in the accompanying consolidated financial statements.
Certain matters discussed in the following discussionManagement’s Discussion and analysisAnalysis of Financial Condition and Results of Operations (MD&A) include forward-looking statements that are subject to certain risks, uncertainties and assumptions. Such forward-looking statements are intended to be identified in this document by the words, “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “objective,” “outlook,” “plan,” “project,” “possible,” “potential,” “should” and similar expressions. Actual results may vary materially.
Forward-looking statements speak only as of the date they are made, and the Company does not undertake any obligation to update them to reflect changes that occur after that date. Factors that could cause actual results to differ materially include the items described in Item 1A of this Annual Report on Form 10-K.
Overview
The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business comprises three reportable segments:
Surfactants – Surfactants, which accounted for 70 percent of consolidated net sales in 2013, are principal ingredients in consumer and industrial cleaning products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos, body washes, toothpastes and fabric softeners. Other applications include germicidal quaternary compounds, lubricating ingredients, emulsifiers (for spreading agricultural products), plastics and composites and biodiesel. Surfactants are manufactured at six North American sites (five in the U.S. and one in Canada), three European sites (United Kingdom, France and Germany), three Latin American sites (Mexico, Brazil and Colombia) and two Asian sites (Philippines and Singapore). The Company also holds a 50 percent ownership interest in a joint venture, TIORCO, LLC (TIORCO), that markets chemical solutions for increasing the production of crude oil and natural gas from existing fields (enhanced oil recovery or EOR). The joint venture is accounted for under the equity method, and its financial results are excluded from surfactant segment operating results. Sales and related profits of the Company’s surfactants to enhanced oil recovery customers are included in surfactants segment results.
Polymers – Polymers, which accounted for 26 percent of consolidated net sales in 2013, includes two primary product lines: polyols and phthalic anhydride. Polyols are used in the manufacture of rigid laminate insulation board and panels for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively CASE products) and flexible foams. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the U.S., polymer product lines are manufactured at the Company’s Millsdale, Illinois, site and beginning June 1, 2013, at the Company’s
· |
|
· | Polymers – Polymers, which accounted for 28 percent of consolidated net sales in 2015, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively CASE products) and flexible foams. Polyester resins, which include liquid and powdered products, are used in CASE and polyurethane systems house applications. CASE, polyester resins and flexible foam are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the U.S., polyurethane polyols and phthalic anhydride are manufactured at the Company’s |
· | Specialty Products – Specialty products, which accounted for |
Specialty Products – Specialty products, which accounted for four percent of consolidated net sales in 2013, include flavors, emulsifiers and solubilizers used in the food, nutritional supplement and pharmaceutical industries. Specialty products are primarily manufactured at the Company’s Maywood, New Jersey, site and, in some instances, at outside contractors.
2015 Business Developments
Business Acquisition
On June 1, 2013,15, 2015, the Company acquired the North American polyester resins businesscompleted its previously announced acquisition of Bayer MaterialScience LLC (BMS). Prior to the acquisition, BMS was a leading North American producer of powder polyester resins for metal coating applications and liquid polyester resins for CASE applications. The acquisition included a 21,000-tonProcter & Gamble do Brasil S.A.’s (P&G Brazil’s) sulfonation production facility in Columbus, Georgia,Bahia, Brazil. The facility is located in northeastern Brazil and has 30,000 metric tons of surfactants capacity. The acquisition expands the Company’s capabilities in Brazil, which is the world’s fifth most populous country and has a modern researchgrowing population. As the country’s usage of laundry products transitions from soap bars to powders to liquids, surfactant use is expected to expand. Surfactants usage in functional applications, including the large Brazilian agricultural industry, is also expected to increase. Brazil is a strategic priority for the Company. The new business complements the Company’s existing Vespasiano, Brazil, plant and development laboratory for customer technical support and new product development. Infrastructure is in placeprovides opportunities to allow for future expansion. Prior to the purchase, theserve growing northeastern Brazil. The acquired business had annual sales of approximately $64.0 million. As of the acquisition date, the new business became a part of the North American operations reporting unitis included in the Company’s polymers reportableSurfactants segment.
The acquisition, which included both liquid and powdered resins, has diversified the Company’s polyol product offering and is expected to accelerate Company growth in CASE and PUSH (polyurethane systems house) applications. The Company intends to make future capital expenditures to expand production capabilities at the site.
The total acquisition purchase price was $68.2 million of cash, of which $61.1 million was paid at closing with $7.1 million, primarily for inventory, paid over a three-month period (June 2013 through August 2013) pursuant to a transition services agreement with BMS. The acquisition was originally funded through the Company’s committed revolving credit agreement. Subsequent to closing on the acquisition, the Company completed a $100.0 million private placement loan, which was used in part to finance the acquisition (see the Liquidity and Capital Resources section of this MD&A for further information regarding the private placement borrowing).
The financial effect of the new business was immaterial, although slightly accretive, to Company earnings for 2013. See Note 2 of20 to the consolidated financial statements for further detailsinformation regarding the business acquisition.
16
Supply Agreement and Asset Acquisition
In July 2015, the Company signed a long-term supply agreement with The Sun Products Corporation (SUN). Under this agreement the Company will supply SUN's anionic surfactant requirements for laundry in North America. The agreement commenced in the third quarter of 2015. The demand from this agreement is being serviced from the Company’s existing North American manufacturing assets. The supply agreement was made possible due to the strength of the Company’s sulfonation expertise and North American supply network that provide this customer with multiple source locations and increased surfactant flexibility. This agreement should enable the Company to improve its North American capacity utilization.
In September 2015, the Company closed on the previously announced agreement to purchase select chemical manufacturing assets from SUN's Pasadena, Texas manufacturing site. An option to purchase the land at this site was also exercised. See Note 20 to the consolidated financial statements for further information regarding the asset purchase.
TIORCO Joint Venture
Given the current and forecasted price of crude oil, the Company and Nalco Company (Nalco) decided in October 2015 to dissolve their TIORCO enhanced oil recovery joint venture. The Company expects to continue to participate in the enhanced oil recovery business, but through operations within its organization. With this change, the Company seeks to reduce the unfavorable financial statement impact of TIORCO’s losses, which have averaged about $5.0 million per year over the last three years. The Company expects its own operating expenses to increase to support its enhanced oil recovery activities, but the net impact to earnings of the dissolution is expected to be positive. As a result of the dissolution, TIORCO incurred fourth quarter 2015 exit costs to wind down the entity. The Company’s share of the exit costs was $2.4 million pretax. The exit costs were included in the ‘Loss from equity in joint ventures’ line in the consolidated statement of income for the year ended December 31, 2015. See Note 25 to the consolidated financial statements for further information.
Deferred Compensation Plans
The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company expenses and profits. Compensation expense results when the values of Company common stock and mutual fund investment assets held for the plans increase, and compensation income results when the values of Company common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayedpresented in the following table:
| Income (Expense) |
| Income (Expense) For the Year Ended December 31 |
|
|
|
|
|
| |||||||||||||||||
| (In millions) | For the Year Ended December 31 |
| 2015 |
|
| 2014 |
|
| Change |
|
| ||||||||||||||
| 2013 | 2012 | Change | |||||||||||||||||||||||
Deferred Compensation (Administrative expense) | ($9.5 | ) | ($10.2 | ) | $0.7 | (1) | |||||||||||||||||||
Deferred Compensation (Operating expenses) |
| $ | (6.5 | ) |
| $ | 11.9 |
|
| $ | (18.4 | ) | (1) | ||||||||||||
Investment Income (Other, net) | 1.0 | 0.1 | 0.9 |
|
| 0.8 |
|
|
| 1.2 |
|
|
| (0.4 | ) |
| |||||||||
| Realized/Unrealized Gains (Losses) on Investments (Other, net) | 2.5 | 1.3 | 1.2 |
|
| 0.1 |
|
|
| 0.3 |
|
|
| (0.2 | ) |
| |||||||||
|
|
| |||||||||||||||||||||||
Pretax Income Effect | ($6.0 | ) | ($8.8 | ) | $2.8 |
| $ | (5.6 | ) |
| $ | 13.4 |
|
| $ | (19.0 | ) |
| |||||||
|
|
| |||||||||||||||||||||||
| Income (Expense) |
| Income (Expense) For the Year Ended December 31 |
|
|
|
|
|
| |||||||||||||||||
| (In millions) | For the Year Ended December 31 |
| 2014 |
|
| 2013 |
|
| Change |
|
| ||||||||||||||
| 2012 | 2011 | Change | |||||||||||||||||||||||
Deferred Compensation (Administrative expense) | ($10.2 | ) | ($1.5 | ) | $(8.7 | )(1) | |||||||||||||||||||
Deferred Compensation (Operating expenses) |
| $ | 11.9 |
|
| $ | (9.5 | ) |
| $ | 21.4 |
| (1) | ||||||||||||
Investment Income (Other, net) | 0.1 | 0.1 | — |
|
| 1.2 |
|
|
| 1.0 |
|
|
| 0.2 |
|
| |||||||||
| Realized/Unrealized Gains (Losses) on Investments (Other, net) | 1.3 | (0.1 | ) | 1.4 |
|
| 0.3 |
|
|
| 2.5 |
|
|
| (2.2 | ) |
| ||||||||
|
|
| |||||||||||||||||||||||
Pretax Income Effect | ($8.8 | ) | ($1.5 | ) | $(7.3 | ) |
| $ | 13.4 |
|
| $ | (6.0 | ) |
| $ | 19.4 |
|
| ||||||
|
|
| |||||||||||||||||||||||
(1) | See the applicable Corporate Expenses section of this MD&A for details regarding the period-to-period changes in deferred compensation. |
17
Effects of Foreign Currency Translation
The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects year-to-year comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar year-to-year local currency results for a foreign subsidiary
may translate into different U.S. dollar results). The following tables present the effects that foreign currency translation had on the year-over-year changes in consolidated net sales and various income line items for 20132015 compared to 20122014 and 20122014 compared to 2011:2013:
| Year Ended | Increase Due to Foreign | |||||||||||||||||||||||||||||||
| December 31 | Increase |
| For the Year Ended December 31 |
|
| Increase |
|
| (Decrease) Due to Foreign Currency |
| ||||||||||||||||||||||
| (In millions) | 2013 | 2012 | (Decrease) | Translation |
| 2015 |
|
| 2014 |
|
| (Decrease) |
|
| Translation |
| ||||||||||||||||
Net Sales | $ | 1,880.8 | $ | 1,803.7 | $ | 77.1 | $ | 2.3 |
| $ | 1,776.2 |
|
| $ | 1,927.2 |
|
| $ | (151.0 | ) |
| $ | (131.8 | ) | ||||||||
Gross Profit | 281.7 | 291.6 | (9.9 | ) | — |
|
| 308.2 |
|
|
| 249.6 |
|
|
| 58.6 |
|
|
| (21.6 | ) | |||||||||||
Operating Income | 109.2 | 128.7 | (19.5 | ) | — |
|
| 122.8 |
|
|
| 90.7 |
|
|
| 32.1 |
|
|
| (13.2 | ) | |||||||||||
Pretax Income | 95.6 | 115.7 | (20.1 | ) | 0.2 |
|
| 102.9 |
|
|
| 75.5 |
|
|
| 27.4 |
|
|
| (12.7 | ) | |||||||||||
| Year Ended | Decrease Due to Foreign | |||||||||||||||
| December 31 | Increase | |||||||||||||||
| (In millions) | 2012 | 2011 | (Decrease) | Translation | ||||||||||||
Net Sales | $ | 1,803.7 | $ | 1,843.1 | $ | (39.4 | ) | $ | (39.6 | ) | ||||||
Gross Profit | 291.6 | 255.6 | 36.0 | (5.2 | ) | |||||||||||
Operating Income | 128.7 | 118.5 | 10.2 | (2.7 | ) | |||||||||||
Pretax Income | 115.7 | 104.9 | 10.8 | (2.6 | ) | |||||||||||
|
| For the Year Ended |
|
|
|
|
|
| (Decrease) Due |
| ||||||
|
| December 31 |
|
| Increase |
|
| to Foreign Currency |
| |||||||
(In millions) |
| 2014 |
|
| 2013 |
|
| (Decrease) |
|
| Translation |
| ||||
Net Sales |
| $ | 1,927.2 |
|
| $ | 1,880.8 |
|
| $ | 46.4 |
|
| $ | (10.8 | ) |
Gross Profit |
|
| 249.6 |
|
|
| 281.7 |
|
|
| (32.1 | ) |
|
| (1.9 | ) |
Operating Income |
|
| 90.7 |
|
|
| 109.2 |
|
|
| (18.5 | ) |
|
| (1.2 | ) |
Pretax Income |
|
| 75.5 |
|
|
| 95.6 |
|
|
| (20.1 | ) |
|
| (1.2 | ) |
RESULTS OF OPERATIONS
20132015 Compared with 20122014
Summary
Net income attributable to the Company for 2013 declined eight2015 increased 33 percent to $72.8$76.0 million, or $3.18$3.32 per diluted share, compared to $79.4from $57.1 million, or $3.49$2.49 per diluted share, for 2012.2014. Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, profits and expenses. A detailed discussion of segment operating performance for 20132015 compared to 2014 follows the summary.
Consolidated net sales increased $77.0declined $151.0 million, or foureight percent, year over year due to a sevenbetween years. A five percent improvementincrease in sales volume andfavorably affected the year-over-year net sales change by $96.6 million. All three segments contributed to the favorableconsolidated sales volume improvement. Sales volumes for Surfactants and Polymers grew five percent each, and sales volumes for the Specialty Products segment increased two percent. The positive effect of increased sales volume was more than offset by the unfavorable effects of foreign currency translation and lower selling prices, which accounted for $118.6$131.8 million and $2.3$115.8 million, respectively, of the net sales increase. Sales volumes for all three segments improved – six percent for surfactants, eight percent for polymers and two percent for specialty products. A decline in average selling prices had a $43.9 million unfavorable impact on the year-over-year net sales change. Decreaseddecline. The unfavorable foreign currency translation effect reflected a stronger U.S. dollar against all currencies of countries where the Company has foreign operations. Selling prices were lower primarily related to certain pass-through contract requirements associated with lower raw materials costs. Overall margins improved slightly. The decline in raw material costs reflected the impacts of decreases in the cost of crude oil and a less favorable mix of sales for surfactants led to the dropsluggish economies in average selling prices.China and other emerging market countries.
Operating income for 2013 declined $19.62015 increased $32.1 million, or 1535 percent, fromover operating income reported for 2012. Gross profit decreased $9.9 million, or three percent. The polymers segment reported higher year-over-year gross profit, but the improvement was more than offset by gross profit declines for the surfactants and specialty products segments. The higher polymers
gross profit was2014, largely due to greater sales volumeimproved results for EuropeanSurfactants and North American operations.Polymers. Increased deferred compensation expense and the effects of foreign currency translation negatively affected the year-over-year operating income change by $18.4 million and $13.2 million, respectively. Included in the 2015 results was a $2.9 million gain on the divestiture of the Company’s specialty polyurethane systems product line (part of the Polymers segment). See Note 21 to the consolidated financial statements for additional information regarding the sale. In addition, 2013 European polymer profits benefited from insurance recoverylast year’s operating income that was $2.5 million greater than that for 2012. Gross profit for surfactants was negatively impactedunfavorably affected by lower margins that more than offset the effect of higher sales volume. Included in 2013 surfactants gross profit were approximately $9.0$4.0 million of expenses resulting from the consumption of higher cost raw material inventory built to support the Company’s Singapore plant start-up, contractual timing differences between changes in raw material costsrestructuring and selling pricesasset impairment charges and non-recurring costs to secure a strategic raw material$2.4 million bad debt charge necessitated when a major Polymer customer filed for specialty surfactant growth. Specialty products profits were negatively impacted by lower sales volumes and lower margins for medium-chain triglyceride products used in food ingredient applications.bankruptcy protection.
18
Operating expenses increased $9.7$33.5 million, or six22 percent, between years.year over year. Higher deferred compensation, incentive-based compensation and consulting expenses were the major contributors to the increase. The following summarizes the year-over-year changes in the individual income statement line items that comprise the Company’s operating expenses:
Selling expenses increased $0.1 million, or less than one percent, year over year. The only significant year-over-year variance was a $1.6 million reduction in U.S. fringe benefit expenses largely due to declines in short and long-term incentive expenses. Increases in a number of small expense items offset the decrease in U.S. benefit expense.
· | Selling expenses increased $0.8 million, or one percent, year over year primarily due to higher global fringe benefit expenses, largely offset by the favorable impact of foreign currency translation ($3.9 million) and a reduction in bad debt expense. U.S. fringe benefit expenses, which accounted for the largest share of the fringe benefit expense increase, were up $5.8 million primarily due to increased incentive-based compensation (i.e., bonuses, profit sharing and stock-based compensation). Prior year bad debt expense included a $2.4 million charge for a Polymer customer that filed for bankruptcy protection. |
· | Administrative expenses increased $9.5 million, or 14 percent, year over year due to increases for consulting ($5.9 million), fringe benefits ($4.7 million), talent acquisition/relocation ($1.5 million), expatriate ($0.8 million), salaries ($0.7 million) and the accumulation of a number of smaller expense increases. Administrative expenses were up $0.7 million in China, where a new plant is being constructed. Administrative expenses for both Europe and Brazil operations were generally up, but the increases were offset by the favorable effects of foreign currency translation. Partially offsetting the increases were lower environmental remediation expenses ($6.4 million). |
The increase in consulting expenses increased $7.5 million, or twelve percent, year over year. Much of the increase reflectedwas related to the Company’s continued investment in growth and innovation initiatives. Increases in corporate and other Company entity legal (including intellectual property), acquisition (actual and exploratory) and salary expenses accounted for $2.4 million, $1.0 million and $0.9 million, respectively, of the year-over-year change in corporate expenses. In addition, 2013 expenses included a $0.7 million charge for estimated dismantling costs for the manufacturing site in Nanjing, China. Other contributorsongoing initiative to the increase in consolidated administrative expenses included hardware and software maintenance ($0.5 million), hiring ($0.3 million) and temporary help ($0.3 million). The remaining year-over-year variance is attributable to the accumulation of small increasesimprove efficiency across the Company’s global organization.
organization (the initiative is referred to as DRIVE within the Company). The above increases were partially offset by a $0.7 million year-over-yearcontract with the consulting company advising on the DRIVE initiative has expired, so it is expected that such expenses will decline in deferred2016. Higher incentive-based compensation expense. The decline reflected a year-over-yearcosts accounted for the increase in fringe benefit expenses. With respect to the valuedecline in environmental remediation expenses, 2014 included a $7.1 million charge to increase the remediation liability for the Company’s Maywood, New Jersey, site. The U.S. Environmental Protection Agency issued its record of Company stockdecision for soil remediation at that was smallersite in 2013 than in 2012. SeeSeptember 2014, which led to the liability increase.
· | Research, development and technical service (R&D) expenses increased $4.8 million, or 11 percent, year over year primarily due to higher fringe benefit expenses ($6.2 million) partially offset by the favorable effects of foreign currency translation ($1.1 million). Increased incentive-based compensation expenses accounted for most of the higher fringe benefit expenses. |
· | Deferred compensation plan activity resulted in $6.5 million of expense in 2015 compared to $11.9 million of income in 2014. An increase in the value of Company stock for 2015 compared to a decrease in the value of Company common stock for 2014 led to the year-over-year swing in deferred compensation results (see the ‘Overview’ and ‘Corporate Expenses’ sections of this MD&A for further details). |
Net interest expense for 2015 increased $3.1 million, or 27 percent, over net interest expense for 2014. Higher average debt levels resulting from the July 2015 issuance of $100.0 million in unsecured debt was the principal contributor to the increase. See Note 6 to the consolidated financial statements for further details.
Research, development and technical service (R&D) expenses were up $1.1 million, or two percent, year over year. Most ofinformation regarding the increase was attributable to higher personnel, outside contract service and consulting expenses required to pursue the Company’s growth and innovation opportunities. Lower product registration costs under Europe’s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) regulation favorably affected the year-over-year change in R&D expenses by $0.6 million.
Business Restructuring – In the fourth quarter of 2013, the Company approved a plan to consolidate a portion of its North American surfactants manufacturing operations (part of the surfactants reportable segment) to reduce future costs and optimize asset utilization. The Company will shut down sulfonation production at its Canadian manufacturing site, which will result in the elimination of an estimated 20 North American positions. Production of affected products currently manufactured in Canada will be moved to U.S. plants. The restructuring effort is expected to be completed in the third quarter of 2014.
As a result of the approved plan, the Company recognized $1.0 million of one-time severance expenses in the fourth quarter of 2013. Most of the severance payments are expected to be made in the third quarter of 2014.
It should be noted that in addition to the restructuring costs, the Company reduced the useful lives of the manufacturing assets in the affected areas of the Canada plant. As a result, the Company recognized $0.3 million of additional depreciation expense in the fourth quarter of 2013. The expense was included in the cost of sales line of the consolidated statement of income. The change in the useful lives of the assets will add about $1.8 million of depreciation expense in the first half of 2014.new private placement debt.
The loss from the Company’s 50-percent equity joint venture (TIORCO) increased $0.6$2.0 million year over year primarilylargely due to lower commission income.
Net interest expensethe Company’s $2.4 million-share of exit costs recorded by TIORCO in 2013 increased $0.8 million over net interest expense in 2012.the fourth quarter of 2015. The increase reflected higher average debt levels. On June 27, 2013,costs were precipitated by the Company borrowed $100.0 million pursuantjoint venture partners’ agreement to a private placement note purchase agreement that matures in 2025. The Company borroweddissolve the funds primarilyventure. See Note 25 to finance the second quarter acquisitionconsolidated financial statements for further information regarding the dissolution of the North American polyester resins business of BMS and expects to use the remaining proceeds for related capital expenditures and working capital as well as for general corporate purposes.TIORCO.
Other, net was $2.2 million of income for 20132015 increased $0.3 million, or 23 percent, over other, net income for 2014. Foreign exchange activity resulted in a $0.7 million gain in 2015 compared to $1.3a $0.2 million of income for 2012. Net investmentloss in 2014. Investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets was up $2.1declined $0.6 million year over year. Foreign exchange losses werebetween years to $0.9 million in 2015 from $1.5 million for 2013 compared to $0.3 million for 2012.in 2014.
The effective tax rate was 26.1 percent in 2015 compared to 24.4 percent in 2013 compared to 31.1 percent in 2012.2014. The decreaseincrease was primarily attributable to certain favorable foreign tax benefits recorded in 2014 that were nonrecurring in 2015, an unrecognized tax benefit recorded in 2015 for prior tax years, and a less favorable IRS ruling publishedgeographical mix of income in 2015. The 2015 tax rate was also negatively impacted by the fourth quarter of 2013 that allowed the Companylower tax benefit realized on nontaxable foreign interest income due to exclude certain biodiesel excisehigher consolidated income. These items were partially offset by higher U.S. tax credits from income retroactive to January 1, 2010 (this rulingrecorded in 2015. U.S. tax credits included the current year R&D credit, which was a major factor forpermanently extended on December 18, 2015, and the $0.2 million income tax provision benefit reported by the Company in the fourth quarter of 2013). The decrease was also attributableAgricultural Chemicals Security Credit related to the federal research2011 and development2012 tax credit and the small agri-biodiesel producer tax credit which were extended retroactively from January 1, 2012 through December 31, 2013 whenThe American Taxpayer Relief Act of 2012was signed into law on January 2, 2013. Also contributing to the effective tax rate decline was a greater percentage of consolidated income being generated outside the U.S. where the effective tax rates are lower.returns. See Note 109 to the consolidated financial statements for a reconciliation of the statutory U.S. federal income tax rate to the effective tax rate.
