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EXHIBIT (13)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
1994 COMPARED WITH 1993
Sales for 1994 grew one percent to a record $444 million despite a one
percent decline in sales volume. Sales by product group were:
Percent
(Dollars in Thousands) 1994 1993 Change
------------------------------------------------------------------------------------------------
Surfactants $329,186 $324,809 +1
Polymers 78,778 79,071 --
Specialty products 35,984 34,945 +3
------------------------------------------------------------------------------------------------
Total $443,948 $438,825 +1
============================================================================================
Surfactants are a principal ingredient in consumer and industrial cleaning
products such as detergents, shampoos, lotions, toothpaste and cosmetics. Other
applications include lubricating ingredients and emulsifiers for spreading of
insecticides and herbicides. Surfactant sales rose one percent despite a four
percent decline in sales volume. The moderate growth in sales was primarily
contributed by foreign subsidiaries, as domestic sales were essentially flat
between years. Domestic volume, representing 83 percent of total surfactant
sales volume, was down seven percent from the prior year as a result of product
reformulation by large national customers. Partially offsetting this was a
significant volume growth in the broad commercial customer base. Sales of
foreign subsidiaries, representing 17 percent of surfactant sales volume, grew
six percent as a result of a strong volume gain. Mexico contributed a 46 percent
year-to-year volume increase, followed by a 13 percent and a six percent
increase from Canada and Europe, respectively. The weakened Canadian dollar has
negatively affected the subsidiary's reported sales growth. The continued
competitive pressure on prices in Europe has erased the revenue growth fueled by
stronger sales volume and the strengthening French franc.
The polymer product group includes phthalic anhydride, polyurethane systems
and polyurethane polyols. 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. Polyurethane
systems provide thermal insulation and are sold to the construction, industrial
and appliance markets. Polyurethane polyols are used in the manufacture of
laminate board for the construction industry. Polymer sales were essentially
unchanged from a year ago, although sales volume rose eight percent. Phthalic
anhydride, which represents 57 percent of polymer volume, reported a 16 percent
increase in sales due to a 13 percent increase in volume and higher selling
prices. Higher selling prices were driven by improved market conditions and
higher raw material costs. The increase in phthalic anhydride volume was the
result of strong domestic demand, lower levels of competing foreign imports and
high production levels attributable to refurbishments made to our manufacturing
facility. Polyurethane polyols, which represent 38 percent of total polymer
volume, posted 15 percent sales growth due entirely to improved volume.
Polyurethane systems sales fell 44 percent as volume dropped 45 percent due to
delays in the roll-out of new products with more favorable environmental
characteristics.
Specialty products include flavors, lubricant additives, oil field
chemicals and emulsifiers and solubilizers used in the food and pharmaceutical
industry. Specialty products revenues grew three percent with most of the
improvement coming from higher volume.
Gross profit in 1994 was $81.1 million, or 18.3 percent of net sales, an
increase from $80.0 million, or 18.2 percent of net sales in 1993. Surfactant
gross profit was $61.3 million for 1994, a decrease of three percent from 1993.
Domestic surfactants were down $3.5 million, or seven percent, as a result of
the reduced sales to larger national customers. Foreign operations were up $1.9
million as Mexico and Canada continued to post stronger sales over prior years.
Negatively impacting the result was Stepan Europe which continued to face
increasingly competitive price pressure in a recovering European economy.
Polymer gross profit rose $3.4 million to $13.1 million for 1994 representing a
35 percent increase from 1993. Phthalic anhydride
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contributed most of the increased polymer gross profit, as a result of
significantly improved margins and volume. Insurance recoveries of $1.1 million
related to 1993 production outages also contributed to the improved margin.
Despite the significant sales drop in polyurethane systems, gross
profit only declined 26 percent due primarily to the development of lower cost
formulations. While polyurethane polyols posted higher sales and volume,
increased manufacturing expenses, raw material costs and export freight costs
more than offset the volume gains. Specialty products gross profit fell $.7
million to $6.7 million for 1994 representing a nine percent decline from 1993.
Despite the increased sales, the decline in gross profit was largely
attributable to reduced royalty income compared to a year earlier.
Average raw material costs climbed six percent during 1994 and are expected
to rise modestly during 1995 as the economy continues to grow. Labor costs