19
| (In thousands) | Surfactants | Polymers | Specialty Products | Segment Results | Business Restructuring | Corporate | Total | |||||||||||||||||||||
For the year ended December 31, 2013
| ||||||||||||||||||||||||||||
Net sales | $ | 1,317,164 | $ | 483,361 | $ | 80,261 | $ | 1,880,786 | — | — | $ | 1,880,786 | ||||||||||||||||
Operating income | 100,201 | 54,536 | 10,902 | 165,639 | (1,040 | ) | (55,446 | ) | 109,153 | |||||||||||||||||||
For the year ended December 31, 2012
| ||||||||||||||||||||||||||||
Net sales | $ | 1,305,800 | $ | 423,959 | $ | 73,978 | $ | 1,803,737 | — | — | $ | 1,803,737 | ||||||||||||||||
Operating income | 118,591 | 48,130 | 12,242 | 178,963 | — | (50,247 | ) | 128,716 | ||||||||||||||||||||
(In thousands) |
| For the Year Ended |
|
|
|
|
|
|
|
|
| |||||
Net Sales |
| December 31, 2015 |
|
| December 31, 2014 |
|
| (Decrease) |
|
| Percent Change |
| ||||
Surfactants |
| $ | 1,205,849 |
|
| $ | 1,296,638 |
|
| $ | (90,789 | ) |
|
| -7 |
|
Polymers |
|
| 491,488 |
|
|
| 550,966 |
|
|
| (59,478 | ) |
|
| -11 |
|
Specialty Products |
|
| 78,830 |
|
|
| 79,609 |
|
|
| (779 | ) |
|
| -1 |
|
Total Net Sales |
| $ | 1,776,167 |
|
| $ | 1,927,213 |
|
| $ | (151,046 | ) |
|
| -8 |
|
(In thousands) |
| For the Year Ended |
|
|
|
|
|
|
|
|
| |||||
Operating Income |
| December 31, 2015 |
|
| December 31, 2014 |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||
Surfactants |
| $ | 104,080 |
|
| $ | 60,778 |
|
| $ | 43,302 |
|
|
| 71 |
|
Polymers |
|
| 80,942 |
|
|
| 60,690 |
|
|
| 20,252 |
|
|
| 33 |
|
Specialty Products |
|
| 4,397 |
|
|
| 10,487 |
|
|
| (6,090 | ) |
|
| -58 |
|
Segment Operating Income |
| $ | 189,419 |
|
| $ | 131,955 |
|
| $ | 57,464 |
|
|
| 44 |
|
Business Restructuring |
|
| — |
|
|
| 4,009 |
|
|
| (4,009 | ) |
|
| -100 |
|
Corporate Expenses, Excluding Deferred Compensation |
|
| 60,129 |
|
|
| 49,155 |
|
|
| 10,974 |
|
|
| 22 |
|
Deferred Compensation Expense (Income) |
|
| 6,500 |
|
|
| (11,903 | ) |
|
| 18,403 |
|
| NM |
| |
Total Operating Income |
| $ | 122,790 |
|
| $ | 90,694 |
|
| $ | 32,096 |
|
|
| 35 |
|
Surfactants
Surfactants 2015 net sales for 2013 increased $11.4declined $90.8 million, or oneseven percent, overfrom 2014 net sales for 2012.sales. Sales volume increased five percent between years, which had a $67.0 million positive effect on the year-over-year net sales change. All regions contributed to the sales volume improvement. Foreign currency translation and decreased selling prices had negative effects of $97.9 million and $59.9 million, respectively, on the net sales change. Compared to 2014, the U.S. dollar was stronger against all currencies of the segment’s foreign operations. Selling prices were lower primarily related to certain pass-through contract requirements associated with lower raw materials costs. Overall margins improved slightly. A year-over-year comparison of net sales by sixregion follows:
|
| For the Year Ended |
|
|
|
|
|
|
|
|
| |||||
(In thousands) |
| December 31, 2015 |
|
| December 31, 2014 |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||
North America |
| $ | 737,713 |
|
| $ | 792,244 |
|
| $ | (54,531 | ) |
|
| -7 |
|
Europe |
|
| 258,841 |
|
|
| 287,592 |
|
|
| (28,751 | ) |
|
| -10 |
|
Latin America |
|
| 148,812 |
|
|
| 160,076 |
|
|
| (11,264 | ) |
|
| -7 |
|
Asia |
|
| 60,483 |
|
|
| 56,726 |
|
|
| 3,757 |
|
|
| 7 |
|
Total Surfactants Segment |
| $ | 1,205,849 |
|
| $ | 1,296,638 |
|
| $ | (90,789 | ) |
|
| -7 |
|
Net sales for North American operations declined seven percent between years. Sales volume increased three percent, which favorably affected the year-over-yearchange in net sales change by $83.2$26.2 million. All regions reportedThe sales volume improvements. Aimpact was more than offset by a nine percent decline in average selling prices and the unfavorable effects of foreign currency translation, offset the impactwhich led to year-over-year net sales decreases of sales volume by $69.0$72.8 million and $2.8$7.9 million, respectively. The decreaseimproved sales volume resulted from increased sales of laundry and cleaning and personal care products, partially offset by decreased sales of functional surfactants and household, industrial and institutional (HI&I) products. The increase in average selling priceslaundry and cleaning sales volume was largely due to reducedadditional volumes resulting from the Company’s new long-term supply agreement with SUN. Personal care sales volumes increased principally due to higher demand from existing customers. The decline in sales volumes for functional surfactants was principally due to lower sales of products used in oil field and agricultural applications. Decreased sales volumes to EOR customers, driven by the decline in crude oil prices, led to the lower oil field sales volume. The decline in agricultural chemicals sales volume was largely due to customers’ carryover inventory from 2014 and to farmers’ efforts to reduce spraying costs due to lower crop prices. HI&I sales volume was down mainly due to some lost business. The drop in selling prices was primarily attributable to decreases in raw material costs. A year-over-year comparison of net sales by region follows:The negative foreign currency translation effect reflected a stronger U.S. dollar relative to the Canadian dollar.
| For the Year Ended | ||||||||||||||||
| (In thousands) | ||||||||||||||||
| December 31, 2013 | December 31, 2012 | Increase (Decrease) | Percent Change | |||||||||||||
North America | $ | 802,568 | $ | 810,988 | $ | (8,420) | -1 | |||||||||
Europe | 287,394 | 286,071 | 1,323 | — | ||||||||||||
Latin America | 160,426 | 156,509 | 3,917 | +3 | ||||||||||||
Asia | 66,776 | 52,232 | 14,544 | +28 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total Surfactants Segment | $ | 1,317,164 | $ | 1,305,800 | $ | 11,364 | +1 | |||||||||
|
|
|
|
|
| |||||||||||
Net sales for North AmericanEuropean operations declined one percent.ten percent between years. Sales volume increased threewas up six percent, which favorably affected the year-over-year change in net sales by $21.9$16.8 million. The increase in sales volume reflected greater sales of functional surfactants used in agricultural and biodiesel applications and increased consumer product sales. Sales volume of oil field chemicals declined between years. Average selling prices declined three percent, which had a $28.6 million negative effect onimpact was more than offset by the year-over-year net sales change. Lower raw material costs and the effects of customer contract selling price lags led to the decline in average selling prices. Theunfavorable effects of foreign currency translation hadand a $1.7two percent decline in selling prices, which accounted for $40.7 million unfavorable effect on the net sales change.
Net sales for European operations increased less than one percent between years. Sales volume increased six percent, which had a $15.8and $4.9 million favorable effect onof the year-over-
20
year net sales change. Increaseddecline. An increase in sales of Company products used in personal care, HI&I (household, institutionlaundry and industrial)cleaning and agricultural chemical applications drove the sales volume improvement. Most of the improvement came from additional businessproducts, due to stronger demand from existing customers. A six percent decline in average selling prices had a negative $18.8 million effect on the year-over-year net sales change. Lower raw material costscustomers and price competitionnew business, led to the reductionimprovement in selling prices. The effects ofsales volume. A stronger U.S. dollar against the European euro and British pound sterling led to the foreign currency translation had a $4.3 million positive effect on the net sales change.result.
Net sales for Latin American operations increased threedeclined seven percent asbetween years due to a result$48.0 million unfavorable effect of aforeign currency translation. A 12 percent increase in sales volume and a 10 percent increase in selling prices offset the foreign currency translation impact by $18.8 million and $17.9 million, respectively. Brazil operations accounted for most of the increased Latin American sales volume, with stronger demand from existing customers and business gained as a result of the P&G Brazil acquisition finalized in the second quarter of 2015. Sales volume was up for Colombia operations but was partially offset by a five percent decline in averagesales volume in Mexico. The foreign currency translation effect resulted from the year-over-year weakening of the Brazilian real as well as the Colombian and Mexican pesos against the U.S. dollar.
Net sales for Asian operations increased seven percent due to increased selling prices and a four percent negative effect of foreign currency translation. The increased sales volume had an $18.0 million positive effect on the year-over-year net sales change, while the decreased selling prices and impact of foreign currency translation had negative effects of $9.0 million and $5.1 million, respectively. Sales volume for all three Latin American locations improved between years, with most of the increase derived from Brazil, where the Company has focused on expanding its surfactants franchise. The decrease in average selling prices reflected declines in raw material costs.
Net sales for Asia operations increased 28 percent due to a 33 percent increase in sales volume, reflectingwhich accounted for $3.4 million and $1.7 million, respectively, of the year-over-year increase in net sales. The increase in sales fromvolume was primarily attributable to the Company’s Philippines operation, partially offset by lower sales volume for Singapore subsidiary that was not commercially operational untiloperations. The unfavorable effects of foreign currency translation offset the fourth quartereffects of 2012.higher sales volume and selling prices by $1.3 million.
Surfactants operating income for 2013 declined $18.42015 increased $43.3 million, or 1671 percent, fromover operating income for 2012.2014. Gross profit fell $17.7increased $48.0 million or nine percent. Included in 2013 surfactantslargely due to strong improvement for North American operations. All other regions except Asia also reported increased profits. Foreign currency translation reduced the year-over-year gross profit were approximately $9.0and operating income increase by $16.7 million of expenses resulting from the consumption of higher cost raw material inventory built to support the Company’s Singapore plant start-up, contractual timing differences between changes in raw material costs and selling prices and non-recurring costs to secure a strategic raw material for specialty surfactant growth. The effects of foreign currency translation contributed $1.0$10.4 million, to the gross profit decline. Operating expenses increased $0.7 million, or one percent.respectively. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:
| (In thousands) | For the Year Ended | |||||||||||||||
| December 31, 2013 | December 31, 2012 | Increase (Decrease) | Percent Change | |||||||||||||
Gross Profit | ||||||||||||||||
North America | $ | 128,643 | $ | 155,891 | $ | (27,248) | -17 | |||||||||
Europe | 24,928 | 24,759 | 169 | +1 | ||||||||||||
Latin America | 22,114 | 20,381 | 1,733 | +9 | ||||||||||||
Asia | 10,021 | 2,339 | 7,682 | +328 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total Surfactants Segment | $ | 185,706 | $ | 203,370 | $ | (17,664) | -9 | |||||||||
Operating Expenses | 85,505 | 84,779 | 726 | +1 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating Income | $ | 100,201 | $ | 118,591 | $ | (18,390) | -16 | |||||||||
|
|
|
|
|
| |||||||||||
|
| For the Year Ended |
|
|
|
|
|
|
|
|
| |||||
(In thousands) |
| December 31, 2015 |
|
| December 31, 2014 |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 124,522 |
|
| $ | 84,118 |
|
| $ | 40,404 |
|
|
| 48 |
|
Europe |
|
| 31,363 |
|
|
| 27,392 |
|
|
| 3,971 |
|
|
| 14 |
|
Latin America |
|
| 25,366 |
|
|
| 19,741 |
|
|
| 5,625 |
|
|
| 28 |
|
Asia |
|
| 12,254 |
|
|
| 14,269 |
|
|
| (2,015 | ) |
|
| -14 |
|
Surfactants Segment Gross Profit |
| $ | 193,505 |
|
| $ | 145,520 |
|
| $ | 47,985 |
|
|
| 33 |
|
Operating Expenses |
|
| 89,425 |
|
|
| 84,742 |
|
|
| 4,683 |
|
|
| 6 |
|
Operating Income |
| $ | 104,080 |
|
| $ | 60,778 |
|
| $ | 43,302 |
|
|
| 71 |
|
Gross profit for North American gross profit declined 17operations increased 48 percent year over year primarily due to reduced margins that more than offset the effect ofimproved operations, the three percent improvement in sales volume. Factors that contributed to thevolume increase and better sales margins. The improved sales margin resulted from lower sales margins included customer contract selling price lags (which unfavorably impacted selling margins in 2013 while favorably impacting margins in 2012), the consumption of high priced methyl ester inventories (built up in the prior fourth quarter to support the Singapore start-up) and non-recurring costs to secure a strategic raw material and transportation costs. Costs for specialtyall major surfactant growth.raw materials declined year-over-year. In addition, manufacturing2014, the Company incurred additional transportation expenses increased $4.2 million (3 percent) between years primarily due to higher maintenancefuel costs and depreciation costs. Fourth quarter 2013to carrier delays and suboptimal supply chain movements related to the effects of severe winter weather and to upgrades at the Anaheim, California, plant that resulted in shifting production to other Company locations. Other items contributing to the year-over-year increase in gross profit declined $13.1were the favorable 2015 resolution of a previously recorded customer claim and $1.8 million from gross profit forof accelerated depreciation recorded in 2014 related to the fourth quarterCompany’s 2013 restructuring plan. The effect of 2012 despite a six percent increaseforeign currency translation on the year-over-year change in sales volume. The decline in quarter-over-quarter gross profit was due to the factors cited above and also due to the fact that costs for a number of key raw materials began rising in the fourth quarter, which had a further negative effect on margins. The Company announced selling price increases effective mid-January 2014 to recapture these higher costs.an unfavorable $1.7 million.
Gross profit for European operations increased one14 percent year over year. The effect of the six percent sales volume increase was largely offset by a less favorable mix of sales. In addition, competitive pressures led to some selling price reductions.
Gross profit for Latin American operations increased nine percent primarilybetween years principally due to the 12six percent increase in sales volume. Average unit margins have also improved between years asvolume and to sales margin improvement. The margin improvement reflected a resultmore favorable mix of greater utilization of the Brazil site’s new manufacturing capacity. The effects of foreignsales (growth in agricultural sales volume) and declines in raw material costs. Foreign currency translation had a $1.2$5.4 million unfavorable effect on the year-over-year change in gross profit.
Gross profit for Latin American operations increased 28 percent largely due to a more profitable mix of sales, higher selling prices and the 12 percent increase in sales volume that more than offset an unfavorable foreign currency translation impact of $9.5 million.
Asia operations gross profit improvement was principallydeclined 14 percent largely due to the Singapore subsidiary, which was not commercially operational until the fourth quartera less profitable mix of 2012.sales reflecting lower sales out of Singapore.
Operating expenses for the surfactantsSurfactants segment were up $0.7increased $4.7 million, or onesix percent, year over year. AdministrativeExcluding the effects of foreign currency translation, operating expenses increased $1.5$11.1 million. North American operations, European operations and Latin American operations accounted for $7.1 million, $1.9 million and R&D and marketing expenses declined $0.6 million and $0.2 million, respectively. Approximately $1.0$1.7 million of the increase, in administrative expenses reflected higher costs necessary to supportrespectively. Higher fringe benefits,
21
particularly incentive-based compensation, accounted for a large portion of the Company’s growth initiatives in Asia and Latin America. The decline in R&D expenses was attributable to a decrease inoperating expense increases. Reimbursement from new consortium members of past European product registration expensesfees ($0.61.3 million) under Europe’s REACH initiative.
Polymers
Polymers net sales for 2013 increased $59.42015 declined $59.5 million, or 1411 percent, overfrom net sales for 2012. An eight2014. Sales volume was up five percent, increasewhich had a $25.2 million favorable effect on the year-over-year change in sales volume, higher averagenet sales. All regions reported improved volumes. Lower selling prices and the favorable effects of foreign currency translation accounted for $33.6 million, $21.2negatively impacted the year-over-year net sales change by $53.4 million and $4.6$31.3 million, respectively,respectively. Selling prices were lower primarily related to certain pass-through contract requirements associated with lower raw materials costs. Overall margins improved slightly. The foreign currency translation effect reflected a stronger U.S. dollar against the currencies of the net sales improvement. The acquired BMS North American polyester resins business contributed $31.9 million to 2013 net sales.segment’s foreign operations. A year-over-year comparison of net sales by region is displayed below:follows:
| For the Year Ended |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||
| (In thousands) | For the Year Ended |
| December 31, 2015 |
|
| December 31, 2014 |
|
| (Decrease) |
|
| Percent Change |
| |||||||||||||||||||
| December 31, 2013 | December 31, 2012 | Increase | Percent Change | |||||||||||||||||||||||||||||
North America | $ | 294,421 | $ | 262,376 | $ | 32,045 | +12 |
| $ | 317,580 |
|
| $ | 347,447 |
|
| $ | (29,867 | ) |
|
| -9 |
| |||||||||
Europe | 161,262 | 135,198 | 26,064 | +19 |
|
| 150,654 |
|
|
| 175,862 |
|
|
| (25,208 | ) |
|
| -14 |
| ||||||||||||
Asia and Other | 27,678 | 26,385 | 1,293 | +5 |
|
| 23,254 |
|
|
| 27,657 |
|
|
| (4,403 | ) |
|
| -16 |
| ||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total Polymers Segment | $ | 483,361 | $ | 423,959 | $ | 59,402 | +14 |
| $ | 491,488 |
|
| $ | 550,966 |
|
| $ | (59,478 | ) |
|
| -11 |
| |||||||||
|
|
| ||||||||||||||||||||||||||||||
Net sales for North American operations declined nine percent. Sales volume increased 12three percent, which had a $10.0 million favorable effect on the year-over-year net sales change. Selling prices declined 11 percent, which unfavorably affected year-over-year net sales by $39.9 million. Sales volume of polyols used in rigid foam applications increased one percent, while sales volume of specialty polyols declined five percent. A drop in sales for products used in lower-margin flexible foam applications led to the decline in specialty polyol sales volume. Phthalic anhydride sales volume increased 10 percent as the result of new business coupled with stronger demand from existing customers. The reduction in sales prices reflected decreases in the costs of major raw materials.
Net sales for European operations declined 14 percent between years. The increase inSales volume increased eight percent, which positively affected the year-over-year net sales was largely attributable to the contributionchange by $14.3 million. Increased sales of the BMS North American polyester resins acquisition maderigid polyols used in June. The acquired businessinsulation board and metal panels accounted for $31.9 millionthe volume improvement. The unfavorable effects of the year-over-year changeforeign currency translation and a five percent decline in net sales. Net sales for the Company’s pre-acquisition polymer business were unchanged between years on sales volume that declined three percent. Phthalic anhydride volume was down six percent due primarily to continued weak demand from polyester resin customers. Sales volume for rigid polyol products in insulation applications was down one percent. Also affectingselling prices negatively affected the year-over-year change in net sales by $29.7 million and $9.8 million, respectively. The foreign currency translation effect reflected a stronger U.S. dollar relative to the Polish zloty. The selling price decline was a significant 2012 sale of a urethane systems product usedprincipally attributable to decreases in a new aircraft carrier that did not recur in 2013. Average selling prices for the pre-acquisition business were up three percent year over year due to higher average raw material costs and a more favorable product mix of sales.costs.
Net sales for EuropeanAsia and Other operations increased 19declined 16 percent due to a 16 percent improvement in sales volumelower selling prices and the favorableunfavorable effects of foreign currency translation, which accounted for $22.0$3.3 million and $4.1$1.5 million respectively, of the growth inyear-over-year net sales. Increased business from a number of major polyol customers, due in part to increased sales of polyols for metal panel applications, and the addition of a new customer accounted for the sales volume increase. The strengthening of the Polish zloty against the U.S. dollardecrease, respectively. Reduced raw material costs led to the foreign currency translation effect.
Net sales for Asia and Other operations improved fivelower selling prices. Sales volume increased two percent, between years due to a more favorable customer sales mix and towhich had a $0.5 million positive impact on the net sales change. The volume gain reflected increased sales volume in Asia.
Polymer 2015 operating income increased $20.3 million, or 33 percent, over 2014 operating income. The $2.9 million gain on the sale of the Company’s specialty polyurethane systems product line, the effects of lower raw material costs, the five percent sales volume increase and reduced 2015 bad debt expense, partially offset by a $3.1 million unfavorable effect of foreign currency translation effect. Sales volume was down one percent year over year.
Polymerand higher incentive-based pay compensation, led to the improvement in operating incomeincome. Last year’s bad debt expense included a $2.4 million charge for 2013 increased $6.4 million, or 13 percent, over operating incomea customer that filed for 2012. Gross profit improved $9.0 million due to year-over-year improvement for European and North American operations. In addition, current year profits benefited from insurance recovery income that was $2.5 million greater in 2013 than in 2012. The insurance recoveries in both years were for lost business resulting from a 2011 fire that damaged polyol equipment at the Germany site. Operating expenses increased $2.6 million, or 11 percent.
bankruptcy protection. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:
| (In thousands) | For the Year Ended |
| For the Year Ended |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| December 31, 2013 | December 31, 2012 | Increase (Decrease) | Percent Change |
| December 31, 2015 |
|
| December 31, 2014 |
|
| Increase (Decrease) |
|
| Percent Change |
| |||||||||||||||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
North America | $ | 53,554 | $ | 50,006 | $ | 3,548 | +7 |
| $ | 83,213 |
|
| $ | 64,532 |
|
| $ | 18,681 |
|
|
| 29 |
| |||||||||
Europe | 27,380 | 18,688 | 8,692 | +47 |
|
| 22,357 |
|
|
| 22,193 |
|
|
| 164 |
|
|
| 1 |
| ||||||||||||
Asia and Other | (17) | 3,207 | (3,224) | -101 |
|
| 2,276 |
|
|
| 1,868 |
|
|
| 408 |
|
|
| 22 |
| ||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total Polymers Segment | $ | 80,917 | $ | 71,901 | $ | 9,016 | +13 | |||||||||||||||||||||||||
Operating Expenses | 26,381 | 23,771 | 2,610 | +11 | ||||||||||||||||||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Polymers Segment Gross Profit |
| $ | 107,846 |
|
| $ | 88,593 |
|
| $ | 19,253 |
|
|
| 22 |
| ||||||||||||||||
Operating Expenses (incl. gain on sale of product line) |
|
| 26,904 |
|
|
| 27,903 |
|
|
| (999 | ) |
|
| -4 |
| ||||||||||||||||
Operating Income | $ | 54,536 | $ | 48,130 | $ | 6,406 | +13 |
| $ | 80,942 |
|
| $ | 60,690 |
|
| $ | 20,252 |
|
|
| 33 |
| |||||||||
|
|
| ||||||||||||||||||||||||||||||
Gross profit for North American operations increased seven29 percent between years mainlyyear over year due to higherimproved sales margins, increased sales volume and operating efficiencies. The sales margin improvement reflected lower costs for all major raw materials, better inventory cost positions throughout the year and manufacturing fee increases aimed at partially offsetting the increasing cost of maintaining the
22
polymer production facilities. Less outsourcing during the year also contributed to the contribution derived from the BMS business acquisition. The higher margins resulted from a combination of selling price increases and a more favorable mix of sales. The year-over-year improvement inresults. In addition to the foregoing, 2015 gross profit for North American operations was tempered by a large 2012 saleincluded the recognition of a urethane systems product used in a new aircraft carrier. There were no such sales in 2013.$1.0 million of previously deferred revenue due to the satisfaction of contractual requirements.
The 47 percent increase in grossGross profit for European operations was primarily driven byincreased one percent. The effects of the previously mentioned 16eight percent improvement in sales volume increase and the $2.5lower raw material costs were largely offset by an unfavorable $4.4 million year-over-year increase in insurance recovery income. Increased unit margins and a $0.9 million favorable effect of foreign currency also contributed.translation impact.
The declineincrease in gross profit for Asia and Other operations was primarily due to reduced selling margins, higherlower outsourcing and raw material costs and increased sales volume that more than offset the negative effects of foreign currency translation.
Operating expenses and the one percent decrease in sales volume. As a result of ceasing manufacturing at the plant site in Nanjing, China, products are now being outsourced from other Company locations or outside processors, which leads to reduced selling margins. In addition, during 2013 the Company accelerated $0.6 million of depreciation on all assets that were not projected to be moved to the new site. As noted in previous filings, government officials in Nanjing, China, informed the Company that its manufacturing facility needed to be relocated. In 2012, the Company purchased land use rights in the Nanjing Chemical Industrial Park as a potential site on which to construct a new manufacturing plant. Management continues to review the scope and cost of a building project, while concurrently negotiating with the local government for compensation for the move.
Polymer operating expensesPolymers segment (excluding the $2.9 million gain on the product line sale) increased $2.6$1.9 million, or 11seven percent, year over year. Higher R&D ($0.9 million) and selling ($0.3 million) expenses, a $0.7 million charge for estimated dismantling costs for the manufacturing site in Nanjing, China, and the unfavorable effects of foreign currency translation ($0.3 million) accounted for most of the operating expense increase. North American operations accounted for $0.8 million of the increase in R&D expenses. Approximately $0.2 millionMuch of the increase was attributable to resources needed to supporthigher incentive-based pay. In addition, operating expenses in China, where a new plant is being constructed, increased $1.1 million year over year. The higher expenses were partially offset by a $2.2 million decrease in bad debt expense. Last year’s bad debt expense included a $2.4 million bad debt charge for a customer that filed for bankruptcy. Foreign exchange translation had a favorable $1.6 million effect on the acquired BMS business. The remainder of the increase in North American R&D expenses was due to planned additional spending for polyol and CASE research projects. European operations accounted for the rise in selling expenses.
Specialty Products
Net sales for 2013 increased $6.32015 declined $0.8 million, or eightone percent, overfrom net sales for the same period2014. The decline in net sales was due to a $2.7 million unfavorable foreign currency translation effect partially offset by higher average selling prices and a two percent increase in sales volume. All product lines reported slightly improved sales volumes year over year, principally due to a stronger fourth quarter. The increase in average selling prices reflected a more favorable mix of 2012.sales. Operating income declined $1.3decreased $6.1 million, or 58 percent, between years due to higher raw material costs increased manufacturing and operating expenses, and competitive pricing pressures, especiallyparticularly for the Company’s medium-chain triglyceride products used in food ingredient applications.and nutritional supplement product lines. Fourth quarter 2015 operating income improved $1.0 million over fourth quarter 2014 operating income largely due to a 26 percent increase in sales volume and to a more profitable mix of sales.
Corporate Expenses
Corporate expenses, which comprise deferred compensation and other operating expenses that are not allocated to the reportable segments, increased $5.2$29.4 million to $55.4$66.6 million for 20132015 from $50.2$37.2 million for 2012. In large part,2014. The significant contributors to the year-over-year increase in corporate expenses reflectedincluded higher deferred compensation ($18.4 million), consulting ($5.9 million), fringe benefit ($5.4 million), talent acquisition/relocation ($1.5 million), expatriate ($0.8 million) and salaries ($0.7 million) expenses, along with the Company’s continued investment in its growth and innovation initiatives. Increases in legal, acquisition (actual and exploratory) and salary expenses accounted for $1.6 million, $1.0 million and $0.9 million, respectively,accumulation of the year-over-year change in corporate expenses. In addition, statutory profit sharinga number of smaller expense in France was up $1.6 million, and corporate computer hardware and softwareincreases. The increased expenses were up $0.5 million.partially offset by lower environmental remediation charges ($6.4 million).
Deferred compensation was $6.5 million of expense for 2015 compared to $11.9 million of income for 2014. The change between years was largely attributable to a $9.61 per share increase in statutory profit sharing expense resulted from the transfer of ownership of the Company’s European polymer intangibles from its France subsidiary to its Poland subsidiary.
A $0.7 million decline in deferred compensation expense partially offset the foregoing increases. The value of Company common stock increased less in 2013 than in 2012, which drove the reduction in deferred compensation expense. The market price of Company stock increased $10.092015 compared to a $25.55 per share decrease in 2013 compared to $15.46 per share in 2012. Higher year-over-year mutual fund investment earnings partially offset the impact of the change in Company common stock values.2014. The following table presents the year-end per share Company common stock market prices used in the computation of deferred compensation expense:
|
| December 31 |
| |||||||||
|
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Company Stock Price |
| $ | 49.69 |
|
| $ | 40.08 |
|
| $ | 65.63 |
|
| December 31 | ||||||||||||
| 2013 | 2012 | 2011 | ||||||||||
Company Stock Price | $ | 65.63 | $ | 55.54 | $ | 40.08 | ||||||
The increase in fringe benefit expenses resulted primarily from higher incentive-based compensation (both short- and long-term). In 2014, a limited amount of annual bonuses were paid because the Company failed to meet its financial performance targets. Consulting expenses increased largely due to the Company’s ongoing DRIVE initiative to improve efficiency across the Company’s global organization. The contract with the consulting company advising on the DRIVE initiative has expired, so it is expected that such expenses will decline in 2016.
With respect to the decline in environmental remediation expenses, 2014 included $7.1 million of charges to increase the best estimate of the remediation liability for the Company’s Maywood site. The U.S. Environmental Protection Agency issued its record of decision for soil remediation at that site in September 2014, which led to the liability increase.
23
20122014 Compared with 20112013
Summary
Net income attributable to the Company for 2012 increased 102014 declined 22 percent year over year to $79.4$57.1 million, or $3.49$2.49 per diluted share, compared to $72.0$72.8 million, or $3.21$3.18 per diluted share, for 2011.2013. Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, profits and expenses. A detailed discussion of segment operating resultsperformance for 2012 compared to 20112014 follows the summary.
Consolidated net sales declined $39.4for 2014 increased $46.4 million, or two percent, over consolidated net sales for 2013. Higher average selling prices favorably affected the year-over-year net sales change by $131.2 million. A four percent decline in sales volume and the effects of foreign currency translation unfavorably affected the net sales change by $74.0 million and $10.8 million, respectively. The increase in average selling prices was attributable to higher raw material costs, primarily for Surfactants. The sales volume decline was mainly driven by the Surfactants segment, which reported an eight percent year-over-year volume decrease. Most of the sales volume decline was attributable to North American operations. Sales volume for the Polymers segment increased 13 percent due to solid organic growth in North America and Europe and growth from the North American polyester resins business acquired from Bayer MaterialScience LLC (BMS) in June 2013. Sales volume for Specialty Products declined four percent.
Operating income for 2014 declined $18.5 million, or 17 percent, from operating income for 2013. Gross profit decreased $32.1 million, or 11 percent, largely due to lower profits for Surfactants caused by reduced sales volumes and higher expenses for North American operations. Polymers gross profit improved nine percent between years due to sales volume growth that more than offset the effect of a $3.7 million business interruption insurance recovery that benefited 2013. Specialty Products reported a five percent year-over-year gross profit decline.
Operating expenses, including business restructuring and asset impairment charges, declined $13.7 million, or eight percent, year over year. Lower average selling pricesdeferred compensation and incentive-based compensation expenses were the unfavorable impact of foreign currency translation accounted for $39.7 million and $39.6 million, respectively, of the decrease. A two percent increase in sales volume offset the effects of lower prices and foreign currency translation by $39.9 million. Decreased average raw material costs for surfactants drove the decline in average selling prices. Weaker foreign currencies against the U.S. dollar for most countries in which
the Company transacts business caused the unfavorable currency translation impact. Sales volume improved for the surfactants and polymers segments, but was down for specialty products.
Operating income for 2012 improved $10.3 million, or nine percent, over operating income reported for 2011. Gross profit increased $36.0 million, or 14 percent, due to higher unit profit margins and sales volumes. In addition, polymers gross profit benefited from a large sale of urethane systems used to insulate an aircraft carrier. All three segments contributedmajor contributors to the gross profit improvement. The effects of foreign currency translation reduced the year-over-year gross profit and operating income increases by $5.2 million and $2.7 million, respectively.
Operating expenses increased $25.7 million, or 19 percent, year over year.decrease. The following summarizes the year-over-year changes in the individual income statement line items that comprise the Company’s operating expenses:
Administrative expenses increased $13.2 million, or 26 percent, largely due to an $8.7 million increase in deferred compensation expense. An increase in the value of Company common stock, to which a large part of the Company’s deferred compensation obligation is tied, led to the higher year-over-year deferred compensation expense. See the ‘Overview’ and ‘Corporate Expenses’ sections of this management discussion and analysis for further details. Legal and environmental expenses and patent filing costs accounted for $1.8 million and $0.8 million, respectively, of the year-over-year administrative expense increase. Increased costs to protect intellectual property related to the Company’s global innovation and growth activities led to the higher patent filing and legal expenses. Revised estimates for remediation costs at three of the Company’s environmental sites contributed about $0.7 million to the higher legal and environmental expenses. In addition to the foregoing, corporate fringe benefit (which includes incentive pay) and salary expenses increased $0.8 million and $0.7 million, respectively, between 2012 and 2011. The increase in fringe benefits was driven by higher performance-based bonus and profit sharing expenses that reflected the year-over-year improvement in Company earnings. Additional staffing to support the Company’s growth, promotions and normal pay raises caused the increase in salary expense. The effects of foreign currency translation reduced the year-over-year expense change by $0.8 million.
Selling expenses increased $7.3 million, or 16 percent, year over year. Approximately $1.7 million of the increase was due to added expense incurred for the Lipid Nutrition business, which was acquired in June 2011 (i.e., 12 months of expense in 2012 compared to six months of expense in 2011). North American fringe benefit and salary expenses increased $1.7 million and $1.5 million, respectively. The increased fringe benefits included higher bonus and profit sharing expenses, and the increased salary expenses reflected additional staffing and annual merit increases. Selling expenses in Latin America were $1.3 million higher due mainly to increased personnel expenses resulting from higher staffing levels to support the Company’s growth initiatives in Brazil. Total bad debt
· | Selling expenses increased $1.5 million, or three percent, year over year. The increase was primarily attributable to $3.2 million in additional bad debt expense, most of which related to a $2.4 million bad debt charge necessitated when a major Polymer customer filed for bankruptcy protection in September 2014. The remainder of the bad debt expense increase reflected changes in allowances for certain high risk customers. A decline in incentive-based compensation, due to lower Company earnings, partially offset the effect of higher bad debt expense. |
· | Administrative expenses increased |
· | R&D expenses declined $1.4 million, or three percent, year over year. Lower incentive-based compensation, partially offset by higher salary expense accounted for most of the decline. |
· | Deferred compensation plan activity resulted in $11.9 million of income in 2014 compared to $9.5 million of expense in 2013. A decrease in the value of Company stock for 2014 compared to an increase in the value of Company common stock for 2013 led to the year-over-year |
Research, development and technical service expenses increased $5.2 million, or 13 percent, year over year. Higher North American salary and fringe benefit expenses accounted for $1.3 million and $1.2 million of the increase, respectively. Expenses for European operations were up $1.7 million between 2012 and 2011 mainly due to a $0.8 million increase in costs for registering Company products under Europe’s REACH (Registration, Evaluation, Authorization and Restriction of Chemical Substances) initiative and to a $0.7 million increase in salary and fringe benefit expenses. Lipid Nutrition and Singapore each added $0.4 million of additional research and development expenses (primarily personnel costs), respectively, in 2012. The effects of foreign currency translation reduced the year-over-year research, development and technical service expense increase by $0.4 million.
· | Business Restructuring and Asset Impairments – Expenses for business restructuring and asset impairments were $4.0 million in 2014 compared to $1.0 million in 2013. The following are brief descriptions of the restructuring and impairment activities for each year. See Note 22 to the consolidated financial statements for additional details. |
Interest expense, net, increased $0.5 million, or six percent, between years. Higher average borrowing levels led to the increase. 2014
In the fourth quarter of 2011,2014, a restructuring plan was approved that affects certain Company functions, principally the R&D function and to a lesser extent product safety and compliance and plant-site accounting functions. The objective of the plan was to better align staffing resources with the needs of the Company’s diversification and growth initiatives. In connection with the plan, the Company secured $65recognized a $1.7 million charge against income for the three and twelve months ended December 31, 2014.
24
In the fourth quarter of additional long-term notes2014, the Company wrote off the net book values of three assets, resulting in a charge against income of $2.3 million for the three and twelve months ended December 31, 2014. All three assets were part of the Company’s Surfactants segment, although the write-off charges were excluded from Surfactants segment results.
2013
For the three and twelve months ended December 31, 2013, the Company recorded a $1.0 million restructuring charge for estimated severance expense related to take advantagean approved plan to reduce future costs and increase operating efficiencies by consolidating a portion of lowits North American Surfactants manufacturing operations (part of the Surfactants reportable segment). In the third quarter of 2014, the Company shut down certain production areas at its Canadian manufacturing site. The future savings resulting from the restructuring are expected to run approximately $2.5 million per year.
Net interest ratesexpense for 2014 increased $1.1 million, or 10 percent, over net interest expense for 2013. The increase reflected the recognition of a full year’s interest on the $100.0 million private placement loan the Company executed in June 2013 to finance the BMS North American polyester resins acquisition and to support global growth initiatives.other capital expenditures.
The loss from the Company’s 50-percent equity joint venture (TIORCO) increased $1.1declined $0.3 million year over year primarilylargely due to higher operating expenses and lower commission and technical service income.
Other, net for 2014 was $1.3 million of income for 2012 compared to $0.9$2.2 million of expenseincome for 2011.2013. Investment activityincome (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets resulted in income of $1.6declined $2.2 million between years to $1.5 million for 2012 compared to expense of $0.12014 from $3.7 million for 2011. In addition, foreign2013. Foreign exchange losses for 2012 totaled $0.3declined $1.3 million compared to $0.8$0.2 million for 2011.2014 from $1.5 million for 2013.
The effective tax rate was 31.124.4 percent in 20122014 compared to 30.824.4 percent in 2011.2013. Even though the tax rate remained the same year over year, there were significant offsetting items that impacted the rate. The increasetax rate was primarily attributable todriven higher by certain retroactive tax benefits recorded in 2013 that were nonrecurring in 2014. The 2013 benefits included the expirationincome exclusion of certain biodiesel excise tax credits for the U.S.2010 through 2012 tax periods and the federal research and development tax credit whichfor the 2012 tax period. The 2014 tax rate was partiallyalso negatively impacted by a lower domestic production activities deduction as a result of lower U.S. taxable income and by higher state taxes as a result of certain tax benefits recorded in 2013 that were nonrecurring in 2014. These items were offset by an overall lower statea greater percentage of consolidated income being generated outside the U.S. in 2014 where the effective tax rates are lower. See Note 9 to the consolidated financial statements for a reconciliation of the statutory U.S. federal income tax rate to the effective tax rate.
Segment Results
| (In thousands) | Surfactants | Polymers | Specialty Products | Segment Results | Corporate | Total | ||||||||||||||||||
For the year ended December 31, 2012
| ||||||||||||||||||||||||
Net sales | $ | 1,305,800 | $ | 423,959 | $ | 73,978 | $ | 1,803,737 | — | $ | 1,803,737 | |||||||||||||
Operating income | 118,591 | 48,130 | 12,242 | 178,963 | (50,247 | ) | 128,716 | |||||||||||||||||
For the year ended December 31, 2011
| ||||||||||||||||||||||||
Net sales | $ | 1,361,956 | $ | 421,515 | $ | 59,621 | $ | 1,843,092 | — | $ | 1,843,092 | |||||||||||||
Operating income | 100,811 | 40,909 | 13,307 | 155,027 | (36,571 | ) | 118,456 | |||||||||||||||||
(In thousands) |
| For the Year Ended |
|
|
|
|
|
|
|
|
| |||||
Net Sales |
| December 31, 2014 |
|
| December 31, 2013 |
|
| Increase |
|
| Percent Change |
| ||||
Surfactants |
| $ | 1,296,638 |
|
| $ | 1,317,164 |
|
| $ | (20,526 | ) |
|
| -2 |
|
Polymers |
|
| 550,966 |
|
|
| 483,361 |
|
|
| 67,605 |
|
|
| 14 |
|
Specialty Products |
|
| 79,609 |
|
|
| 80,261 |
|
|
| (652 | ) |
|
| -1 |
|
Total Net Sales |
| $ | 1,927,213 |
|
| $ | 1,880,786 |
|
| $ | 46,427 |
|
|
| 2 |
|
(In thousands) |
| For the Year Ended |
|
|
|
|
|
|
|
|
| |||||
Operating Income |
| December 31, 2014 |
|
| December 31, 2013 |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||
Surfactants |
| $ | 60,778 |
|
| $ | 100,201 |
|
| $ | (39,423 | ) |
|
| -39 |
|
Polymers |
|
| 60,690 |
|
|
| 54,536 |
|
|
| 6,154 |
|
|
| 11 |
|
Specialty Products |
|
| 10,487 |
|
|
| 10,902 |
|
|
| (415 | ) |
|
| -4 |
|
Segment Operating Income |
| $ | 131,955 |
|
| $ | 165,639 |
|
| $ | (33,684 | ) |
|
| -20 |
|
Business Restructuring |
|
| 4,009 |
|
|
| 1,040 |
|
|
| 2,969 |
|
|
| 285 |
|
Corporate Expenses, Excluding Deferred Compensation |
|
| 49,155 |
|
|
| 45,950 |
|
|
| 3,205 |
|
|
| 7 |
|
Deferred Compensation Expense (Income) |
|
| (11,903 | ) |
|
| 9,496 |
|
|
| (21,399 | ) |
|
| -225 |
|
Total Operating Income |
| $ | 90,694 |
|
| $ | 109,153 |
|
| $ | (18,459 | ) |
|
| -17 |
|
25
Surfactants net sales for 20122014 declined $56.2$20.5 million, or fourtwo percent, from net sales for 2011. Lower average selling prices, primarily due to decreased raw material costs,2013. An eight percent decrease in sales volume and the effects of foreign currency translation accounted for $57.2$103.0 million and $28.1$11.1 million, respectively, of the decrease. Sales volume grew by two percent, which increased net sales by $29.1 million.decline. All regions contributed to the drop in sales volume, improvement.although most of the decline was attributable to North American operations. An increase in average selling prices favorably affected the net sales change by $93.6 million. A year-over-year comparison of net sales by region follows:
| For the Year Ended |
| For the Year Ended |
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
(In thousands) |
| December 31, 2014 |
|
| December 31, 2013 |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||||||||||||||||||
| December 31, 2012 | December 31, 2011 | Increase (Decrease) | Percent Change | |||||||||||||||||||||||||||||
North America | $ | 810,988 | $ | 839,940 | $ | (28,952) | -3 |
| $ | 792,244 |
|
| $ | 802,568 |
|
| $ | (10,324 | ) |
|
| -1 |
| |||||||||
Europe | 286,071 | 317,629 | (31,558) | -10 |
|
| 287,592 |
|
|
| 287,394 |
|
|
| 198 |
|
|
| — |
| ||||||||||||
Latin America | 156,509 | 147,614 | 8,895 | +6 |
|
| 160,076 |
|
|
| 160,426 |
|
|
| (350 | ) |
|
| — |
| ||||||||||||
Asia | 52,232 | 56,773 | (4,541) | -8 |
|
| 56,726 |
|
|
| 66,776 |
|
|
| (10,050 | ) |
|
| -15 |
| ||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total Surfactants Segment | $ | 1,305,800 | $ | 1,361,956 | $ | (56,156) | -4 |
| $ | 1,296,638 |
|
| $ | 1,317,164 |
|
| $ | (20,526 | ) |
|
| -2 |
| |||||||||
|
|
| ||||||||||||||||||||||||||||||
Net sales for North American operations decreased threedeclined one percent mainly due to a four10 percent drop in average selling prices, which accounted for $30.5 million of the net sales decline. A slight increase in sales volume increased net sales by $2.2 million. The decrease in average selling prices was attributable to lower raw material costs, particularly for the last half of 2012, partially offset by a more favorable sales mix. Sales volume increased less than one percent between years as increases in sales of products used in agricultural and household and industrial cleaning applications were largely offset by decreases in sales of products used in consumer laundry and cleaning and personal care applications. Increased business with most major customers led to the improved sales volume of agricultural and household and industrial cleaning and products. Competitive pressures and lower surfactant requirements for certain customer applications accounted for the decline in sales volume for consumer laundry and personal care products. The effects of foreign currency translation reduced year-over-year net sales by $0.7 million.
Net sales for European operations declined 10 percent due to an eight percent decrease in average selling prices and the unfavorable effects of foreign currency translation, which accounted for $25.5$82.8 million and $15.7$4.3 million, respectively, of the net sales change.decrease. Lower year-over-year sales of products used in biodiesel, laundry and cleaning, personal care and agricultural chemical applications accounted for the North American sales volume decline. These sales volume decreases were partially offset by sales volume growth for products used in oil field and household, industrial and institutional (HI&I) applications and for surfactants sold through distributors. The Company chose not to manufacture and sell biodiesel products in 2014 because to do so would not have been economically advantageous. The decline in laundry and cleaning sales volume was largely attributable to customers bringing surfactant production in-house to more fully utilize their internal capacity. Sales volumes for laundry and cleaning and personal care products were negatively affected by the severe winter weather earlier in the year that caused production issues at some Company and customer manufacturing facilities. The decline in agricultural chemical sales volume improved threereflected lower customer demand resulting from a shortened spring planting season resulting from prolonged winter weather in parts of the U.S. Average selling prices increased 11 percent, which offset the effects of the sales volume decline and unfavorable foreign currency translation by $76.8 million. The higher average selling prices were primarily attributable to higher raw material costs.
Net sales for European operations increased less than one percent between years which mitigateddue to a $5.5 million favorable effect of foreign currency translation offset by lower average selling prices and sales volume. The foreign currency translation effect was primarily the result of a year-over-year stronger British pound sterling relative to the U.S. dollar. Average unit selling prices and sales volumes declined one percent each, reducing the year-over-year net sales change by $3.6 million and $1.7 million, respectively. The one percent decline by $9.6 million. Average selling prices fell as a result of raw material cost decreases. A weakening of the European euro and British pound sterling against the U.S. dollar caused the unfavorable foreign currency translation effect. Strongerin sales volume reflected lower demand and new business for the Company’s laundry and cleaning and fuel additive products particularly fabric softeners, accounted for theoffset by sales volume increase.improvements for HI&I, agricultural chemicals and emulsion polymers and foamers products.
Net sales for Latin American operations grew sixdeclined less than one percent due to a 12 percent increase in average selling prices and a three percent increase in sales volume, which accounted for $18.0 million and $4.0 million, respectively, of the year-over-year net sales change. The
unfavorable effects of foreign currency translation reduced($9.9 million unfavorable effect) and a two percent decline in sales volume ($3.4 million unfavorable effect) offset by the net sales improvement by $13.1 million. Theimpact of higher average selling prices reflected a more($12.9 million favorable mix of sales, notably foreffect). The foreign currency translation effect resulted from the Brazil manufacturing plant for which the sale of higher value product was made possible by last year’s addition of neutralizer capacity. Ayear-over-year weakening of the Brazilian real and the Mexican pesoand Colombian pesos against the U.S. dollardollar. The sales volume decline was attributable to lower sales out of Brazil, mainly due to decreased demand for laundry and cleaning products and to lower sales of agricultural chemical products resulting from drought conditions in Brazil. Higher raw material costs led to the unfavorable currency translation effect.increase in average selling prices.
Net sales for AsiaAsian operations declined eight15 percent due to a different mix of sales (a greater proportion of toll sales using raw material consigned by the customer) that more than offset a 19an 18 percent improvementdecline in sales volume. Stronger demandvolume and to a $2.4 million unfavorable foreign currency translation effect. Sales volume in 2013 included one-time shipments of low-margin methyl ester and biodiesel products from existing customers and startup sales for the Company’s Singapore plant accountedto customers in Asia and Europe that did not recur in 2014. Singapore sales volume of products to U.S. operations was up 46 percent, and sales volume for operations in the volume increase.Philippines increased one percent.
Surfactants operating income for 2012 improved $17.82014 declined $39.4 million, or 1839 percent, overfrom operating income for 2011.2013. Gross profit increased $24.9decreased $40.2 million or 14 percent, primarilylargely due to improved margins resulting from a more favorable mix of sales and lower raw material costs. The two percent increase in sales volume and improved production efficiencieshigher expenses in Brazil alsoNorth America. Foreign currency translation contributed $2.1 million to the profit growth. The effects of foreign currency translation reduced the year-over-year increase in gross profit by $3.6 million.decline. Operating expenses increased $7.1decreased $0.8 million, or nineone percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:
| (In thousands) | For the Year Ended | |||||||||||||||
| December 31, 2012 | December 31, 2011 | Increase (Decrease) | Percent Change | |||||||||||||
Gross Profit | ||||||||||||||||
North America | $ | 155,891 | $ | 138,578 | $ | 17,313 | +12 | |||||||||
Europe | 24,759 | 22,114 | 2,645 | +12 | ||||||||||||
Latin America | 20,381 | 12,633 | 7,748 | +61 | ||||||||||||
Asia | 2,339 | 5,192 | (2,853) | -55 | ||||||||||||
|
|
|
|
|
| |||||||||||
Total Surfactants Segment | $ | 203,370 | $ | 178,517 | $ | 24,853 | +14 | |||||||||
Operating Expenses | 84,779 | 77,706 | 7,073 | +9 | ||||||||||||
|
|
|
|
|
| |||||||||||
Operating Income | $ | 118,591 | $ | 100,811 | $ | 17,780 | +18 | |||||||||
|
|
|
|
|
| |||||||||||
Gross profit for 26
| For the Year Ended |
|
|
|
|
|
|
|
|
| ||||||
|
| December 31, 2014 |
|
| December 31, 2013 |
|
| Increase (Decrease) |
|
| Percent Change |
| ||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
| $ | 84,118 |
|
| $ | 128,643 |
|
| $ | (44,525 | ) |
|
| -35 |
|
Europe |
|
| 27,392 |
|
|
| 24,928 |
|
|
| 2,464 |
|
|
| 10 |
|
Latin America |
|
| 19,741 |
|
|
| 22,114 |
|
|
| (2,373 | ) |
|
| -11 |
|
Asia |
|
| 14,269 |
|
|
| 10,021 |
|
|
| 4,248 |
|
|
| 42 |
|
Total Surfactants Segment |
| $ | 145,520 |
|
| $ | 185,706 |
|
| $ | (40,186 | ) |
|
| -22 |
|
Operating Expenses |
|
| 84,742 |
|
|
| 85,505 |
|
|
| (763 | ) |
|
| -1 |
|
Operating Income |
| $ | 60,778 |
|
| $ | 100,201 |
|
| $ | (39,423 | ) |
|
| -39 |
|
North American operations improved 12gross profit declined 35 percent year-over-yeardue to the effects of a 10 percent decline in sales volume and higher expenses. Manufacturing expenses were up $11.1 million, or eight percent, largely due to improved unit sales margins. A more favorable sales mixincreased maintenance and lowerdepreciation costs. Prolonged inclement winter weather early in 2014 and a significant planned fourth quarter maintenance shutdown in a major production area at the Millsdale, Illinois, plant led to the increase in maintenance expenses. In addition to higher manufacturing costs, the Company incurred incremental transportation expenses for the transfer of some production from weather-affected locations to other less impacted North American plants. Transportation expenses continued to be higher throughout the balance of the year due to increased general freight rates and a planned infrastructure upgrade project at the Company’s Anaheim, California, plant. Further to all of the foregoing, a fourth quarter charge for a customer claim against the Company and higher year-over-year raw material costs droveaccelerated depreciation ($1.8 million in 2014 compared to $0.3 million in 2013) related to the improvement. This was particularly evidentrestructuring plan approved in the final three monthsfourth quarter of 2012 as quarter-over-quarter2013 also contributed to the gross profit increased $8.5 million. The favorable sales mix resulted from the previously noted increases in sales volumes of agricultural and household and industrial cleaning products. Although average sales prices declined between years, average raw material costs fell to a greater degree, which led to improved comparative margins.decline.
Gross profit for European operations increased 1210 percent which was principally attributable to improved unit marginsyear over year, reflecting a more favorable mix of sales and lower material and manufacturing costs that more than offset the threeimpact of the one percent increasedecline in sales volume. Lower raw material costs, which outpaced declining selling prices, and reduced manufacturing
expenses led to the improved margins. Manufacturing expenses were lower between years as expenses for 2011 included the effects of a planned three-week shutdown for a mandatory inspection at the Company’s Germany plant. Partially offsetting the lower expenses was the impact of foreign currency translation, which lessened the year-over-year increase in gross profit by $1.5 million.
Gross profit for Latin American operations improved 61 percent mainly as a result of lower costs, favorable sales mix and higher sales volume. Gross profit for 2011 was negatively impacted by significant expenses related to the delayed start-up of the capacity expansion in Brazil. The favorable sales mix reflected a greater sales volume of neutralized products.
Gross profit for Asia operations declined 5511 percent due to start-uplower sales volume, a less favorable mix of sales, higher raw material costs and preproduction expenses related to the new plant in Singapore, which offset the effect of the 19 percentan unfavorable $1.5 million foreign currency translation effect.
The year-over-year increase in sales volume. After delay, the Singapore plant produced trial quantities in the fourth quarter. In addition to the impact of the Singapore plant, 2011 gross profit benefitedfor Asian operations was driven by the sales volume increase to U.S. operations from a $1.4 million recovery of value added tax receivables in the Philippines, which were previously reserved for due to recoverability uncertainty.Company’s Singapore plant.
Operating expenses for the surfactantsSurfactants segment increased $7.1declined $0.8 million, or nineone percent, yearbetween years. Lower incentive-based compensation and the favorable effects of foreign currency translation ($0.7 million), partially offset by higher expenses in Latin America primarily due to increased spending to support the Company’s growing organization in Brazil, accounted for the year-over-year decline.
Polymers
Polymers net sales for 2014 increased $67.6 million, or 14 percent, over year. Excludingnet sales for 2013. A 13 percent increase in sales volume, higher average selling prices and the effects of foreign currency translation which reduced the year- over-year change by $1.9 million, operating expenses were up $9.0 million. Selling expenses increased $4.6 million, which was primarily attributable to higher salary expenses, due to increased staffing levels and pay increases, and related personnel costs (fringe benefits, incentive pay and travel) associated with the Company’s growth initiatives. Also contributing to the selling expense increase was bad debt expense, which was up $0.7 million year over year primarily due to favorable reserve adjustments in 2011. Research and development expenses increased $3.8 million largely as a result of higher salary expenses and related personnel costs. Higher expenses in Europe associated with the REACH initiative contributed $0.8 million of the increase in research and development costs.
Polymers
Polymers net sales for 2012 increased $2.4 million, or one percent, over net sales for 2011. A three percent rise in sales volume and higher average selling prices accounted for $10.6$61.2 million, $6.3 million and $3.1$0.1 million, respectively, of the increase. The unfavorable effects of foreign currency translation reduced theyear-over-year net sales increase by $11.3 million. Increased costs for raw materials, particularlyimprovement. Sales volume was up between years for North American operations, led to the higher average selling prices. Europe accounted for the sales volume growth.and European operations. A year-over-year comparison of net sales by region is displayed below:follows:
| (In thousands) | For the Year Ended |
| For the Year Ended |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| December 31, 2012 | December 31, 2011 | Increase (Decrease) | Percent Change |
| December 31, 2014 |
|
| December 31, 2013 |
|
| Increase (Decrease) |
|
| Percent Change |
| |||||||||||||||||
North America | $ | 262,376 | $ | 259,713 | $ | 2,663 | +1 |
| $ | 347,447 |
|
| $ | 294,421 |
|
| $ | 53,026 |
|
|
| 18 |
| |||||||||
Europe | 135,198 | 133,375 | 1,823 | +1 |
|
| 175,862 |
|
|
| 161,262 |
|
|
| 14,600 |
|
|
| 9 |
| ||||||||||||
Asia and Other | 26,385 | 28,427 | (2,042) | -7 |
|
| 27,657 |
|
|
| 27,678 |
|
|
| (21 | ) |
|
| — |
| ||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total Polymers Segment | $ | 423,959 | $ | 421,515 | $ | 2,444 | +1 |
| $ | 550,966 |
|
| $ | 483,361 |
|
| $ | 67,605 |
|
|
| 14 |
| |||||||||
|
|
| ||||||||||||||||||||||||||||||
Net sales for North American operations were up oneincreased 18 percent due to a one16 percent increase in average selling prices,sales volume. Specialty polyols, which increased year-over-year net sales by $3.8 million. Sales volume declined less than oneincludes the polyester resin business acquired from BMS in June 2013, accounted for about 56 percent reducing the effect of the sales volume increase in average selling prices by $1.1 million. Higher phthalic anhydride raw material costs led(2014 included twelve months of sales related to the increaseacquisition from BMS compared to seven months of sales in average selling prices. Polyol selling prices declined between 2012 and 2011 due to a lower cost for a major raw material.2013). Sales volume for phthalic anhydride fell three percent between years primarily due to reduced demand for phthalic anhydride in plasticizer applications. Polyol sales volume grew two percent primarily as a result of greater demand for polyolpolyols used in rigid board insulation and in CASEfoam applications particularly in the fourth quarter. Given lower anticipatedimproved 13 percent, principally due to increased demand for greater insulation usage to conserve energy and to an improved economy. Sales volume of phthalic anhydride was essentially unchanged between years, as the Companyimpact of reduced its manufacturing capacitybusiness with a large phthalic anhydride customer was largely offset by shutting down its oldest, fully depreciated reactor.new business.
27
Net sales for European operations increased onegrew nine percent due to a 10nine percent improvementincrease in sales volumevolume. Demand was strong for the Company’s polyol products used in rigid insulation board and a lessmetal panels in the first half of 2014. Sales volumes for the second half of 2014 were down slightly (less than one percent rise in average selling prices, which increased year-over-year net sales by $12.9 million and $0.6 million, respectively. The unfavorablepercent) from volumes for the second half of 2013 primarily due to the effects of foreign currency translation reduced the net sales change by $11.7 million. The improvement in sales volume reflected new uses in metal insulation panels and adhesive polyol. A year-over-year weakening of theunsteady European euro and the Polish zloty against the U.S. dollar led to the foreign currency translation effect.economy.
Net sales for Asia and Other operations declined seven percentregions were essentially unchanged between 2012 and 2011years. Higher average selling prices due to a sevenmore favorable sales mix offset the effects of a five percent sales volume decline. The sales mix reflected a year-over-year sales volume decrease in average selling pricesAsia and a one percent decreasean increase in sales volume, which accounted for $2.0 million and $0.4 million, respectively, of the year-over-year reductionpolymers sold in net sales. The effects of foreign currency translation mitigated the net sales decline by $0.4 million. The lower selling prices reflected a decline in raw material costs.Latin America.
PolymerPolymers operating income for 20122014 increased $7.2$6.2 million, or 1811 percent, over operating income for 2011. Gross2013. Most of the profit increased $10.3improvement was attributable to the sales volume increase for North American operations. The 2014 operating income growth was tempered by a $2.4 million as all three regions reported improvements. The year-over-year increase in gross profit reflected higher margins,bad debt charge resulting from the bankruptcy filing of a large North American urethane systems sale used to insulate an aircraft carrier and increased sales volume. The impactphthalic anhydride customer. In addition, the 2013 results for European operations included the receipt of a second quarter planned maintenance shutdown$3.7 million business insurance recovery related to business interruption losses resulting from a 2011 fire that damaged equipment at the North American site tempered the gross profit improvement. Operating expenses increased $3.1 million, or 15 percent. Below are year-over-yearCompany’s Germany plant. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income:income follow:
| (In thousands) | For the Year Ended |
| For the Year Ended |
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| December 31, 2012 | December 31, 2011 | Increase | Percent Change |
| December 31, 2014 |
|
| December 31, 2013 |
|
| Increase (Decrease) |
|
| Percent Change |
| |||||||||||||||||
Gross Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
North America | $ | 50,006 | $ | 44,296 | $ | 5,710 | +13 |
| $ | 64,532 |
|
| $ | 53,554 |
|
| $ | 10,978 |
|
|
| 20 |
| |||||||||
Europe | 18,688 | 14,803 | 3,885 | +26 |
|
| 22,193 |
|
|
| 27,380 |
|
|
| (5,187 | ) |
|
| -19 |
| ||||||||||||
Asia and Other | 3,207 | 2,455 | 752 | +31 |
|
| 1,868 |
|
|
| (17 | ) |
|
| 1,885 |
|
| NM |
| |||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Total Polymers Segment | $ | 71,901 | $ | 61,554 | $ | 10,347 | +17 |
| $ | 88,593 |
|
| $ | 80,917 |
|
| $ | 7,676 |
|
|
| 9 |
| |||||||||
Operating Expenses | 23,771 | 20,645 | 3,126 | +15 |
|
| 27,903 |
|
|
| 26,381 |
|
|
| 1,522 |
|
|
| 6 |
| ||||||||||||
|
|
| ||||||||||||||||||||||||||||||
Operating Income | $ | 48,130 | $ | 40,909 | $ | 7,221 | +18 |
| $ | 60,690 |
|
| $ | 54,536 |
|
| $ | 6,154 |
|
|
| 11 |
| |||||||||
|
|
| ||||||||||||||||||||||||||||||
Gross profit for North American operations increased 1320 percent largelyprincipally due to improved polyol margins andthe 16 percent increase in sales volume. All product lines contributed to the large urethane systems sale, partially offset byyear-over-year gross profit growth. Specialty polyols, which includes the effectspolyester resin business acquired from BMS in June 2013, accounted for 55 percent of a planned triennial maintenance shutdown takenthe year-over-year gross profit improvement. Twelve months of financial activity for the new polyester resin activity were included in the second quarter of 2012. The maintenance shutdown resulted2014 financial results compared to seven months in approximately $1.0 million of additional costs for outsourcing a portion of the Company’s second quarter requirements of phthalic anhydride.2013 results.
Gross profit for European operations increased 26declined 19 percent which was attributableyear over year in large part due to improved unitthe non-recurring benefit of $3.7 million of business interruption insurance income recognized in 2013. In addition, current year margins declined from 2013 due to higher raw material costs, competitive pressures on selling prices and higher sales volumes. manufacturing expenses.
The increase in unit margins included the elimination of outsourced volumes necessitated in 2011 due to a reactor fire in Germany’s polyol plant. Foreign currency translation had a $1.6 million negative effect on the year-over-year change in gross profit.
As noted in prior filings, in May of 2011 one of two reactors in the German polyol plant sustained fire damage. The damaged equipment was repaired and placed back into service in the fourth quarter of 2011. The Company had insurance policies to cover repair costs and business interruption losses. In the fourth quarter of 2012, the Company settled its insurance claim against one of two insurers. The settlement did not have a material effect on the Company’s financial results.
Gross profit for Asia and Other operations increased 31 percentregions was primarily due to improved margins resulting from lower raw material costs.plant costs, higher selling prices and a more favorable mix of sales. Plant costs in 2013 included costs associated with the winding down of manufacturing operations at the Company’s Nanjing, China. In addition, as a result of the Company’s requirement to relocate its Nanjing, China, plant, the Company reduced the useful life of the current plant’s assets, thereby accelerating depreciation expense. The$0.6 million charge for accelerated depreciation was recognized in the first half of 2013 that did not have a significant effect on profitsrecur in 2014. The results for 2012.2014 were tempered by higher costs related to outsourcing products to sell.
Operating expenses for the polymersPolymers segment increased $3.1were up $1.5 million, or 15 percent, between years. Excluding the effects of foreign currency translation, the year-over-year increase was $3.7 million. Selling expenses increased $2.3 million, which was primarily attributable to higher salary expenses, due to increased staffing levels and pay increases, and the related personnel costs (fringe benefits and incentive pay). In addition, bad debt expense increased $0.4 million between years. The increase in bad debt expense reflected favorable provision adjustments made in 2011. Research and development expenses increased $0.8 million mainly due to increased salaries and related personnel costs.
Specialty Products
Net sales for 2012 increased $14.4 million, or 24 percent, over net sales for 2011. The business added when the Lipid Nutrition product lines were acquired in June 2011 accounted for the net sales improvement. Year-over-year net sales and sales volume excluding the new Lipid Nutrition business were down five percent and 13 percent, respectively, primarily for the segment’s legacy multi-chain triglyceride product lines, due to lost customer share resulting from increased foreign competition. Gross profit increased $1.3 million, or sevensix percent, between years due to the addition$2.4 million bad debt charge for a phthalic anhydride customer that filed for bankruptcy. The effect of the Lipid Nutrition product lines, butbad debt charge was partially offset by lower 2014 incentive-based compensation attributable to lower total Company operating income fell $1.1results.
Specialty Products
Net sales for 2014 declined $0.7 million, or eight percent. The combinationone percent, from net sales for 2013 primarily due to a four percent decline in sales volume and to lower sales of incrementalproducts used in pharmaceutical applications, partially offset by increased selling prices. Operating income declined $0.4 million, or four percent, principally due to lower sales volume partially offset by lower operating expenses needed to support the Lipid Nutrition product lines and weakness in medium-chain triglyceride sales led to the operating income decline.
Corporate Expensesexpenses.
Corporate Expenses
Corporate expenses which comprise operating expenses that are not allocated to the reportable segments, increased $13.6declined $18.2 million to $50.2$37.2 million for 20122014 from $36.6$55.4 million for 2011. Increases2013. The decline in corporate expenses was primarily due to decreased deferred compensation ($21.4 million) and fringe benefit ($2.8 million) expenses partially offset by increased legal and environmental ($7.2 million) expenses. The decrease in deferred compensation expense legal and environmental expenses and patent filing costs accounted for $8.7 million, $1.8 million and $0.8($11.9 million of the increase, respectively. Fringe benefits (which included incentive pay), salary expenses and travel-related expenses were also up year over year ($0.8 million, $0.7 million and $0.5 million, respectively).
With respectincome in 2014 compared to deferred compensation, the Company recorded $10.2$9.5 million of expense for 2012 compared to $1.5 million of expense for 2011. Increasesin 2013) reflected a $25.55 per share decline in the value of Company common stock for 2014 compared to which a large partan increase of $10.09 per share for 2013. Lower year-over-year mutual fund investment appreciation contributed to the
28
decline in deferred compensation obligation is tied, accounted for most of the higher year-over-year deferred compensation expense. For 2012, the value of Company stock increased $15.46 per share compared to a $1.94 per share increase for 2011. The following table presents the year-end per share Company common stock prices used in the computation of deferred compensation expense:
| December 31 | ||||||||||||
| 2012 | 2011 | 2010 | ||||||||||
Company Stock Price | $ | 55.54 | $ | 40.08 | $ | 38.14 | ||||||
|
| December 31 |
| |||||||||
|
| 2014 |
|
| 2013 |
|
| 2012 |
| |||
Company Stock Price |
| $ | 40.08 |
|
| $ | 65.63 |
|
| $ | 55.54 |
|
The increasesdecrease in fringe benefit expenses was largely attributable to a decline in 2014 incentive-based compensation, which reflected lower Company financial operating results.
The higher year-over-year legal and environmental expenses and patent filing costs were primarily attributableexpense was due to increased costs to supporta $7.1 million increase in the best estimate of the remediation liability for the Company’s global innovation and growth activities. Revised estimatesMaywood site. The USEPA issued its final record of decision for remediation costs for three of the Company’s environmental sites contributed about $0.7 millionsite in 2014, which led to the higher legal and environmental expenses.
The increase in fringe benefits was driven by higher bonus and profit sharing expenses that reflected the year-over-year improvement in Company earnings. Additional staffing to support the Company’s growth, promotions and normal pay raises caused the increase in salary expense.the remediation liability.
Outlook
Although the Company is experiencing a slow start to the year with severe weather impacting customer locations and Company facilities in North America, 2014 earnings should rebound as many of the events that held the Company back in 2013 should not reoccur.
In particular, Surfactant earnings are expected to be down in the first quarter due to the extreme weather and higher maintenance expenses. Earnings should improve as the year progresses, driven by greater agricultural sales, continued consumer product growth in Brazil, projected demand in enhanced oil recovery and gains from operational efficiencies. The Surfactant business will also benefit from not having approximately $9.0 million of non-recurring items.
Polymers should experience continued growth from polyol used in energy-saving rigid foam insulation. Improving economies in the U.S. and Europe, as well as further conversion of metal panel and C.A.S.E. customers, should contribute to volume growth in 2014. The North
American polyester resin business purchased from BMS is fully integrated and is positioned to deliver projected benefits in 2014. In China, the Company expects to continue to incur higher supply costs in 2014 lowering margins, but the shutdown cost recognized in 2013 will not reoccur.
Liquidity and Financial Condition
For the year ended December 31, 2013,2015, operating activities were a cash source of $150.3$183.3 million versus $109.0a source of $82.0 million for the comparable period in 2012.2014. For the current year period, investing cash outflows totaled $167.6$126.0 million and non-debt financing activities consumed $11.0were a source of $42.9 million. To fund theseCash increased by $90.9 million with exchange rates reducing cash requirements, the Company increased debt by $87.2$9.3 million.
For the current year,2015, net income was downup by $7.4$19.0 million and working capital consumed $28.3was a source of $24.8 million less thanversus a cash use of $42.7 for the prior year.comparable year-ago period. Cash outflows for investing activities were up by $80.1$16.7 million year over year. Cash provided byflow for financing activities was a source of $76.3$42.9 million in 20132015 compared to a use of $29.5$14.9 million in 2012.2014.
For the current year,2015, accounts receivable were a usesource of $12.7$4.2 million compared to a sourceuse of $3.9$21.2 million for the comparable period in 2012.2014. Inventories were a usesource of $3.8$2.9 million in 20132015 versus a use of $50.3$18.5 million in 2012.2014. Accounts payable and accrued liabilities were a source of $26.3$21.2 million in 20132015 compared to a sourceuse of $24.1$4.4 million for 2012.in 2014.
During 2013, changesWorking capital requirements were lower in 2015 compared to 2014 primarily due to lower raw material costs had relatively little effect on working capital, while during 2012 the Company experienced lower material costs, which mitigated the cash impact on receivables of higher fourth-quarter sales volumes and higher inventory quantities versus the comparable quarter of the previous year.prices. The Company’s working capital investment is heavily influenced by the cost of crude oil and natural oils, from which many of its raw materials are derived. Fluctuations in raw material costs translate directly to inventory carrying costs and indirectly to customer selling prices and accounts receivable.
The higher current year accounts receivable cash use was driven by current quarter 2013 net sales exceeding fourth quarter 2012 net sales more thandecrease for the comparable quarters last year. Accounts receivable turnover did not change significantly between December 31, 2012, and December 31, 2013 and turnover was not a significant factor in the year-over-year cash flow comparisons. The inventory cash use for the year of 20132015 was driven mainly by lower sales prices partially offset by higher quantities to support customer service levelssales quantities. The inventory cash source for the U.S.year was driven mainly by lower raw material prices. The Company has not changed its own paymentspayment practices related to its payables. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital during 2014.2016.
Investing cash outflows for the current year included capital expenditures of $92.9$119.3 million compared to $83.2 million last year. Current year investing outflows also included $68.2$101.8 million for the acquisition of the North American polyester resins business of BMS, discussed previously.comparable period last year. Other investing activities consumed $6.5$6.6 million in 20132015 versus $4.3$7.4 million in 2012.2014. Other investing activities in 2015 included $5.1 million used to purchase the production facility in Bahia, Brazil and $3.3 million from proceeds on the sale of the specialty polyurethane systems product line.
For 2014,2016, the Company estimates that capital expenditures will range from $115 million to $125$135 million including capacity expansions in the United States, Brazil and Brazil.China.
The Company purchases its common shares in the open market from time to time to fund its own benefit plans and also to mitigate the dilutive effect of new shares issued under its benefit plans. The Company may also make open market repurchases as cash flows permit when, in management’s opinion, the Company’s shares are undervalued in the market. For the
twelve months of 2013,ended December 31, 2015, the Company purchased 41,68841,915 shares in the open market at a total cost of $2.3$2.0 million. At December 31, 2013,2015, there were 958,312761,764 shares remaining under the current share repurchase authorization. Also, in connection with the redemption announced on June 12, 2013, the Company redeemed all shares
As of its 5 1/2 percent convertible preferred stock without par value (preferred stock) outstanding at August 9, 2013. In accordance with the Preferred Shareholders Agreement, the Company redeemed 835 unconverted shares of Company preferred stock for a redemption price of $25.00 per share plus accrued and unpaid dividends of $0.26354 per share. There are no longer any issued and outstanding shares of preferred stock.
At December 31, 2013,2015, the Company’s cash and cash equivalents totaled $133.3$176.1 million, including $66.0$68.8 million in two separate U.S. money market funds, each of which was rated AAA by Standard and Poor’s and Aaa by Moody’s. Cash in U.S. demand deposit accounts totaled $15.9$20.2 million and cash of the Company’s non-U.S. subsidiaries held outside the U.S. totaled $51.4$87.1 million as ofat December 31, 2013.2015.
Consolidated balance sheet debt increased by $88.2$58.7 million for the current year, from $182.4$273.9 million to $270.6$332.6 million. Since last year end,year-end, domestic debt increased by $90.0$70.0 million and foreign debt decreased by $1.8$11.3 million. Net debt (which is defined as
29
total debt minus cash) increaseddecreased by $31.8$32.2 million for the current year, from $105.5$188.7 million to $137.3$156.5 million. As of December 31, 2013,2015, the ratio of total debt to total debt plus shareholders’ equity was 32.837.3 percent compared to 27.533.8 percent at December 31, 2012.2014. As of December 31, 2013,2015, the ratio of net debt to net debt plus shareholders’ equity was 19.921.9 percent, compared to 18.026.0 percent at December 31, 2012.2014.
At December 31, 2013,2015, the Company’s debt included $242.1$322.1 million of unsecured private placement loans with maturities extending from 20142016 through 2025.2027. These loans are the Company’s primary source of long-term debt financing and are supplemented by bank credit facilities to meet short and medium-term needs.
On June 27, 2013,July 10, 2015, the Company entered into a $100.0 million long-termunsecured private placement loan with five insurance companies.loan. This loan bears interest at a fixed rate of 3.86 percent3.95% with interest to be paid semi-annually and with equal annual principal payments beginning on June 27, 2019,July 10, 2021, and continuing through final maturity on June 27, 2025. StepanJuly 10, 2027. The proceeds of this loan will be used the net proceeds from the issuance of the notes primarily to finance the Company’s acquisition of the North American Polyester Resins business of BMS, including the production facility located in Columbus, Georgia, and expects to use the remaining proceeds for related capital expenditures, to pay down existing debt in accordance with normal payment schedules and working capital as well as for generalother corporate purposes. This loan agreement requires the maintenance of certain financial ratios and covenants that are substantially identical to the Company’s existing long-term debt and customary events of default.
The Company has a committed $125.0 million multi-currency syndicated revolving credit agreement. The credit agreement allows the Company to make unsecured borrowings, as requested from time to time, for working capital and other corporate purposes. This unsecured facility is the Company’s primary source of short-term borrowings and is committed through September 20, 2017,July 10, 2019, with terms and conditions that are substantially equivalent to those of the Company’s other U.S. loan agreements. As of December 31, 2013,2015, the Company had outstanding letters of credit of $2.7$4.7 million under this agreement, and no borrowings, under this agreement, with $122.3$120.3 million remaining available. The Company anticipates that cash from
operations, committed credit facilities and cash on hand will be sufficient to fund anticipated capital expenditures, working capital, dividends and other planned financial commitments for the foreseeable future.
Certain foreign subsidiaries of the Company maintain term loans and short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditure programs and acquisitions. At December 31, 2013,2015, the Company’s Europeanforeign subsidiaries had bank term loans of $5.8 million with maturities through 2016 and short-term bankoutstanding debt of $21.6 million with remaining short-term borrowing capacity of $15.0$10.5 million. The Company’s Latin American subsidiaries had no short-term bank debt with $9.7 million of unused short-term borrowing capacity. The Company’s Philippine subsidiary had $1.0 million of short-term bank loans, which were guaranteed by the Company, with $7.0 million of unused borrowing capacity. The Company’s majority-owned joint venture in China had no short-term bank debt, with unused borrowing capacity of $6.5 million, on bank credit lines guaranteed by the Company.
The Company has material debt agreements that require the maintenance of minimum interest coverage and minimum net worth. These agreements also limit the incurrence of additional debt as well as the payment of dividends and repurchase of treasury shares. Testing for these agreements is based on the combined financial statements of the U.S. operations of the Company, Stepan Canada Inc., Stepan Quimica Ltda., Stepan Specialty Products, LLC, Stepan Specialty Products B.V. and Stepan Asia Pte. Ltd. (the “Restricted Group”). Under the most restrictive of these debt covenants:
1. | The Restricted Group must maintain a minimum interest coverage ratio, as defined within the agreements, of |
2. | The Restricted Group must maintain net worth of at least |
3. | The Restricted Group must maintain a ratio of long-term debt to total capitalization, as defined in the agreements, not to exceed |
4. | The Restricted Group may pay dividends and purchase treasury shares after December 31, |
The Company believes it was in compliance with all of its loan agreements as of December 31, 2013.2015. Based on current projections, the Company believes it will be in compliance with its loan agreements throughout 2014.
30
At December 31, 2013,2015, the Company’s contractual obligations, including estimated payments by period, were as follows:
| Payments Due by Period | ||||||||||||||||||||
| (In thousands) | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | |||||||||||||||
Long-term debt obligations | $ | 270,623 | $ | 35,377 | $ | 24,531 | $ | 41,429 | $ | 169,286 | ||||||||||
Interest payments on debt obligations(a) | 73,439 | 11,666 | 21,138 | 17,837 | 22,798 | |||||||||||||||
Capital lease obligations | 254 | 254 | — | — | — | |||||||||||||||
Operating lease obligations | 32,122 | 4,170 | 6,492 | 3,665 | 17,795 | |||||||||||||||
Purchase obligations(b) | 13,553 | 9,316 | 3,770 | 467 | — | |||||||||||||||
Other(c) | 26,583 | 7,545 | 2,321 | 1,965 | 14,752 | |||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
Total | $ | 416,574 | $ | 68,328 | $ | 58,252 | $ | 65,363 | $ | 224,631 | ||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||
|
| Payments Due by Period |
| |||||||||||||||||
(In thousands) |
| Total |
|
| Less than 1 year |
|
| 1-3 years |
|
| 3 – 5 years |
|
| More than 5 years |
| |||||
Long-term debt obligations |
| $ | 332,623 |
|
| $ | 18,806 |
|
| $ | 42,670 |
|
| $ | 59,814 |
|
| $ | 211,333 |
|
Interest payments on debt obligations (a) |
|
| 86,447 |
|
|
| 14,116 |
|
|
| 25,797 |
|
|
| 20,541 |
|
|
| 25,993 |
|
Operating lease obligations |
|
| 37,301 |
|
|
| 5,836 |
|
|
| 7,857 |
|
|
| 5,719 |
|
|
| 17,889 |
|
Purchase obligations (b) |
|
| 31,051 |
|
|
| 28,473 |
|
|
| 2,578 |
|
|
| — |
|
|
| — |
|
Other (c) |
|
| 20,011 |
|
|
| 2,126 |
|
|
| 2,666 |
|
|
| 1,766 |
|
|
| 13,453 |
|
Total |
| $ | 507,433 |
|
| $ | 69,357 |
|
| $ | 81,568 |
|
| $ | 87,840 |
|
| $ | 268,668 |
|
(a) | Interest payments on debt obligations represent interest on all Company debt at December 31, |
(b) | Purchase obligations consist of raw material, utility and telecommunication service purchases made in the normal course of business. |
(c) | The “Other” category comprises deferred revenues that represent commitments to deliver products, expected |
The above table does not include $76.8$101.9 million of other non-current liabilities recorded on the balance sheet at December 31, 2013,2015, as summarized in Note 1615 to the consolidated financial statements. The significant non-current liabilities excluded from the table are defined benefit pension, deferred compensation, environmental and legal liabilities and unrecognized tax benefits for which payment periods cannot be reasonably determined. In addition, deferred income tax liabilities are excluded from the table due to the uncertainty of their timing.
Pension Plans
The Company sponsors a number of defined benefit pension plans, the most significant of which cover employees in its U.S. and U.K. locations. The U.S. and U.K. plans are frozen, and service benefit accruals are no longer being made. The underfundedfunded status (pretax) of the Company’s defined benefit pension plans improved $25.6$5.7 million year-over-year,year over year, from $35.7$43.2 million underfunded at December 31, 2012,2014, to $10.1$37.5 million underfunded at December 31, 2013.2015. The effects of year-over-year increases in the discount rates used to measure pension obligations (70(30- and 30 basis point50-point increases for the U.S. and U.K. plans, respectively) and a change in mortality assumptions, partially offset by less than expected pension asset gainsperformance, accounted for the improvement.
The Company contributed $0.9$0.6 million to its funded U.K. defined benefit plan in 2013. Due to a reduced minimum funding requirement precipitated by the 2012
Pension Funding Stabilization provision of the MAP-21 Act (Moving Ahead for Progress in the 21st Century Act), the Company did not make contributions to its funded U.S. qualified defined benefit pension plans in 2013.2015. In 2014,2016, the Company expects to contribute a total of $2.4$0.4 million to the fundedU.K. defined benefit plan. As a result of pension funding relief included in the Highway and Transportation Funding Act of 2014, the Company has no 2016 contribution requirement to the U.S. pension plans. Payments to participants in the unfunded non-qualified plans should approximate $0.2 million in 2014,2016, which is the same as payments made in 2013.2015.
Letters of Credit
The Company maintains standby letters of credit under its workers’ compensation insurance agreements and for other purposes as needed. The insurance letters of credit are renewed annually and amended to the amounts required by the insurance agreements. As of December 31, 2013,2015, the Company had a total of $2.7$4.7 million in outstanding standby letters of credit.
Off-Balance Sheet Arrangements
The Securities and Exchange Commission requires disclosure of off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. During the periods covered by this Form 10-K, the Company was not party to any such off-balance sheet arrangements.
Environmental and Legal Matters
The Company’s operations are subject to extensive local, state and federal regulations. Although the Company’s environmental policies and practices are designed to ensure compliance with these regulations, future developments and increasingly stringent environmental regulation couldmay require the Company to make additional environmental expenditures. The Company will continue to
31
invest in the equipment and facilities necessary to comply with existing and future regulations. During 2013,2015, the Company’s expenditures for capital projects related to the environment were $4.7$1.7 million. These projects are capitalized and depreciated over their estimated useful lives, which are typically 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at the Company’s manufacturing locations were approximately $22.1 million for 2015, $21.2 million for 2014 and $18.7 million for 2013, $18.3 million for 2012 and $16.0 million for 2011.2013. While difficult to project, it is not anticipated that these recurring expenses will increase significantly in the near future.
Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party 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 the sites. See the Critical Accounting Policies section that follows for a
discussion of the Company’s environmental liabilities accounting policy. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses from $9.7$20.9 million to $28.9$41.4 million at December 31, 2013,2015, compared to $10.3$21.9 million to $28.9$41.8 million at December 31, 2012.2014. At December 31, 2013,2015, 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 $14.7$20.9 million compared to $15.4$22.0 million at December 31, 2012.2014. Because the liabilities accrued are estimates, actual amounts could differ from the amounts reported. During 2013,2015, cash outlays related to legal and environmental matters approximated $2.4$2.7 million compared to $3.3$1.2 million expended in 2012.2014.
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.
See Item 3, Legal Proceedings, in this Form 10-K and in other filings of the Company with the Securities and Exchange Commission, which are available upon request from the Company. See also Note 17,16, Contingencies, in the Notes to Consolidated Financial Statements for a summary of the significant environmental proceedings related to certain environmental sites.
Outlook
In 2016, the Company expects to build on the momentum generated in 2015. The business should benefit from a full year of higher commodity sulfonation volumes in North America and continued growth in core polymer markets. Benefits from the Company’s product and end-market diversification efforts, as well as lower costs associated with restructured activities, should positively impact 2016. Start-up expenses and lower growth rates in China will negatively impact Polymer performance. Both Surfactants and Polymers will experience higher costs during the fourth quarter due to a thirty-day government mandated shutdown of the Company’s facility in Germany. Specialty Products should improve on lower costs from structural actions taken in 2015.
32
Based on currently available information, the Company does not believe that existing or pending climate change legislation or regulation is reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.
Critical Accounting Policies
The Company prepares its financial statements in accordance with accounting principles generally accepted in the United States of America (generally accepted accounting principles). Preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The following is a summary of the accounting policies the Company believes are the most important to aid in understanding its financial results.results:
Deferred Compensation
The Company sponsors deferred compensation plans that allow management employees to defer receipt of their annual bonuses and outside directors to defer receipt of their fees until retirement, departure from the Company or as elected by the participant. The plans allow for the deferred compensation to grow or decline based on the results of investment options chosen by the participants. The investment options include Company common stock and a limited selection of mutual funds. The Company funds the obligations associated with these plans by purchasing investment assets that match the investment choices made by the plan participants. A sufficient number of shares of treasury stock are maintained on hand to cover the equivalent number of shares that result from participants electing the Company common stock investment option. As a result, the Company must periodically purchase its common shares in the open market. Upon retirement or departure from the Company, participants receive cash amounts equivalent to the payment date value of the investment choices they have made or Company common stock shares equal to the number of share equivalents held in the accounts.
Some plan distributions may be made in cash or Company common stock at the option of the participant. Other plan distributions can only be made in Company common stock. For deferred compensation obligations that may be settled in cash, the Company must record appreciation in the market value of the investment choices made by participants as additional compensation expense. Conversely, declines in the value of Company stock or the mutual funds result in a reduction of compensation expense since such declines reduce the cash obligation of the Company as of the date of the financial statements. These market price movements may result in significant period-to-period fluctuations in the Company’s income. The increases or decreases in compensation expenses attributable to market price movements are reported in the administrative expense lineoperating expenses section of the consolidated statements of income. Because the obligations that must be settled only in Company common stock are treated as equity instruments, fluctuations in the market price of the underlying Company stock do not affect earnings.
At December 31, 2013,2015, the Company’s deferred compensation liability was $51.5$44.0 million, of which approximately 6657 percent represented deferred compensation tied to the performance of the Company’s common stock; the remainder was tied to the mutual fund investment choices. A $1.00 increase in the market price of the Company’s common stock will result in approximately $0.5 million of additional compensation expense. A $1.00 reduction in the market price of the common stock will reduce compensation expense by a like amount. The expense or income associated with the mutual fund component will generally fluctuate in line with the overall percentage increase or decrease of the U.S. stock markets.
The mutual fund assets related to the deferred compensation plans are recorded on the Company’s balance sheet at cost when acquired and adjusted to their market values at the end of each reporting period. As allowed by generally accepted accounting principles, the Company elected the fair value option for recording the mutual fund investment assets. Therefore, market value changes for the mutual fund investment assets are recorded in the income statement in the same periods that the offsetting changes in the deferred compensation liabilities are recorded. Dividends, capital gains distributed by the mutual funds, unrealized gains and losses and realized gains and losses from sales of mutual fund shares, are recognized as investment income or loss in the other, net line of the consolidated statements of income.
Environmental Liabilities
It is the Company’s accounting policy to record environmental liabilities when environmental assessments and/or remedial efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within a range of possible costs is a better estimate than any other amount, the minimum amount in the range is accrued. Some of the factors on which the Company bases its estimates include information provided by feasibility studies, potentially responsible party negotiations and the development of remedial action plans.
33
Estimates for environmental liabilities are subject to significant fluctuations as new facts emerge related to the various sites where the Company is exposed to liability for the remediation of environmental contamination. See the Environmental and Legal Matters section of this MD&A for discussion of the Company’s recorded liabilities and range of loss estimates.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers, at which time title and risk of loss pass to the customer. For arrangements where the Company consigns product to a customer location, revenue is recognized when the customer uses the inventory. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are recorded in cost of sales. Volume discounts due customers are estimated and recorded in the same period as the sales to which the discounts relate and are reported as reductions of revenue in the consolidated statements of income.
Recent Accounting Pronouncements
See Note 1 to the consolidated financial statements, included in Part II, Item 8, for information on recent accounting pronouncements which affect the Company.
34
ItemItem 7A. Quantitative and Qualitative Disclosures About Market Risk
FOREIGN CURRENCY EXCHANGE RISK
Because the Company operates globally, its cash flows and operating results are subject to movements in foreign currency exchange rates. The Company manufactures and sells products in many foreign locations and, therefore, believes its currency exchange risk is well diversified. Except as noted below, substantially all the Company’s foreign subsidiaries’ financial instruments are denominated in their respective functional currencies. Gains and losses on unhedged foreign currency transactions are recorded in income.
The Company uses forward contracts to mitigate the exposure of certain foreign currency transactions and balances to fluctuating exchange rates. At December 31, 2013,2015, the Company had forward contracts to sell $16.5$19.6 million on behalf of subsidiaries in Canada, Mexico, France,China, Poland, the Netherlands, and the Philippines. At year end theThe Company also had forward contracts to buy $2.0sell EUR 10.2 million on behalf of subsidiaries in GermanyPoland and the U.K. The Company also had a forward contract to buy EUR 1.0 million on behalf of its subsidiary in PolandUK and a forward contract to sell GBP 0.30.4 million on behalf of its subsidiary in France. The
fair value of theseall forward contracts as of December 31, 2013,2015, was a net liability of $0.1$0.2 million. As of December 31, 2013,2015, the potential reduction in the Company’s earnings resulting from the impact of hypothetical adverse changes in exchange rates on the fair value of its outstanding foreign currency hedge contracts of 10 percent for all currencies would have been $1.6$3.1 million.
Periodically, the Company and its subsidiaries issue U.S. dollar and euro denominated trade receivables or loans to each other. Gains and losses on these transactions are included in income. Except for the Company’s subsidiaries in Brazil and Colombia, and China, foreign currency exposures are essentially all coveredsubstantially hedged by forward contracts. At December 31, 2013, the U.S. dollar and euro denominated trade receivables or loans balances2015, currency exposures not covered by forward contracts were insignificant.
INTEREST RATES
The Company’s debt was made up of fixed-rate and variable-rate borrowings totaling $244.5$322.1 million and $26.1$10.5 million, respectively, as of December 31, 2013.2015. For 2014,2016, it is projected that interest on short-term variable-rate borrowings will total approximately $1.0$0.5 million. A hypothetical 10 percent average change to short-term interest rates would result in less than a $0.1 million increase or decrease to interest expense for 2014.2016.
The fair value of the Company’s long term fixed-rate debt, including current maturities, was estimated to be $250.0$320.7 million as of December 31, 2013,2015, which was approximately $5.4$1.4 million abovebelow the carrying value. Market risk was estimated as the potential increase to the fair value that would result from a hypothetical 10 percent decrease in the Company’s weighted average long-term borrowing rates at December 31, 2013,2015, or $5.8$20.8 million.
COMMODITY PRICE RISK
Certain raw materials used in the manufacture of the Company’s products are subject to price volatility caused by weather, petroleum prices,price fluctuations, general economic demand and other unpredictable factors. Increased raw material costs are recovered from customers as quickly as the marketplace allows; however, certain customers havecontractual arrangements that allow for price changes only on a quarterly basis, and competitive pressures sometimes prevent the recovery of cost increases from customers, particularly in periods where there is excess industry capacity. As a result, for some product lines or market segments it may take time to recover raw material price increases. Periodically, firm purchase commitments are entered into which fix the price of a specific commodity that will be delivered at a future time. Forward purchase contracts are used to aid in managing the Company’s natural gas and electric costs. At December 31, 2013,2015, the Company had open forward contracts for the purchase of 1.21.1 million dekatherms of natural gas at a cost of $4.9$3.6 million. Because the Company has agreed to fixed prices for the noted quantity of natural gas, a hypothetical 10 percent fluctuation in the price of natural gas would cause the Company’s actual natural gas cost to be $0.5$0.4 million higher or lower than the cost at market price.
35
ItemItem 8. Financial Statements and Supplementary Data
The following statements and data are included in this item:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Income (For years ended December 31, 2015, 2014 and 2013)
Consolidated Statements of Comprehensive Income (For years ended December 31, 2015, 2014 and 2013)
Consolidated Balance Sheets (December 31, 2015 and 2014)
Consolidated Statements of Cash Flow (For years ended December 31, 2015, 2014 and 2013)
Consolidated Statements of Stockholders’ Equity (For years ended December 31, 2015, 2014 and 2013)
Notes to Consolidated Financial Statements
Selected Quarterly Financial Data
36
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Stepan Company
Northfield, Illinois
We have audited the accompanying consolidated balance sheets of Stepan Company and subsidiaries (the “Company”) as of December 31, 20132015 and 2012,2014, and the related consolidated statements of income, comprehensive income, equity, and cash flows for each of the three years in the period ended December 31, 2013.2015. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Stepan Company and subsidiaries as of December 31, 20132015 and 2012,2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2013,2015, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2013,2015, based on the criteria established inInternal Control – Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 26, 201424, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
/s/ Deloitte & Touche LLP |
DELOITTE & TOUCHE LLP |
Chicago, Illinois
February 26, 2014
37
Consolidated Statements of Income
For the years ended December 31, 2013, 20122015, 2014 and 20112013
| (In thousands, except per share amounts) | 2013 | 2012 | 2011 | |||||||||
Net Sales (Note 1) | $ | 1,880,786 | $ | 1,803,737 | $ | 1,843,092 | ||||||
Cost of Sales | 1,599,101 | 1,512,184 | 1,587,539 | |||||||||
|
|
|
|
|
| |||||||
Gross Profit | 281,685 | 291,553 | 255,553 | |||||||||
Operating Expenses: | ||||||||||||
Selling (Note 1) | 53,229 | 53,145 | 45,807 | |||||||||
Administrative (Note 1) | 71,454 | 63,979 | 50,766 | |||||||||
Research, development and technical services (Note 1) | 46,809 | 45,713 | 40,524 | |||||||||
|
|
|
|
|
| |||||||
| 171,492 | 162,837 | 137,097 | ||||||||||
Business Restructuring (Note 21) | 1,040 | — | — | |||||||||
|
|
|
|
|
| |||||||
Operating Income | 109,153 | 128,716 | 118,456 | |||||||||
Other Income (Expense): | ||||||||||||
Interest, net (Note 7) | (10,358 | ) | (9,599 | ) | (9,095 | ) | ||||||
Loss from equity in joint ventures (Note 1) | (5,336 | ) | (4,724 | ) | (3,616 | ) | ||||||
Other, net (Note 9) | 2,171 | 1,329 | (851 | ) | ||||||||
|
|
|
|
|
| |||||||
| (13,523 | ) | (12,994 | ) | (13,562 | ) | |||||||
|
|
|
|
|
| |||||||
Income Before Provision for Income Taxes | 95,630 | 115,722 | 104,894 | |||||||||
Provision for Income Taxes (Note 10) | 23,293 | 36,035 | 32,292 | |||||||||
|
|
|
|
|
| |||||||
Net Income | 72,337 | 79,687 | 72,602 | |||||||||
|
|
|
|
|
| |||||||
Net (Income) Loss Attributable to Noncontrolling Interests (Note 1) | 491 | (291 | ) | (626 | ) | |||||||
|
|
|
|
|
| |||||||
Net Income Attributable to Stepan Company | $ | 72,828 | $ | 79,396 | $ | 71,976 | ||||||
|
|
|
|
|
| |||||||
Net Income Per Common Share Attributable to Stepan Company (Note 19): | ||||||||||||
Basic | $ | 3.22 | $ | 3.71 | $ | 3.44 | ||||||
|
|
|
|
|
| |||||||
Diluted | $ | 3.18 | $ | 3.49 | $ | 3.21 | ||||||
|
|
|
|
|
| |||||||
Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 19): | ||||||||||||
Basic | 22,621 | 21,273 | 20,726 | |||||||||
|
|
|
|
|
| |||||||
Diluted | 22,924 | 22,730 | 22,440 | |||||||||
|
|
|
|
|
| |||||||
(In thousands, except per share amounts) |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Net Sales (Note 1) |
| $ | 1,776,167 |
|
| $ | 1,927,213 |
|
| $ | 1,880,786 |
|
Cost of Sales |
|
| 1,467,926 |
|
|
| 1,677,650 |
|
|
| 1,599,101 |
|
Gross Profit |
|
| 308,241 |
|
|
| 249,563 |
|
|
| 281,685 |
|
Operating Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Selling (Note 1) |
|
| 55,522 |
|
|
| 54,763 |
|
|
| 53,229 |
|
Administrative (a) (Note 1) |
|
| 76,048 |
|
|
| 66,549 |
|
|
| 61,958 |
|
Research, development and technical services (Note 1) |
|
| 50,243 |
|
|
| 45,451 |
|
|
| 46,809 |
|
Deferred compensation expense (income) (a) (Note 1) |
|
| 6,500 |
|
|
| (11,903 | ) |
|
| 9,496 |
|
|
|
| 188,313 |
|
|
| 154,860 |
|
|
| 171,492 |
|
Gain on sale of product line |
|
| 2,862 |
|
|
| — |
|
|
| — |
|
Business restructuring and asset impairments (Note 22) |
|
| — |
|
|
| (4,009 | ) |
|
| (1,040 | ) |
Operating Income |
|
| 122,790 |
|
|
| 90,694 |
|
|
| 109,153 |
|
Other Income (Expense): |
|
|
|
|
|
|
|
|
|
|
|
|
Interest, net (Note 6) |
|
| (14,533 | ) |
|
| (11,441 | ) |
|
| (10,358 | ) |
Loss from equity in joint ventures (Notes 1 and 25) |
|
| (6,985 | ) |
|
| (5,008 | ) |
|
| (5,336 | ) |
Other, net (Note 8) |
|
| 1,584 |
|
|
| 1,290 |
|
|
| 2,171 |
|
|
|
| (19,934 | ) |
|
| (15,159 | ) |
|
| (13,523 | ) |
Income Before Provision for Income Taxes |
|
| 102,856 |
|
|
| 75,535 |
|
|
| 95,630 |
|
Provision for Income Taxes (Note 9) |
|
| 26,819 |
|
|
| 18,454 |
|
|
| 23,293 |
|
Net Income |
|
| 76,037 |
|
|
| 57,081 |
|
|
| 72,337 |
|
Net (Income) Loss Attributable to Noncontrolling Interests (Note 1) |
|
| (69 | ) |
|
| 20 |
|
|
| 491 |
|
Net Income Attributable to Stepan Company |
| $ | 75,968 |
|
| $ | 57,101 |
|
| $ | 72,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income Per Common Share Attributable to Stepan Company (Note 18): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 3.34 |
|
| $ | 2.51 |
|
| $ | 3.22 |
|
Diluted |
| $ | 3.32 |
|
| $ | 2.49 |
|
| $ | 3.18 |
|
Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company (Note 18): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 22,730 |
|
|
| 22,758 |
|
|
| 22,621 |
|
Diluted |
|
| 22,858 |
|
|
| 22,917 |
|
|
| 22,924 |
|
(a) In 2014 and 2013, deferred compensation expense (income) was included in administrative expenses. The 2014 and 2013 amounts have been changed to conform to the current year presentation.
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
38
Consolidated Statements of Comprehensive Income
For the years ended December 31, 2013, 20122015, 2014 and 20112013
| (In thousands) | 2013 | 2012 | 2011 | |||||||||
Net Income | $ | 72,337 | $ | 79,687 | $ | 72,602 | ||||||
Other Comprehensive Income (Loss): | ||||||||||||
Foreign currency translation adjustments (Note 20) | (8,034 | ) | 6,101 | (12,523 | ) | |||||||
Defined benefit pension plans: | ||||||||||||
Net actuarial loss arising in period (net of taxes of $7,783, $2,568, $3,617 for 2013, 2012 and 2011, respectively) | 13,417 | (5,387 | ) | (5,259 | ) | |||||||
Amortization of prior service cost included in pension expense (net of taxes of $6, $5, $6 for 2013, 2012 and 2011, respectively) | 13 | 13 | 13 | |||||||||
Amortization of actuarial loss included in pension expense (net of taxes of $2,015, $1,371, $1,154 for 2013, 2012 and 2011, respectively) | 3,395 | 2,261 | 1,913 | |||||||||
Amortization of transition obligation included in pension expense (net of taxes of $1, $5, $8 for 2013, 2012 and 2011, respectively) | 1 | 13 | 19 | |||||||||
|
|
|
|
|
| |||||||
Net defined benefit pension plan activity (Note 20) | 16,826 | (3,100 | ) | (3,314 | ) | |||||||
Cash flow hedges: | ||||||||||||
Gains (losses) arising in period (net of taxes of $0, $16, $12 in 2013, 2012 and 2011, respectively) | (32 | ) | 116 | (1 | ) | |||||||
Reclassifications to income in period (net of taxes of $14 and $8 in 2013 and 2012, respectively) | 13 | 19 | — | |||||||||
|
|
|
|
|
| |||||||
Net cash flow hedge activity (Note 20) | (19 | ) | 135 | (1 | ) | |||||||
|
|
|
|
|
| |||||||
Other Comprehensive Income (Loss) | 8,773 | 3,136 | (15,838 | ) | ||||||||
|
|
|
|
|
| |||||||
Comprehensive Income | 81,110 | 82,823 | 56,764 | |||||||||
Comprehensive (Income) Loss Attributable to Noncontrolling Interests | 440 | (389 | ) | (674 | ) | |||||||
|
|
|
|
|
| |||||||
Comprehensive Income Attributable to Stepan Company | $ | 81,550 | $ | 82,434 | $ | 56,090 | ||||||
|
|
|
|
|
| |||||||
(In thousands) |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Net Income |
| $ | 76,037 |
|
| $ | 57,081 |
|
| $ | 72,337 |
|
Other Comprehensive Income (Loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments (Note 19) |
|
| (45,490 | ) |
|
| (31,980 | ) |
|
| (8,034 | ) |
Defined benefit pension plans: |
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) arising in period (net of taxes of $568, $14,227 and $7,783 for 2015, 2014 and 2013, respectively) |
|
| 1,311 |
|
|
| (24,186 | ) |
|
| 13,417 |
|
Amortization of prior service cost included in pension expense (net of taxes of $6, $6 and $6 for 2015, 2014 and 2013, respectively) |
|
| 11 |
|
|
| 14 |
|
|
| 13 |
|
Amortization of actuarial loss included in pension expense (net of taxes of $1,755, $1,032 and $2,015 for 2015, 2014 and 2013, respectively) |
|
| 3,002 |
|
|
| 1,695 |
|
|
| 3,395 |
|
Amortization of transition obligation included in pension expense (net of taxes of $0, $0 and $1 for 2015, 2014 and 2013, respectively) |
|
| — |
|
|
| — |
|
|
| 1 |
|
Net defined benefit pension plan activity (Note 19) |
|
| 4,324 |
|
|
| (22,477 | ) |
|
| 16,826 |
|
Cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Gains (losses) arising in period (net of taxes of $26, $0, $0 in 2015, 2014 and 2013, respectively) |
|
| (49 | ) |
|
| — |
|
|
| (32 | ) |
Reclassifications to income in period (net of taxes of $8, $7 and $14 in 2015, 2014 and 2013, respectively) |
|
| 5 |
|
|
| 3 |
|
|
| 13 |
|
Net cash flow hedge activity (Note 19) |
|
| (44 | ) |
|
| 3 |
|
|
| (19 | ) |
Other Comprehensive Income (Loss) |
|
| (41,210 | ) |
|
| (54,454 | ) |
|
| 8,773 |
|
Comprehensive Income |
|
| 34,827 |
|
|
| 2,627 |
|
|
| 81,110 |
|
Comprehensive (Income) Loss Attributable to Noncontrolling Interests |
|
| (2 | ) |
|
| 57 |
|
|
| 440 |
|
Comprehensive Income Attributable to Stepan Company |
| $ | 34,825 |
|
| $ | 2,684 |
|
| $ | 81,550 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
39
December 31, 20132015 and 20122014
| (Dollars in thousands) | 2013 | 2012 | ||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 133,347 | $ | 76,875 | ||||
Receivables, less allowances of $5,945 in 2013 and $5,533 in 2012 | 265,721 | 255,858 | ||||||
Inventories (Note 6) | 172,368 | 162,013 | ||||||
Deferred income taxes (Note 10) | 12,637 | 9,876 | ||||||
Other current assets | 24,477 | 18,456 | ||||||
|
|
|
| |||||
Total current assets | 608,550 | 523,078 | ||||||
|
|
|
| |||||
Property, Plant and Equipment: | ||||||||
Land | 13,008 | 11,942 | ||||||
Buildings and improvements | 162,199 | 151,831 | ||||||
Machinery and equipment | 1,085,763 | 969,603 | ||||||
Construction in progress | 55,529 | 66,979 | ||||||
|
|
|
| |||||
| 1,316,499 | 1,200,355 | |||||||
Less: accumulated depreciation | 822,457 | 778,333 | ||||||
|
|
|
| |||||
Property, plant and equipment, net | 494,042 | 422,022 | ||||||
|
|
|
| |||||
Goodwill, net (Note 5) | 11,726 | 7,199 | ||||||
Other intangible assets, net (Note 5) | 23,669 | 8,778 | ||||||
Long-term investments (Note 3) | 18,305 | 14,093 | ||||||
Other non-current assets | 10,910 | 10,308 | ||||||
|
|
|
| |||||
Total assets | $ | 1,167,202 | $ | 985,478 | ||||
|
|
|
| |||||
Liabilities and Equity | ||||||||
Current Liabilities: | ||||||||
Current maturities of long-term debt (Note 7) | $ | 35,377 | $ | 32,838 | ||||
Accounts payable | 157,277 | 141,668 | ||||||
Accrued liabilities (Note 15) | 76,339 | 72,661 | ||||||
|
|
|
| |||||
Total current liabilities | 268,993 | 247,167 | ||||||
|
|
|
| |||||
Deferred income taxes (Note 10) | 20,616 | 9,200 | ||||||
|
|
|
| |||||
Long-term debt, less current maturities (Note 7) | 235,246 | 149,564 | ||||||
|
|
|
| |||||
Other non-current liabilities (Note 16) | 88,606 | 98,667 | ||||||
|
|
|
| |||||
Commitments and Contingencies(Note 17) | ||||||||
Equity(Note 10): | ||||||||
5 1/2 percent convertible preferred stock, cumulative, voting, without par value; authorized 2,000,000 shares; issued and outstanding 0 shares in 2013 and 61,935 shares in 2012 (Note 11) | — | 1,548 | ||||||
Common stock, $1 par value; authorized 60,000,000 shares; issued 25,563,909 shares in 2013 and 25,141,610 shares in 2012 | 25,564 | 25,142 | ||||||
Additional paid-in capital | 135,693 | 125,003 | ||||||
Accumulated other comprehensive loss (Note 20) | (29,528 | ) | (38,250 | ) | ||||
Retained earnings | 478,826 | 420,472 | ||||||
Less: Common treasury stock, at cost, 3,231,289 shares in 2013 and 3,175,638 shares in 2012 | (58,269 | ) | (54,930 | ) | ||||
|
|
|
| |||||
Total Stepan Company stockholders’ equity | 552,286 | 478,985 | ||||||
|
|
|
| |||||
Noncontrolling interests | 1,455 | 1,895 | ||||||
|
|
|
| |||||
Total equity | 553,741 | 480,880 | ||||||
|
|
|
| |||||
Total liabilities and equity | $ | 1,167,202 | $ | 985,478 | ||||
|
|
|
| |||||
(Dollars in thousands) |
| 2015 |
|
| 2014 |
| ||
Assets |
|
|
|
|
|
|
|
|
Current Assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 176,143 |
|
| $ | 85,215 |
|
Receivables, less allowances of $8,046 in 2015 and $10,011 in 2014 |
|
| 249,602 |
|
|
| 270,436 |
|
Inventories (Note 5) |
|
| 170,424 |
|
|
| 183,233 |
|
Deferred income taxes (Note 9) |
|
| — |
|
|
| 15,364 |
|
Other current assets |
|
| 23,404 |
|
|
| 21,308 |
|
Total current assets |
|
| 619,573 |
|
|
| 575,556 |
|
Property, Plant and Equipment: |
|
|
|
|
|
|
|
|
Land |
|
| 15,132 |
|
|
| 12,446 |
|
Buildings and improvements |
|
| 173,964 |
|
|
| 171,559 |
|
Machinery and equipment |
|
| 1,161,051 |
|
|
| 1,119,400 |
|
Construction in progress |
|
| 95,951 |
|
|
| 82,446 |
|
|
|
| 1,446,098 |
|
|
| 1,385,851 |
|
Less: accumulated depreciation |
|
| (890,635 | ) |
|
| (861,656 | ) |
Property, plant and equipment, net |
|
| 555,463 |
|
|
| 524,195 |
|
Goodwill, net (Note 4) |
|
| 11,265 |
|
|
| 11,502 |
|
Other intangible assets, net (Note 4) |
|
| 17,957 |
|
|
| 20,803 |
|
Long-term investments (Note 2) |
|
| 20,910 |
|
|
| 20,217 |
|
Other non-current assets |
|
| 14,493 |
|
|
| 9,741 |
|
Total Assets |
| $ | 1,239,661 |
|
| $ | 1,162,014 |
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity |
|
|
|
|
|
|
|
|
Current Liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt (Note 6) |
| $ | 18,806 |
|
| $ | 27,034 |
|
Accounts payable |
|
| 128,605 |
|
|
| 156,983 |
|
Accrued liabilities (Note 14) |
|
| 95,833 |
|
|
| 65,496 |
|
Total current liabilities |
|
| 243,244 |
|
|
| 249,513 |
|
Deferred income taxes (Note 9) |
|
| 9,455 |
|
|
| 15,804 |
|
Long-term debt, less current maturities (Note 6) |
|
| 313,817 |
|
|
| 246,897 |
|
Other non-current liabilities (Note 15) |
|
| 114,761 |
|
|
| 112,856 |
|
Commitments and Contingencies (Note 16) |
|
|
|
|
|
|
|
|
Equity (Note 10): |
|
|
|
|
|
|
|
|
Common stock, $1 par value; authorized 60,000,000 shares; issued 25,709,391 shares in 2015 and 25,640,090 shares in 2014 |
|
| 25,709 |
|
|
| 25,640 |
|
Additional paid-in capital |
|
| 144,601 |
|
|
| 139,573 |
|
Accumulated other comprehensive loss (Note 19) |
|
| (125,088 | ) |
|
| (83,945 | ) |
Retained earnings |
|
| 580,208 |
|
|
| 520,540 |
|
Less: Common treasury stock, at cost, 3,428,541 shares in 2015 and 3,384,443 shares in 2014 |
|
| (68,446 | ) |
|
| (66,262 | ) |
Total Stepan Company stockholders’ equity |
|
| 556,984 |
|
|
| 535,546 |
|
Noncontrolling interests |
|
| 1,400 |
|
|
| 1,398 |
|
Total equity |
|
| 558,384 |
|
|
| 536,944 |
|
Total Liabilities and Equity |
| $ | 1,239,661 |
|
| $ | 1,162,014 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
40
Consolidated Statements of Cash Flows
For the years ended December 31, 2013, 20122015, 2014 and 20112013
| (In thousands) | 2013 | 2012 | 2011 | |||||||||||
Cash Flows From Operating Activities | ||||||||||||||
Net income | $ | 72,337 | $ | 79,687 | $ | 72,602 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||
Depreciation and amortization | 56,400 | 51,294 | 47,099 | |||||||||||
Deferred compensation | 9,496 | 10,252 | 1,529 | |||||||||||
Realized and unrealized (gain) loss on long-term investments | (2,611 | ) | (1,460 | ) | 156 | |||||||||
Stock-based compensation | 2,783 | 3,122 | 3,676 | |||||||||||
Deferred income taxes | 259 | 134 | 5,056 | |||||||||||
Other non-cash items | 7,253 | 2,755 | 4,967 | |||||||||||
Changes in assets and liabilities, excluding effects of acquisitions: | ||||||||||||||
Receivables, net | (12,749 | ) | 3,906 | (60,842 | ) | |||||||||
Inventories | (3,794 | ) | (50,260 | ) | (12,854 | ) | ||||||||
Other current assets | (5,950 | ) | (2,210 | ) | (2,246 | ) | ||||||||
Accounts payable and accrued liabilities | 26,256 | 24,055 | 25,901 | |||||||||||
Pension liabilities | 1,997 | (4,341 | ) | (2,470 | ) | |||||||||
Environmental and legal liabilities | (353 | ) | (66 | ) | (772 | ) | ||||||||
Deferred revenues | 2,428 | (662 | ) | (1,474 | ) | |||||||||
Excess tax benefit from stock options and awards | (3,438 | ) | (7,237 | ) | (2,951 | ) | ||||||||
|
|
|
|
|
| |||||||||
Net Cash Provided By Operating Activities | 150,314 | 108,969 | 77,377 | |||||||||||
|
|
|
|
|
| |||||||||
Cash Flows From Investing Activities | ||||||||||||||
Expenditures for property, plant and equipment | (92,865 | ) | (83,159 | ) | (83,166 | ) | ||||||||
Business acquisitions, net of cash acquired (Note 2) | (68,212 | ) | 0 | (13,562 | ) | |||||||||
Sale of mutual funds | 698 | 537 | 1,615 | |||||||||||
Other, net | (7,179 | ) | (4,827 | ) | (6,274 | ) | ||||||||
|
|
|
|
|
| |||||||||
Net Cash Used In Investing Activities | (167,558 | ) | (87,449 | ) | (101,387 | ) | ||||||||
|
|
|
|
|
| |||||||||
Cash Flows From Financing Activities | ||||||||||||||
Revolving debt and bank overdrafts, net | 4,820 | 770 | 223 | |||||||||||
Term loan | 100,000 | — | 65,000 | |||||||||||
Build-to-suit obligation buyout | — | — | (12,206 | ) | ||||||||||
Other debt borrowings | — | — | 6,573 | |||||||||||
Other debt repayments | (17,618 | ) | (18,460 | ) | (52,454 | ) | ||||||||
Dividends paid | (14,474 | ) | (12,757 | ) | (11,513 | ) | ||||||||
Company stock repurchased | (2,275 | ) | (2,098 | ) | (1,508 | ) | ||||||||
Stock option exercises | 3,977 | 4,473 | 3,228 | |||||||||||
Excess tax benefit from stock options and awards | 3,438 | 7,237 | 2,951 | |||||||||||
Other, net | (1,615 | ) | (8,640 | ) | (2,398 | ) | ||||||||
|
|
|
|
|
| |||||||||
Net Cash Provided By (Used In) Financing Activities | 76,253 | (29,475 | ) | (2,104 | ) | |||||||||
|
|
|
|
|
| |||||||||
Effect of Exchange Rate Changes on Cash | (2,537 | ) | 731 | (985 | ) | |||||||||
|
|
|
|
|
| |||||||||
Net Increase (Decrease) in Cash and Cash Equivalents | 56,472 | (7,224 | ) | (27,099 | ) | |||||||||
Cash and Cash Equivalents at Beginning of Year | 76,875 | 84,099 | 111,198 | |||||||||||
|
|
|
|
|
| |||||||||
Cash and Cash Equivalents at End of Year | $ | 133,347 | $ | 76,875 | $ | 84,099 | ||||||||
|
|
|
|
|
| |||||||||
Supplemental Cash Flow Information | ||||||||||||||
Cash payments of income taxes, net of refunds | $ | 22,691 | $ | 29,698 | $ | 24,327 | ||||||||
Cash payments of interest | $ | 11,281 | $ | 10,491 | $ | 8,647 | ||||||||
(In thousands) |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Cash Flows From Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 76,037 |
|
| $ | 57,081 |
|
| $ | 72,337 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 66,985 |
|
|
| 63,804 |
|
|
| 56,400 |
|
Deferred compensation |
|
| 6,500 |
|
|
| (11,903 | ) |
|
| 9,496 |
|
Realized and unrealized gain on long-term investments |
|
| (21 | ) |
|
| (241 | ) |
|
| (2,611 | ) |
Stock-based compensation |
|
| 4,374 |
|
|
| (68 | ) |
|
| 2,783 |
|
Deferred income taxes |
|
| 3,001 |
|
|
| 5,306 |
|
|
| 259 |
|
Other non-cash items |
|
| 3,830 |
|
|
| 8,260 |
|
|
| 7,253 |
|
Changes in assets and liabilities, excluding effects of acquisitions: |
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net |
|
| 4,160 |
|
|
| (21,229 | ) |
|
| (12,749 | ) |
Inventories |
|
| 2,851 |
|
|
| (18,521 | ) |
|
| (3,794 | ) |
Other current assets |
|
| (3,410 | ) |
|
| 1,430 |
|
|
| (5,950 | ) |
Accounts payable and accrued liabilities |
|
| 21,219 |
|
|
| (4,376 | ) |
|
| 26,256 |
|
Pension liabilities |
|
| 932 |
|
|
| (2,709 | ) |
|
| 1,997 |
|
Environmental and legal liabilities |
|
| (1,398 | ) |
|
| 6,493 |
|
|
| (353 | ) |
Deferred revenues |
|
| (1,345 | ) |
|
| (732 | ) |
|
| 2,428 |
|
Excess tax benefit from stock options and awards |
|
| (442 | ) |
|
| (640 | ) |
|
| (3,438 | ) |
Net Cash Provided By Operating Activities |
|
| 183,273 |
|
|
| 81,955 |
|
|
| 150,314 |
|
Cash Flows From Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures for property, plant and equipment |
|
| (119,349 | ) |
|
| (101,819 | ) |
|
| (92,865 | ) |
Business acquisitions, net of cash acquired (Note 20) |
|
| (5,133 | ) |
| ─ |
|
|
| (68,212 | ) | |
Proceeds from sale of product line (Note 21) |
|
| 3,262 |
|
| ─ |
|
| ─ |
| ||
Sale of mutual funds |
|
| 901 |
|
|
| 908 |
|
|
| 698 |
|
Other, net |
|
| (5,651 | ) |
|
| (8,310 | ) |
|
| (7,179 | ) |
Net Cash Used In Investing Activities |
|
| (125,970 | ) |
|
| (109,221 | ) |
|
| (167,558 | ) |
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Revolving debt and bank overdrafts, net |
|
| (26,217 | ) |
|
| 14,219 |
|
|
| 4,820 |
|
Other debt borrowings |
|
| 100,000 |
|
|
| 4,923 |
|
|
| 100,000 |
|
Other debt repayments |
|
| (13,098 | ) |
|
| (12,656 | ) |
|
| (17,618 | ) |
Dividends paid |
|
| (16,300 | ) |
|
| (15,387 | ) |
|
| (14,474 | ) |
Company stock repurchased |
|
| (2,000 | ) |
|
| (7,924 | ) |
|
| (2,275 | ) |
Stock option exercises |
|
| 777 |
|
|
| 1,754 |
|
|
| 3,977 |
|
Excess tax benefit from stock options and awards |
|
| 442 |
|
|
| 640 |
|
|
| 3,438 |
|
Other, net |
|
| (673 | ) |
|
| (421 | ) |
|
| (1,615 | ) |
Net Cash Provided By (Used In) Financing Activities |
|
| 42,931 |
|
|
| (14,852 | ) |
|
| 76,253 |
|
Effect of Exchange Rate Changes on Cash |
|
| (9,306 | ) |
|
| (6,014 | ) |
|
| (2,537 | ) |
Net Increase (Decrease) in Cash and Cash Equivalents |
|
| 90,928 |
|
|
| (48,132 | ) |
|
| 56,472 |
|
Cash and Cash Equivalents at Beginning of Year |
|
| 85,215 |
|
|
| 133,347 |
|
|
| 76,875 |
|
Cash and Cash Equivalents at End of Year |
| $ | 176,143 |
|
| $ | 85,215 |
|
| $ | 133,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental Cash Flow Information |
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments of income taxes, net of refunds |
| $ | 21,784 |
|
| $ | 23,142 |
|
| $ | 22,691 |
|
Cash payments of interest |
| $ | 11,943 |
|
| $ | 12,447 |
|
| $ | 11,281 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
41
Consolidated Statements of Equity
For the years ended December 31, 2013, 20122015, 2014 and 20112013
| (In thousands, except share and per share amounts) | STEPAN COMPANY SHAREHOLDERS | |||||||||||||||||||||||||||||||||
| Total | Convertible Preferred | Common Stock | Additional Paid-in | Treasury Stock | Accumulated Other Income (Loss) | Retained Earnings | Noncontrolling Interest | |||||||||||||||||||||||||||
Balance, December 31, 2010 | $ | 353,071 | $ | 13,002 | $ | 11,512 | $ | 83,852 | $ | (39,106 | ) | $ | (25,599 | ) | $ | 305,830 | $ | 3,580 | ||||||||||||||||
Issuance of 268,978 shares of common stock under stock option plan | 3,796 | — | 134 | 3,662 | — | — | — | — | ||||||||||||||||||||||||||
Purchase of 115,460 shares of common stock | (4,112 | ) | — | — | — | (4,112 | ) | — | — | — | ||||||||||||||||||||||||
Conversion of preferred stock to common stock | — | (45 | ) | 2 | 43 | — | — | — | — | |||||||||||||||||||||||||
Stock-based compensation | 3,676 | — | 54 | 3,622 | — | — | — | — | ||||||||||||||||||||||||||
Deferred compensation | 832 | — | 7 | 802 | 23 | — | — | — | ||||||||||||||||||||||||||
Net income | 72,602 | — | — | — | — | — | 71,976 | 626 | ||||||||||||||||||||||||||
Other comprehensive income | (15,838 | ) | — | — | — | — | (15,886 | ) | — | 48 | ||||||||||||||||||||||||
Cash dividends paid: | ||||||||||||||||||||||||||||||||||
Preferred stock ($1.375 per share) | (714 | ) | — | — | — | — | — | (714 | ) | — | ||||||||||||||||||||||||
Common stock ($0.53 per share) | (10,799 | ) | — | — | — | — | — | (10,799 | ) | — | ||||||||||||||||||||||||
Non-qualified stock option and stock award income tax benefit | 2,951 | — | — | 2,951 | — | — | — | — | ||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||
Balance, December 31, 2011 | $ | 405,465 | $ | 12,957 | $ | 11,709 | $ | 94,932 | $ | (43,195 | ) | $ | (41,485 | ) | $ | 366,293 | $ | 4,254 | ||||||||||||||||
|
|
|
|
|
| STEPAN COMPANY SHAREHOLDERS |
|
|
|
|
| |||||||||||||||||||||
(In thousands, except share and per share amounts) |
| Total |
|
| Convertible Preferred Stock |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Retained Earnings |
|
| Noncontrolling Interest |
| ||||||||
Balance, December 31, 2012 |
| $ | 480,880 |
|
| $ | 1,548 |
|
| $ | 25,142 |
|
| $ | 125,003 |
|
| $ | (54,930 | ) |
| $ | (38,250 | ) |
| $ | 420,472 |
|
| $ | 1,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 227,410 shares of common stock under stock option plan |
|
| 4,069 |
|
|
| — |
|
|
| 227 |
|
|
| 3,842 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 60,595 shares of common stock |
|
| (3,425 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,425 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption of preferred stock |
|
| (21 | ) |
|
| (21 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of preferred stock to common stock |
|
| — |
|
|
| (1,527 | ) |
|
| 140 |
|
|
| 1,387 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based and deferred compensation |
|
| 2,162 |
|
|
| — |
|
|
| 55 |
|
|
| 2,021 |
|
|
| 86 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 72,337 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 72,828 |
|
|
| (491 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
| 8,773 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 8,722 |
|
|
| — |
|
|
| 51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock ($1.375 per share) |
|
| (43 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (43 | ) |
|
| — |
|
Common stock ($0.65 per share) |
|
| (14,431 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (14,431 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock option and stock award income tax benefit |
|
| 3,440 |
|
|
| — |
|
|
| — |
|
|
| 3,440 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, December 31, 2013 |
| $ | 553,741 |
|
| $ | — |
|
| $ | 25,564 |
|
| $ | 135,693 |
|
| $ | (58,269 | ) |
| $ | (29,528 | ) |
| $ | 478,826 |
|
| $ | 1,455 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
42
Consolidated Statements of Equity
For the years ended December 31, 2013, 20122015, 2014 and 20112013
| (In thousands, except share and per share amounts) | STEPAN COMPANY SHAREHOLDERS | |||||||||||||||||||||||||||||||||
| Total | Convertible Preferred | Common Stock | Additional Paid-in | Treasury Stock | Accumulated Other Income (Loss) | Retained Earnings | Noncontrolling Interest | |||||||||||||||||||||||||||
Balance, December 31, 2011 | $ | 405,465 | $ | 12,957 | $ | 11,709 | $ | 94,932 | $ | (43,195 | ) | $ | (41,485 | ) | $ | 366,293 | $ | 4,254 | ||||||||||||||||
Issuance of 582,730 shares of common stock under stock option plan | 8,806 | — | 321 | 8,485 | — | — | — | — | ||||||||||||||||||||||||||
Purchase of 251,312 shares of common stock | (11,759 | ) | — | — | — | (11,759 | ) | — | — | — | ||||||||||||||||||||||||
Purchase of remaining interest in Stepan Philippines, Inc. from noncontrolling interest | (2,000 | ) | — | — | 551 | — | 197 | — | (2,748 | ) | ||||||||||||||||||||||||
Conversion of preferred stock to common stock | — | (11,409 | ) | 604 | 10,805 | — | — | — | — | |||||||||||||||||||||||||
Stock-based compensation | 2,484 | — | 42 | 2,442 | — | — | — | — | ||||||||||||||||||||||||||
Deferred compensation | 581 | — | 6 | 551 | 24 | — | — | — | ||||||||||||||||||||||||||
Net income | 79,687 | — | — | — | — | — | 79,396 | 291 | ||||||||||||||||||||||||||
Other comprehensive income | 3,136 | — | — | — | — | 3,038 | — | 98 | ||||||||||||||||||||||||||
Cash dividends paid: | ||||||||||||||||||||||||||||||||||
Preferred stock ($1.375 per share) | (579 | ) | — | — | — | — | — | (579 | ) | — | ||||||||||||||||||||||||
Common stock ($0.58 per share) | (12,178 | ) | — | — | — | — | — | (12,178 | ) | — | ||||||||||||||||||||||||
Non-qualified stock option and stock award income tax benefit | 7,237 | — | — | 7,237 | — | — | — | — | ||||||||||||||||||||||||||
Two-for-one stock split | — | — | 12,460 | — | — | — | (12,460 | ) | — | |||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||
Balance, December 31, 2012 | $ | 480,880 | $ | 1,548 | $ | 25,142 | $ | 125,003 | $ | (54,930 | ) | $ | (38,250 | ) | $ | 420,472 | $ | 1,895 | ||||||||||||||||
|
|
|
|
|
| STEPAN COMPANY SHAREHOLDERS |
|
|
| ||||||||||||||||||||
(In thousands, except share and per share amounts) |
| Total |
|
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Retained Earnings |
|
| Noncontrolling Interest |
| |||||||
Balance, December 31, 2013 |
| $ | 553,741 |
|
|
| $ | 25,564 |
|
| $ | 135,693 |
|
| $ | (58,269 | ) |
| $ | (29,528 | ) |
| $ | 478,826 |
|
| $ | 1,455 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 67,029 shares of common stock under stock option plan |
|
| 1,754 |
|
|
|
| 67 |
|
|
| 1,687 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 154,633 shares of common stock |
|
| (7,924 | ) |
|
|
| — |
|
|
| — |
|
|
| (7,924 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based and deferred compensation |
|
| 1,493 |
|
|
|
| 9 |
|
|
| 1,553 |
|
|
| (69 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 57,081 |
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 57,101 |
|
|
| (20 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
| (54,454 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (54,417 | ) |
|
| — |
|
|
| (37 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.69 per share) |
|
| (15,387 | ) |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (15,387 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock option and stock award income tax benefit |
|
| 640 |
|
|
|
| — |
|
|
| 640 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, December 31, 2014 |
| $ | 536,944 |
|
|
| $ | 25,640 |
|
| $ | 139,573 |
|
| $ | (66,262 | ) |
| $ | (83,945 | ) |
| $ | 520,540 |
|
| $ | 1,398 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
43
Consolidated Statements of Equity
For the years ended December 31, 2013, 20122015, 2014 and 20112013
| (In thousands, except share and per share amounts) | STEPAN COMPANY SHAREHOLDERS | |||||||||||||||||||||||||||||||||
| Total | Convertible Preferred | Common Stock | Additional Paid-in Capital | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Retained Earnings | Noncontrolling Interest | |||||||||||||||||||||||||||
Balance, December 31, 2012 | $ | 480,880 | $ | 1,548 | $ | 25,142 | $ | 125,003 | $ | (54,930 | ) | $ | (38,250 | ) | $ | 420,472 | $ | 1,895 | ||||||||||||||||
Issuance of 227,410 shares of common stock under stock option plan | 4,069 | — | 227 | 3,842 | — | — | — | — | ||||||||||||||||||||||||||
Purchase of 60,595 shares of common stock | (3,425 | ) | — | — | — | (3,425 | ) | — | — | — | ||||||||||||||||||||||||
Redemption of preferred stock | (21 | ) | (21 | ) | — | — | — | — | — | — | ||||||||||||||||||||||||
Conversion of preferred stock to common stock | — | (1,527 | ) | 140 | 1,387 | — | — | — | — | |||||||||||||||||||||||||
Stock-based compensation | 1,250 | — | 49 | 1,201 | — | — | — | — | ||||||||||||||||||||||||||
Deferred compensation | 912 | — | 6 | 820 | 86 | — | — | — | ||||||||||||||||||||||||||
Net income | 72,337 | — | — | — | — | — | 72,828 | (491 | ) | |||||||||||||||||||||||||
Other comprehensive income | 8,773 | — | — | — | — | 8,722 | — | 51 | ||||||||||||||||||||||||||
Cash dividends paid: | ||||||||||||||||||||||||||||||||||
Preferred stock ($1.375 per share) | (43 | ) | — | — | — | — | — | (43 | ) | — | ||||||||||||||||||||||||
Common stock ($0.65 per share) | (14,431 | ) | — | — | — | — | — | (14,431 | ) | — | ||||||||||||||||||||||||
Non-qualified stock option and stock award income tax benefit | 3,440 | — | — | 3,440 | — | — | — | — | ||||||||||||||||||||||||||
Balance, December 31, 2013 | $ | 553,741 | $ | — | $ | 25,564 | $ | 135,693 | $ | (58,269 | ) | $ | (29,528 | ) | $ | 478,826 | $ | 1,455 | ||||||||||||||||
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
| STEPAN COMPANY SHAREHOLDERS |
|
|
|
|
| |||||||||||||||||
(In thousands, except share and per share amounts) |
| Total |
|
| Common Stock |
|
| Additional Paid-in Capital |
|
| Treasury Stock |
|
| Accumulated Other Comprehensive Income (Loss) |
|
| Retained Earnings |
|
| Noncontrolling Interest |
| |||||||
Balance, December 31, 2014 |
| $ | 536,944 |
|
| $ | 25,640 |
|
| $ | 139,573 |
|
| $ | (66,262 | ) |
| $ | (83,945 | ) |
| $ | 520,540 |
|
| $ | 1,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 45,289 shares of common stock under stock option plan |
|
| 777 |
|
|
| 45 |
|
|
| 732 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of 41,915 shares of common stock |
|
| (2,000 | ) |
|
| — |
|
|
| — |
|
|
| (2,000 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based and deferred compensation |
|
| 3,694 |
|
|
| 24 |
|
|
| 3,854 |
|
|
| (184 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 76,037 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 75,968 |
|
|
| 69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
| (41,210 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (41,143 | ) |
|
| — |
|
|
| (67 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends paid: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock ($0.73 per share) |
|
| (16,300 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (16,300 | ) |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-qualified stock option and stock award income tax benefit |
|
| 442 |
|
|
| — |
|
|
| 442 |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Balance, December 31, 2015 |
| $ | 558,384 |
|
| $ | 25,709 |
|
| $ | 144,601 |
|
| $ | (68,446 | ) |
| $ | (125,088 | ) |
| $ | 580,208 |
|
| $ | 1,400 |
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
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NotesNotes to Consolidated Financial Statements
For the years ended December 31, 2013, 20122015, 2014 and 20112013
1. Summary of Significant Accounting Policies
Nature of Operations
Stepan Company (the Company) operations consist predominantly of the production and sale of specialty and intermediate chemicals, which are sold to other manufacturers for use in a variety of end products. Principal markets for all products are manufacturers of cleaning and washing compounds (including detergents, shampoos, fabric softeners, toothpastes and household cleaners), paints, cosmetics, food, beverages, nutritional supplements, agricultural products, plastics, furniture, automotive equipment, insulation and refrigeration.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (GAAP) requires Company management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all wholly and majority-owned subsidiaries in which the Company exercises controlling influence. The equity method is used to account for investments in which the Company exercises significant but noncontrolling influence. Intercompany balances and transactions are eliminated in consolidation.
The Company is a partner in two joint ventures: Nanjing Stepan Jinling Chemical Limited Liability Company (Stepan China) in Nanjing, China, and TIORCO, LLC (TIORCO) in Denver, Colorado. The Company has an 80 percent ownership interest in the Stepan China joint venture and exercises controlling influence. Therefore, Stepan China’s accounts are included in the Company’s consolidated financial statements. The joint venture partner’s interest in Stepan China’s net income is reported in the net income attributable to noncontrolling interests line of the consolidated statements of income. The joint venture partner’s interest in the net assets of Stepan China is reported in the noncontrolling interests line (a component of equity separate from Company equity) of the consolidated balance sheets.
TIORCO LLC is equally owned and controlled by the Company and Nalco Company (now a part(a subsidiary of Ecolab Inc.). The Company’s investment in TIORCO LLC is accounted for using the equity method and is included in the other non-current assets line on the consolidated balance sheets. The Company’s share of TIORCO, LLC’sTIORCO’s net earnings is included in the loss from equity in joint ventures line of the consolidated statements of income.
Cash and Cash Equivalents
The Company considers all highly liquid investments with purchased maturities of three months or less to be cash equivalents.
At December 31, 2013,2015, the Company’s cash and cash equivalents totaled $133,347,000,$176.1 million including $66,002,000$68.8 million in two separate U.S. money market funds, each of which was rated AAA by Standard and Poor’s and Aaa by Moody’s. Cash in U.S. demand deposit accounts totaled $15,873,000$20.2 million and cash of the Company’s non-U.S. subsidiaries held outside the U.S. totaled $51,472,000$87.1 million as of December 31, 2013.2015.
Receivables and Credit Risk
Receivables are stated net of allowances for doubtful accounts and other allowances and primarily include trade receivables from customers, as well as nontrade receivables from suppliers, governmental tax agencies and others.
The Company is exposed to credit risk on accounts receivable balances. This risk is mitigated by the Company’s large, diverse customer base, which is dispersed over various geographic regions and industrial sectors. No single customer comprised more than 10 percent of the Company’s consolidated net sales in 2013, 20122015, 2014 or 2011.2013.
The Company maintains allowances for potential credit losses. Specific customer allowances are recorded when a review of customer creditworthiness and current economic conditions indicate that collection is doubtful. In addition, the Company maintains a
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general allowance as a percentage of total trade receivables. The general allowance percentage is periodically reviewed and adjusted based on historical bad debt losses of the Company.
The Company also maintains other customer allowances that occur in the normal course of business. Such allowances are based on historical averages and trade receivable levels.
The following is an analysis of the allowance for doubtful accounts and other accounts receivable allowances for the years ended December 31, 2013, 20122015, 2014 and 2011:2013:
(In thousands) |
| 2015 |
|
| 2014 |
|
| 2013 |
| |||
Balance at January 1 |
| $ | 10,011 |
|
| $ | 5,945 |
|
| $ | 5,533 |
|
Provision charged to income |
|
| 1,106 |
|
|
| 4,625 |
|
|
| 719 |
|
Accounts written off, net of recoveries |
|
| (3,071 | ) |
|
| (559 | ) |
|
| (307 | ) |
Balance at December 31 |
| $ | 8,046 |
|
| $ | 10,011 |
|
| $ | 5,945 |
|
The 2014 provision charged to income included a $2,388,000 bad debt allowance for a major Polymer customer that filed for protection under Chapter 11 of the U.S. Bankruptcy Code in September 2014. Also included in the 2014 provision charged to income were additional allowances for certain high risk accounts and for general reserves. The accounts written off for 2015 included the write-off of the Polymer customer’s uncollectible receivable balance.
| (In thousands) | 2013 | 2012 | 2011 | |||||||||
Balance at January 1 | $ | 5,533 | $ | 5,214 | $ | 6,145 | ||||||
Provision charged (credited) to income | 719 | 314 | (568 | ) | ||||||||
Accounts written off, net of recoveries | (307 | ) | 5 | (363 | ) | |||||||
|
|
|
|
|
| |||||||
Balance at December 31 | $ | 5,945 | $ | 5,533 | $ | 5,214 | ||||||
|
|
|
|
|
| |||||||
Inventories
Inventories are valued at cost, which is not in excess of market value, and include material, labor and plant overhead costs. The last-in, first-out (LIFO) method is used to determine the cost of the Company’s U.S. inventories. The first-in, first-out (FIFO) method is used for all other inventories. Inventories priced at LIFO as of December 31, 20132015 and 2012,2014, accounted for 6472 and 5967 percent of total inventories, respectively.
Property, Plant and Equipment
Depreciation of property, plant and equipment is provided on a straight-line basis over the estimated useful lives of the assets. Lives used for calculating depreciation are generally 30 years for buildings and 15 years for building improvements. For assets classified as machinery and equipment, lives generally used for calculating depreciation expense range from 10 to 15 years for manufacturing equipment, five to 10 years for furniture and fixtures, three to five years for vehicles and three to 10 years for computer equipment and software. Manufacturing of chemicals is capital intensive with over 90 percenta large majority of the assets included in machinery and equipment representing manufacturing equipment. Major renewals and betterments are capitalized in the property accounts, while maintenance and repairs ($48,683,000, $45,072,000,52,549,000, $55,923,000, and $43,128,000$48,683,000 in 2013, 20122015, 2014 and 2011,2013, respectively), which do not renew or extend the life of the respective assets, are charged to operations as incurred. Land is not depreciated. The cost of property retired or sold and the related accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in income.
Included in the computer equipment and software component of machinery and equipment are costs related to the acquisition and development of internal-use software. Capitalized costs for internal-use software include external direct costs of materials and services consumed in obtaining and developing the software. For development projects where major internal resources are committed, payroll and payroll-related costs incurred during the application development phase of the project are also capitalized. The capitalized costs are amortized over the useful lives of the software, which are generally three to 10 years. Costs incurred in the preliminary project phase are expensed.
Interest charges on borrowings applicable to major construction projects are capitalized.
Property, plant and equipment assets are tested for impairment when events indicate that impairment may have occurred.
Fair Value Measurements
U.S. GAAP defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Furthermore, GAAP establishes a framework, in the form of a three-level hierarchy, for measuring fair value that prioritizes the inputs to valuation techniques used to measure fair value. The following describes the hierarchy levels:
Level 1 - quoted prices in active markets for identical assets and liabilities.
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Level 2 - inputs other than quoted prices included within Level 1 that are directly or indirectly observable for the asset or liability, such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.
Level 3 - unobservable inputs which reflect the entity’s own assumptions about the assumptions market participants use in pricing the assets and liabilities.
The Company applies the fair value measurement provisions of GAAP to any of its financial assets and liabilities that are carried at fair value on the consolidated balance sheets (see Note 3)2), its outstanding debt for disclosure purposes (also Note 7)2) and its pension plan assets (see Note 14)13).
The Company also applies the fair value measurement requirements to nonrecurring fair value measurements of nonfinancial assets and liabilities recorded in conjunction with business combinations and as part of impairment reviews for goodwill and other long-lived assets.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers, at which time title and risk of loss pass to the customer. For arrangements where the Company consigns product to a customer location, revenue is recognized when the customer uses the inventory. The Company records shipping and handling billed to a customer in a sales transaction as revenue. Costs incurred for shipping and handling are reported in cost of sales. Volume discounts due customers are estimated and recorded in the same period as the sales to which the discounts relate and reported as reductions of revenue in the consolidated statements of income.
Cost of Sales
Cost of sales comprises raw material costs including(including inbound freight expense to deliver the raw materials,materials), manufacturing plant labor expenses and various manufacturing overhead expenses, which includesuch as utility, maintenance, operating supply, amortization and manufacturing asset depreciation expenses. Cost of sales also includes outbound freight expenses, purchasingshipping and receiving costs, quality assurancehandling expenses, inter-plant transfer costs and warehouse expenses.
Operating Expenses
Selling expense comprises salary and the related fringe benefit expenses for marketing and sales personnel and operating costs, such as outside agent commissions, automobile rental and travel-related expenses, which support the sales and marketing functions. Bad debt charges and any depreciation expenses related to marketing assets (e.g., computers) are also classified as marketingselling expense.
Administrative expense comprises salary and the related fringe benefit expenses and operating costs for the Company’s various administrative functions, which include information services, finance, legal, and human resources. Compensation expense related to the Company’s deferred compensation plans and legal and environmentalEnvironmental remediation expenses are also classified as administrative expense.
The Company’s research and development costs are expensed as incurred. These expenses are aimed at discovery and commercialization of new knowledge with the intent that such effort will be useful in developing a new product or in bringing about a significant improvement to an existing product or process. Total research and development expenses were $30,315,000, $27,236,000 and $28,782,000 $28,032,000in 2015, 2014 and $25,128,000 in 2013, 2012 and 2011, respectively. The
remainder of research, development and technical service expenses reflected on the consolidated statements of income relates to technical services, which include routine product testing, quality control and sales support service.
Compensation expense or income related to the Company’s deferred compensation plans is presented in the Deferred compensation expense (income) line in the Consolidated Statements of Income. In prior years, the deferred compensation expense or income was reported in the administrative expense line. The 2014 and 2013 information has been changed to conform to the current year presentation. The current year presentation is consistent with the Company’s analysis of operating expenses as discussed in the Management’s Discussion and Analysis section of this Annual Report on Form 10-K.
Environmental Expenditures
Environmental expenditures that relate to current operations are expensed in cost of sales or capitalized as appropriate.sales. Expenditures that mitigate or prevent environmental contamination and that benefit future operations are capitalized. Capitalizedcapitalized as assets and depreciated on a straight-line basis over the estimated useful lives of the assets, which are typically 10 years.
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Estimated future expenditures are depreciated generally utilizing a 10 year life. Expenditures that relate to an existing condition caused by past operations, and which do not contribute to current or future revenue generation, are expensed torecorded as liabilities, with the corresponding charge recorded in administrative expense. Liabilities are recordedexpenses, when environmental assessments and/or remedial efforts are probable and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum amount in the range is accrued. Some of the factors on which the Company bases its estimates include information provided by feasibility studies, potentially responsible party negotiations and the development of remedial action plans. Because reported liabilities are recorded based on estimates, actual amounts could significantly differ from those estimates. Legal costs related to environmental matters are expensed as incurred (see Note 1716 for environmental contingencies).
Goodwill and Other Intangible Assets
IntangibleThe Company’s intangible assets include patents, agreements not to compete, trademarks, customer lists, technological and manufacturing know-how and goodwill, all of which were acquired as part of business or product line acquisitions. The Company separately identifies intangibleIntangible assets other than goodwill and amortizes them in accordanceare determined to have either finite or indefinite useful lives. The Company currently has no indefinite-life intangible assets. The values for intangible assets with theirfinite lives are amortized over the useful lives generally ranging from five to 15 years.of the assets. In addition, finite-life intangible assets are tested for impairment when events or changes in circumstances indicate that the carrying value of an intangible asset may not be recoverable. Goodwill is not amortized. Goodwill is tested for impairment at least annually or more frequently if an event indicatesoccurs or circumstances change that impairment may have occurred. Finite life intangible assets are tested for impairment when events indicate that impairment may have occurred.would more likely than not reduce the fair value of a reporting unit to which goodwill relates below the reporting unit’s carrying value. For more details see Note 5.4.
Income Taxes
The provision for income taxes is determined using the asset and liability method, under which deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets or liabilities are computed using the currently enacted tax rates that apply to taxable income in effect for the years in which those tax assets and liabilities are expected to be realized or settled. Deferred tax assets and liabilities are adjusted for changes in tax rates or laws, and the effects of the changes are recorded in income in the period of enactment. Valuation allowances are recorded to reduce deferred tax assets when the Company determines that it is more likely than not that a tax benefit will not be realized.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by tax authorities. If the tax position meets the more-likely-than-not threshold, the tax benefit
recognized in the consolidated financial statements is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon effective settlement. Unrecognized tax benefits, which are differences between the tax position taken on a tax return and the amounts recognized in the financial statements, are recorded either as an increase to a tax liability or as a decrease to an income tax receivable. The Company includes estimated interest and penalty amounts related to the unrecognized tax benefits in the tax provision.
See Note 109 for detailed information about income taxes.
Translation of Foreign Currencies
Assets and liabilities ofFor the Company’s consolidated foreign subsidiaries whose functional currency is the local foreign currency, assets and liabilities are translated into U.S. dollars at exchange rates in effect at year end. Theend and revenues and expenses are translated at average exchange rates for the year. Any resulting translation adjustments are included in stockholders’ equity. Revenues and expenses for the consolidated foreign subsidiaries are translated at average exchange rates prevailing duringbalance sheets in the year.accumulated other comprehensive loss line of stockholders’ equity. Gains or losses on foreign currency transactions are reflected in the other, net caption of the consolidated statements of income. The Company has one foreign subsidiary whose functional currency is the U.S. dollar. For this subsidiary, nonmonetary assets and liabilities are translated at historical rates, monetary assets and liabilities are translated at exchange rates in effect at year end, revenues and expenses are translated at average exchange rates for the year and translation gains and losses are included in the other, net caption of the consolidated statements of income.
Stock-Based Compensation
The Company grants stock options, performance stock awards and stock appreciation rights (SARs) to certain employees under its incentive compensation plans. The Company calculates the fair values of stock options, performance stock awards and SARs on the date such instruments are granted. The fair values of the stock option and performance stock awards are then recognized as compensation expense over the vesting periods of the instruments. The Company’s SARs which were granted for the first time in 2012,before 2015 are cash-settled and therefore, accounted for as liabilities that must be re-measured at fair value at the end of each reporting period. Compensation expense for each reporting period is based oncalculated as the period-to-period change (or portion of the change, depending on the proportion of the vesting period that has been completed at the reporting date) in the fair value of the cash-settled SARs. The Company’s SARs granted in 2015
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are stock-settled only and the accounting treatment of their compensation expenses is similar to those of stock options. See Note 1211 for detailed information about the Company’s stock-based compensation.
Earnings Per Share
Basic earnings per share amounts are computed based on the weighted-average number of common shares outstanding. Net income used in computing basic earnings per share is net income attributable to the Company reduced by dividends paid to preferred stockholders.stockholders (as of August 9, 2013, all Company preferred stock had been redeemed or converted to Company common stock). Diluted earnings per share amounts are based on the weighted-average number of common shares outstanding plus the increased number of common shares that would be outstanding assuming the exercise of certain outstanding stock options, contingent performance awards and SARs settling in stock only (under the treasury stock method), the conversion of the convertible preferred stock (when such conversion would have the effect of reducing earnings per share), and contingent stock awards that are part of the Company’s incentive stock-based compensation program (see Note 12)11). All share and per share data reflect the two-for-one common stock split that was effective December 14, 2012. See Note 1918 for detailed information about the Company’s earnings per share calculations.
Comprehensive Income and Accumulated Other Comprehensive Income
Comprehensive income includes net income and all other non-owner changes in equity that are not reported in net income. Comprehensive income is disclosed in the consolidated statements of comprehensive income. Accumulated other comprehensive income (AOCI) is reported as a component of stockholders’ equity in the Company’s consolidated balance sheets. See Note 2019 for detailed information regarding changes in the Company’s AOCI and reclassifications out of AOCI to income.
Segment Reporting
The Company reports financial and descriptive information about its reportable operating segments. Operating segments are components of the Company that have separate financial information that is regularly evaluated by the chief operating decision maker to assess segment performance and allocate resources. The Company discloses segment revenue, operating income, assets, capital expenditures and depreciation and amortization expenses. Enterprise-wide financial information about the geographic locations in which the Company earns revenues and holds assets is also disclosed (see Note 18)17).
Derivative Instruments
Derivative instruments are recognized in the consolidated balance sheets as either assets or liabilities measured at fair value. For derivative instruments that are not designated as hedging instruments, changes in the fair values of the derivative instruments are recognized currently in earnings. For derivative instruments designated as hedging instruments, depending on the nature of the hedge, changes in the fair values of the derivative instruments are either offset in earnings against changes in the fair values of the hedged items or recognized in AOCI until the hedged transaction is recognized in earnings. At the time a hedging relationship is designated, the Company establishes the method it will use for assessing the effectiveness of the hedge and the measurement approach for determining the ineffective aspect of the hedge. Company policy prohibits the use of derivative instruments for trading or speculative purposes. See Note 43 for further information regarding the Company’s use of derivatives.
At December 31, 2013,2015, the Company held open forward contracts for the purchase of 1.21.1 million dekatherms of natural gas in 20142016 at a cost of $4,866,000.$3,561,000. The Company uses forward contracts to minimize its exposure to volatile natural gas prices. Because the Company anticipates taking delivery of the natural gas for use in its operations, the forward contracts qualify for the normal purchase exception election provided under the accounting rulesU.S. GAAP for derivative instruments. The Company has elected the exceptionsexception for such contracts. As a result, the forward contracts are not accounted for as derivative instruments. The cost of natural gas is charged to expense at the time the natural gas is delivered and used.
Recent Accounting Pronouncements
In December 2011,April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-11,2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. The update amends the definition of a discontinued operation, changes the criteria for reporting discontinued operations and requires expanded disclosures for discontinued operations and new disclosures about Offsetting Assetsdisposal transactions that do not meet the discontinued operations criteria. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that is disposed of or is classified as held for sale and Liabilities. Also, in January 2013, the FASB issuedrepresents a strategic shift that has or will have a major effect on an entity's operations and financial results. The requirements of ASU No. 2013-01,Clarifying the Scope of
Disclosures about Offsetting Assets and Liabilities. These updates create new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its derivatives, repurchase agreements and securities lending transactions. Entities are required to apply the new disclosure requirements2014-08 were effective for annualfiscal years, and interim reporting periods within those years, beginning on or after January 1, 2013. Retrospective application is required. Adoption of the new requirementsDecember 15, 2014, with early adoption permitted. This ASU did not have an effect on the Company’s financial position, results of operations or cash flows. In addition, because the Company does not have arrangements where rights of offset exist, adoption of the standard did not have an effect on Company disclosures.
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In July 2012,May 2014, the FASB issued ASU No. 2012-02,Intangibles2014-09, Revenue from Contracts with Customers (Topic 606). The new update was later amended by ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The standard, which is the result of a joint project by the FASB and the International Accounting Standards Board, outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. In addition, the ASU requires expanded disclosures about revenue recognition that enable the users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU No. 2014-09 supersedes most of the previous revenue recognition guidance. For public entities, the new guidance, as amended, is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. An entity may use either a full retrospective or a modified retrospective approach to adopt the requirements of the new standard. The Company continues the process of determining the effects, if any, that adoption of ASU No. 2014-09 will have on Company financial position, results of operations and cash flows.
In January 2015, the FASB issued ASU No. 2015-01, Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, which amends Subtopic 225-20, Income Statement – GoodwillExtraordinary and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment.Unusual Items, of the Accounting Standards Codification. The update, which is part of FASB’s initiative to reduce complexity of accounting standards, eliminates the US GAAP concept of extraordinary items. The amendments in this update aim to simplify the impairment test for indefinite-lived intangible assets by permitting an entity the option to first assess qualitative factors to determine whether it is more likely than not (defined as having a likelihood of more than 50 percent) that an indefinite-lived intangible asset is impaired as a basis for determining whether the quantitative impairment test included in Accounting Standards Codification Subtopic 350-30,Intangibles – Goodwill and Other – General Intangibles Other than Goodwill must be performed. The amendment isare effective for annualfiscal years, and interim impairment tests performed forperiods within those fiscal years, beginning after SeptemberDecember 15, 2012. The Company currently has no indefinite-lived intangible assets other than goodwill reported on its consolidated balance sheet. As such,2015. A reporting entity may apply the amendments prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of this amendment didthe fiscal year of adoption. This ASU is not expected to have an effect on the Company’s financial position, results of operations or cash flows.
In February 2013,2015, the FASB issued ASU No. 2013-02,Comprehensive Income2015-02, Consolidation (Topic 220)810): ReportingAmendments to the Consolidation Analysis. The amendments in this update affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. Specifically, the amendments: 1) modify the evaluation of Amounts Reclassified Outwhether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities; 2) eliminate the presumption that a general partner should consolidate a limited partnership; 3) affect the consolidation analysis of Accumulated Other Comprehensive Income, which adds new disclosurereporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and 4) provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with certain Investment Company Act of 1940 requirements for items reclassified out of AOCI and expands the existing disclosure requirements for the presentation of changesregistered money market funds. The amendments in AOCI. The amendment isASU No. 2015-02 are effective for reportingpublic business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2012. Because2015. A reporting entity may apply the amendments in this update affects onlyusing a modified retrospective approach by recording a cumulative-effect adjustment to equity as of the disclosures for AOCI,beginning of the fiscal year of adoption. A reporting entity also may apply the amendments retrospectively. Early adoption is permitted. Under the assumption that the Company’s organizational structure remains as it is currently, adoption of the requirements didASU No. 2015-02 is not expected to have an effect on the Company’s financial position, results of operations or cash flows.
In February 2013,April 2015, the FASB issued ASU No. 2013-04,Liabilities (Topic 405), Obligations Resulting2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The amendments in this update change the presentation of debt issuance costs in financial statements. Under this ASU, an entity will be required to present debt issuance costs in the balance sheet as a direct deduction from Joint and Several Liability Arrangements for Which the Total Amountrelated debt liability rather than as an asset. Amortization of the Obligationcosts is Fixed at the Reporting Date. This update requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date,be reported as the sum of a) the amount the reporting entity agreed to pay on the basis of its arrangement among its co-obligors and b) any additional amount the reporting entity expects to pay on behalf of its co-obligors.interest expense. The update also requires an entity to disclose the nature and amount of the obligation as well as other information about those obligations. The requirements ofguidance in ASU No. 2013-04 are2015-03 is effective on a retrospective basis for fiscal years, and interim and annual periods within those fiscal years, beginning after December 15, 2013. Because the Company has no applicable obligations resulting from joint and several liability arrangements,2015. Early adoption is allowed for financial statements that have not been previously issued. The new guidance is to be applied retrospectively to all prior periods. Upon adoption of ASU No. 2013-042015-03, the Company will reclassify its debt issuance costs from the other non-current assets line of the consolidated balance sheet to the long-term, and where applicable, current maturities of long-term debt lines. Adoption of the update is not expected to have a material impactan effect on the Company’s results of operations or cash flows. In August 2015, the FASB issued ASU No. 2015-15, Interest—Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements—Amendments to SEC Paragraphs Pursuant to Staff Announcement at June 18, 2015 EITF Meeting (SEC Update which) that sets forth additional guidance from the SEC regarding debt issuance costs associated with line-of-credit arrangements, which ASU No. 2015-03 does not address. The SEC has stated that given the absence of authoritative guidance for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The SEC’s guidance is not expected to have an effect on the Company’s financial position, results of operations or cash flows.
In July 2013,April 2015, the FASB issued ASU No. 2013-11,Income Taxes (Topic 740), Presentation2015-05, Intangibles - Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of an Unrecognized Tax Benefit Whenthe arrangement consistent with the acquisition of other software licenses. If a Net Operating Loss Carryforward,cloud computing arrangement does not include a
Similar Tax Loss, or a Tax Credit Carryforward Exists.The update clarifies that unrecognized tax benefits related to a net operating loss carryforward, or similar tax loss, or tax credit carryforward, software license, the customer should generally be presented inaccount for the financial statementsarrangement as a reduction to a deferred tax asset.service contract. The requirements ofamendments in ASU No. 2013-11 are2015-05 will be effective for fiscal years, andannual periods, including interim periods within those years,annual
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periods, beginning after December 15, 2013. The update allows for early adoption. The2015. Early adoption is permitted. An entity can elect to adopt the amendments either prospectively to all arrangements entered into or materially modified after the effective date or retrospectively. Based on the Company’s current cloud computing arrangements, the Company currently has no unrecognized tax benefits in jurisdictions where a net operating loss carryforward, or similar tax loss, or tax credit carryforward exists. As such, thedoes not believe that adoption of the new guidanceASU No. 2015-05 will not have a material impacteffect on the Company’s financial position, results of operations and cash flows.
In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330), Simplifying the Measurement of Inventory, which requires an entity to measure inventory within the scope of the update at the lower of cost and net realizable value. Prior guidance required inventory to be measured at the lower of cost or market. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. For public entities, ASU No. 2015-11 is effective prospectively for annual periods beginning after December 15, 2016, and interim periods therein. Early adoption is permitted. Adoption of ASU No. 2015-11 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
2. Acquisitions
2013 Acquisition
On June 1, 2013,In September 2015, the Company acquiredFASB issued ASU No. 2015-16, Business Combinations (Topic 805), Simplifying the North American polyester resinsAccounting for Measurement-Period Adjustments. The update requires that the acquirer in a business of Bayer MaterialScience LLC (BMS). Priorcombination recognize adjustments to provisional amounts that are identified during the acquisition, BMS was a North American producer of powder polyester resins for metal coating applications and liquid polyester resins for coatings, adhesives, sealants and elastomers (CASE) applications. The purchase included a 21,000-ton production facility in Columbus, Georgia, and a modern research and development laboratory for customer technical support and new product development. Infrastructure is in place to allow for future expansion. The acquisition has diversified the Company’s polyol product offering and is expected to accelerate the Company’s growth in CASE and PUSH (polyurethane systems house) applications. As of the acquisition date, the new business and acquired net assets became a part of the North American operations reporting unit includedmeasurement period in the Company’s polymers reportable segment. The new business’s post-acquisition net sales includedreporting period in consolidated net sales forwhich the year ended December 31, 2013, were $31,913,000. The acquisition’sadjustment amounts are determined (not retrospectively as with prior guidance). Additionally, the acquirer must record in the same period’s financial statements the effect on earnings was immaterial forof changes in depreciation, amortization or other income effects as a result of the year ended December 31, 2013.
The total acquisition purchase price was $68,212,000 cash, of which $61,067,000 was paid at closing and $7,145,000 primarily for inventory was paid over a three-month period (June 2013 through August 2013) pursuant to a transition services agreement with BMS. The acquisition was originally funded through the Company’s committed revolving credit agreement. Subsequent to closing on the acquisition, the Company completed a $100,000,000 private placement loan, which was used in part to finance the acquisition (see Note 7 for additional information regarding the private placement loan).
In additionchange to the purchase price paid,provisional amounts, calculated as if the Company incurred $270,000 of acquisition-related expenses related to legal, consulting, valuation and accounting services. These costs were included in administrative expenses in the Company’s consolidated statement of income for the year ended December 31, 2013.
The acquisition was accounted for as a business combination and, accordingly, the assets acquired and liabilities assumed as part of the acquisition were measured and recorded at their estimated fair values. The following table summarizes the assets acquired and liabilities assumed:
| (Dollars in thousands) | June 1, 2013 | |||
Assets: | ||||
Inventory | $ | 9,002 | ||
Property, plant and equipment | 37,000 | |||
Identifiable intangible assets | 17,800 | |||
Goodwill | 4,642 | |||
|
| |||
Total assets acquired | $ | 68,444 | ||
|
| |||
Liabilities: | ||||
Accrued expenses | 232 | |||
|
| |||
Net assets acquired | $ | 68,212 | ||
|
| |||
The acquired goodwill, which was assigned entirely to the Company’s North American operations reporting unit included in the Company’s polymers reportable segment, is deductible for tax purposes. The goodwill reflects the potential marketing, manufacturing and raw material sourcing synergies of the new business with the Company’s existing polymer business. Identifiable intangible assets included a technology and manufacturing know-how license agreement ($7,900,000), a trademark/trade name ($3,800,000) and customer relationships ($6,100,000). The amortization periods for these intangibleshad been completed at the time of acquisition were 8, 11 and 12 years, respectively.acquisition. The purchase price allocationacquiring entity is final, and no purchase price allocation adjustments were maderequired to disclose, on the face of the financial statements or in the footnotes to the financial statements, the portion of the amount recorded in current period earnings, by financial statement line item, that would have been recorded in previous reporting periods if the adjustment to the provisional amounts originally recorded athad been recognized as of the acquisition date. The guidance in ASU No. 2015-16 is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Earlier application is permitted for financial statements that have not been issued. Adoption of ASU No. 2015-16 is not expected to have a material effect on the Company’s financial position, results of operations or cash flows.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes. The update requires entities to present deferred tax assets and liabilities as noncurrent in a classified balance sheet. The update simplifies the current guidance, which requires entities to separately present deferred tax assets and liabilities as current and noncurrent in a classified balance sheet. The guidance in ASU 2015-17 is effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Earlier application is permitted for all entities as of the beginning of an interim or annual reporting period. As allowed, the Company early-adopted the amendments in this update on a prospective basis in the fourth quarter of 2015. Therefore, the classifications of prior year amounts were not changed from those previously reported. Adoption of ASU No. 2015-17 did not have a material effect on the Company’s financial position, results of operations or cash flows. See Note 9 to these consolidated financial statements.
2. Fair Value Measurements
The following is pro forma financial information prepared under the assumption that the acquisition of the BMS North American polyester resins business occurred on January 1, 2012.
Pro Forma Financial Information Unaudited | ||||||||
| (In thousands, except per share amounts) | Year Ended December 31 | |||||||
| 2013 | 2012 | |||||||
Net Sales | $ | 1,907,607 | $ | 1,866,209 | ||||
|
|
|
| |||||
Net Income Attributable to Stepan Company | $ | 73,609 | $ | 80,353 | ||||
|
|
|
| |||||
Net Income Per Common Share Attributable to Stepan Company: | ||||||||
Basic | $ | 3.25 | $ | 3.75 | ||||
|
|
|
| |||||
Diluted | $ | 3.21 | $ | 3.54 | ||||
|
|
|
| |||||
The supplemental pro forma information is presented for illustrative purposes only and may not be indicative of the consolidated results that would have actually been achieved by the Company. Furthermore, future results may vary significantly from the results reflected in
the pro forma information. The pro forma results include adjustments primarily related to amortization of acquired intangible assets, depreciation of the fair value adjustment of acquisition-date plant assets, interest on borrowings and tax expense. In addition, nonrecurring adjustments to pro forma net income include $270,000 of acquisition- related expenses and $558,000 of expense related to the fair value adjustment of the acquisition date inventory; such expenses were excluded from 2013 pro forma net income and included in pro forma net income for the year ended December 31, 2012.
2011 Acquisition
On June 23, 2011, the Company purchased the Clarinol®, Marinol®, and PinnoThin® product lines of Lipid Nutrition B.V., a part of Loders Croklaan B.V. As of the acquisition date, the acquired product lines became a part of the Company’s specialty products segment. The acquisition purchase price was $13,562,000 of cash. In addition to the purchase price paid, the Company incurred $300,000 of acquisition-related costs, including legal and consulting expenses, which were reflected in administrative expenses on the Company’s consolidated statement of income for the year ended December 31, 2011.
The acquisition was accounted for as a business combination and, accordingly, the assets acquired and liabilities assumed were measured and recorded at their estimated fair values. The following table summarizes the assets acquired and liabilities assumed at June 23, 2011:
| (In thousands) | June 23, 2011 | |||
Assets: | ||||
Inventory | $ | 5,000 | ||
Identifiable intangible assets: | ||||
Patents | 6,948 | |||
Customer lists | 736 | |||
Trademarks, know-how | 429 | |||
|
| |||
Total identifiable intangible assets | 8,113 | |||
Goodwill | 483 | |||
|
| |||
Total assets acquired | $ | 13,596 | ||
|
| |||
Current liabilities | $ | 34 | ||
|
| |||
Net assets acquired | $ | 13,562 | ||
|
| |||
The acquired goodwill, which was allocated entirely to the Company’s specialty products segment, is deductable for tax purposes. The goodwill reflected the potential manufacturing and marketing synergies arising from combining the acquired product lines with the Company’s existing food and health services products. The weighted average amortization periods for the identifiable intangible assets at the time of acquisition were as follows: patents-12 years; customer lists- five years; and trademarks and know-how- five years.
Pro forma financial information has not been included because revenues and earnings of the Company’s consolidated entity would not have been materially different than reported had the acquisition date been January 1, 2010.
3. Fair Value Measurements
The following are the financial instruments held by the Company at December 31, 20132015 and 2012,2014, and descriptions of 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 relate toincluded the foreign currency exchange and interest rate contracts discussed in Note 4.3. 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 areincluded the mutual fund assets the Company holdsheld 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 14)
51
13). Fair value and carrying value were the same because the mutual fund assets were recorded at fair value in accordance with the FASB’s fair value option rules. 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 December 31, 20132015 and 2012,2014, the fair values of debt and the related carrying values of debt, including current maturities, were as follows:
| (In thousands) | December 31 |
| December 31 |
| ||||||||||||
| 2013 | 2012 |
| 2015 |
|
| 2014 |
| |||||||||
Fair value | $ | 276,069 | $ | 194,620 |
| $ | 331,183 |
|
| $ | 285,441 |
| ||||
|
|
|
|
|
|
|
|
| ||||||||
Carrying value | 270,623 | 182,402 |
|
| 332,623 |
|
|
| 273,931 |
| ||||||
The following tables present financial assets and liabilities measured on a recurring basis at fair value as of December 31, 20132015 and 2012,2014, and the level within the fair value hierarchy in which the fair value measurement falls:
| (In thousands) | December 2013 | Level 1 | Level 2 | Level 3 |
| December 2015 |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||||||||||||||
Mutual fund assets | $ | 18,305 | $ | 18,305 | $ | — | $ | — |
| $ | 20,910 |
|
| $ | 20,910 |
|
| $ | — |
|
| $ | — |
| ||||||||
Derivative assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency contracts | 74 | — | 74 | — |
|
| 112 |
|
|
| — |
|
|
| 112 |
|
|
| — |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total assets at fair value | $ | 18,379 | $ | 18,305 | $ | 74 | $ | — | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Derivative liabilities : | ||||||||||||||||||||||||||||||||
Foreign currency contracts | $ | 165 | $ | — | $ | 165 | $ | — | ||||||||||||||||||||||||
Interest rate contracts | 20 | — | 20 | — | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total liabilities at fair value | $ | 185 | $ | — | $ | 185 | $ | — | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
| (In thousands) | December 2012 | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||||||||||
Mutual fund assets | $ | 14,093 | $ | 14,093 | $ | — | $ | — | ||||||||||||||||||||||||
Derivative assets: | ||||||||||||||||||||||||||||||||
Foreign currency contracts | 67 | — | 67 | — | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total assets at fair value | $ | 14,160 | $ | 14,093 | $ | 67 | $ | — |
| $ | 21,022 |
|
| $ | 20,910 |
|
| $ | 112 |
|
| $ | — |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Derivative liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Foreign currency contracts | $ | 2 | $ | — | $ | 2 | $ | — |
| $ | 305 |
|
| $ | — |
|
| $ | 305 |
|
| $ | — |
| ||||||||
Interest rate contracts | 57 | — | 57 | — |
|
| 53 |
|
|
| — |
|
|
| 53 |
|
|
| — |
| ||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total liabilities at fair value | $ | 59 | $ | — | $ | 59 | $ | — |
| $ | 358 |
|
| $ | — |
|
| $ | 358 |
|
| $ | — |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||
(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 |
|
| $ | — |
|
52
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. generally accepted accounting principles. 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 receivable and payable balances into the applicable functional currencies. At December 31, 20132015 and 2012,2014, the Company had open forward foreign currency exchange contracts, all with settlement dates of about one month, to buy or sell foreign currencies with a U.S. dollar equivalent of $20,289,000$31,194,000 and $16,258,000,$51,623,000, respectively.
During the reporting period, the Company also held forward foreign currency exchange contracts that were designated as a cash flow hedge. The Company used these contracts to manage the risks and related cash flow variability resulting from exposure to exchange rate fluctuations on forecasted progress payments related to a construction project undertaken in Singapore. The progress payments were denominated in a currency other than the Singapore location’s functional currency. The Company completed its hedging activity for the progress payments in September 2013. When in use, the forward foreign exchange contracts were recognized on the balance sheet as either an asset or a liability measured at fair value. Period-to-period changes in the fair value of the hedging instruments were recognized as gains or losses in other comprehensive income, to the extent effective. The accumulated gains and losses are being reclassified out of AOCI into earnings in the periods over which the asset is being depreciated. The amount currently in AOCI that is expected to be reclassified into earnings in the next 12 months is immaterial. The Company had no open forward foreign currency exchange contracts designated as cash flow hedges at December 31, 2013. At December 31, 2012, the Company held open forward foreign currency exchange contracts designated as cash flow hedges with a U.S. dollar equivalent amount of $1,197,000.
The Company is exposed to volatility in short-term interest rates and, at times, mitigates certain portions of that risk by using interest rate swaps.swaps and designating such swaps as cash flow hedges. The interest rate swaps are recognized on the balance sheet as either an asset or a liability measured at fair value. At December 31, 2013 and 2012, the Company held interest rate swap contracts with notional values of $2,268,000 and $2,969,000, respectively, which were designated as cash flow hedges. Period-to-period changes in the fair value of interest rate swap hedges 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 AOCI into earnings in that settlement period. The latest date through whichAt December 31, 2015, the Company expects to hedge its exposure to the volatilityheld an interest rate swap contract with a notional value of short-term interest rates is September 30, 2015.$3,724,000.
The fair values of the derivative instruments held by the Company on December 31, 2013,2015, and December 31, 2012,2014, and derivative instrument gains and losses for the years ended December 31, 2015, 2014 and 2013, were immaterial. For amounts reclassified out of AOCI into earnings for the years ended December 31, 2015, 2014 and 2013, 2012 and 2011, were immaterial.
5.4. Goodwill and Other Intangible Assets
The changes in the carrying value of goodwill for the years ended December 31, 20132015 and 2012,2014, were as follows:
| (In thousands) | Surfactants Segment | Polymer Segment | Specialty Products Segment | Total
| ||||||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2013 | 2012 | 2013 | 2012 | |||||||||||||||||||||||||
Balance as of January 1 | ||||||||||||||||||||||||||||||||
Goodwill | $ | 9,246 | $ | 9,143 | $ | 937 | $ | 841 | $ | 483 | $ | 483 | $ | 10,666 | $ | 10,467 | ||||||||||||||||
Accumulated impairment loss | (3,467 | ) | (3,467 | ) | — | — | — | — | (3,467 | ) | (3,467 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| 5,779 | 5,676 | 937 | 841 | 483 | 483 | 7,199 | 7,000 | |||||||||||||||||||||||||
Goodwill acquired(1) | — | — | 4,642 | — | — | — | 4,642 | — | ||||||||||||||||||||||||
Foreign currency translation | (139 | ) | 103 | 24 | 96 | — | — | (115 | ) | 199 | ||||||||||||||||||||||
Balance as of December 31 | ||||||||||||||||||||||||||||||||
Goodwill | 9,107 | 9,246 | 5,603 | 937 | 483 | 483 | 15,193 | 10,666 | ||||||||||||||||||||||||
Accumulated impairment loss | (3,467 | ) | (3,467 | ) | — | — | — | — | (3,467 | ) | (3,467 | ) | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
| 5,640 | $ | 5,779 | 5,603 | $ | 937 | $ | 483 | $ | 483 | 11,726 | $ | 7,199 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||
|
(In thousands) |
| Surfactants Segment |
|
| Polymer Segment |
|
| Specialty Products Segment |
|
| Total |
| ||||||||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||||||
Balance as of January 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
| $ | 9,025 |
|
| $ | 9,107 |
|
| $ | 5,461 |
|
| $ | 5,603 |
|
| $ | 483 |
|
| $ | 483 |
|
| $ | 14,969 |
|
| $ | 15,193 |
|
Accumulated impairment loss |
|
| (3,467 | ) |
|
| (3,467 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,467 | ) |
|
| (3,467 | ) |
Goodwill, net |
|
| 5,558 |
|
|
| 5,640 |
|
|
| 5,461 |
|
|
| 5,603 |
|
|
| 483 |
|
|
| 483 |
|
|
| 11,502 |
|
|
| 11,726 |
|
Goodwill acquired |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Foreign currency translation |
|
| (156 | ) |
|
| (82 | ) |
|
| (81 | ) |
|
| (142 | ) |
|
| — |
|
|
| — |
|
|
| (237 | ) |
|
| (224 | ) |
Balance as of December 31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 8,869 |
|
|
| 9,025 |
|
|
| 5,380 |
|
|
| 5,461 |
|
|
| 483 |
|
|
| 483 |
|
|
| 14,732 |
|
|
| 14,969 |
|
Accumulated impairment loss |
|
| (3,467 | ) |
|
| (3,467 | ) |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,467 | ) |
|
| (3,467 | ) |
Goodwill, net |
| $ | 5,402 |
|
| $ | 5,558 |
|
| $ | 5,380 |
|
| $ | 5,461 |
|
| $ | 483 |
|
| $ | 483 |
|
| $ | 11,265 |
|
| $ | 11,502 |
|
The Company tests its goodwill balances for impairment in the second quarter of each calendar year. The 20132015 and 20122014 tests indicated no impairment.
53
The following table reflectspresents the components of other intangible assets, all of which have finite lives, as of December 31, 20132015 and 2012. 2014. The year-over-year changes in gross carrying values resulted from the 2013 acquisition disclosed in Note 2, removal of fully amortized intangibles from the table and the effects of foreign currency translation.
| (In thousands) | Gross Carrying Value | Accumulated Amortization |
| Gross Carrying Value |
|
| Accumulated Amortization |
| ||||||||||||||||||||||||
| December 31 | December 31 |
| December 31 |
|
| December 31 |
| |||||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 |
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| |||||||||||||||||
Other Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Patents | $ | 6,947 | $ | 8,947 | $ | 1,498 | $ | 2,831 |
| $ | 6,947 |
|
| $ | 6,947 |
|
| $ | 2,696 |
|
| $ | 2,096 |
| ||||||||
Trademarks | 4,087 | 5,843 | 345 | 5,468 |
|
| 4,087 |
|
|
| 4,087 |
|
|
| 1,150 |
|
|
| 748 |
| ||||||||||||
Customer lists | 8,094 | 7,359 | 1,098 | 5,802 |
|
| 8,026 |
|
|
| 8,082 |
|
|
| 2,621 |
|
|
| 1,871 |
| ||||||||||||
Know-how(a) | 8,313 | 8,950 | 831 | 8,453 |
|
| 8,245 |
|
|
| 8,273 |
|
|
| 2,881 |
|
|
| 1,871 |
| ||||||||||||
Non-compete agreements | 0 | 1,235 | 0 | 1,002 | ||||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total | $ | 27,441 | $ | 32,334 | $ | 3,772 | $ | 23,556 |
| $ | 27,305 |
|
| $ | 27,389 |
|
| $ | 9,348 |
|
| $ | 6,586 |
| ||||||||
|
|
|
| |||||||||||||||||||||||||||||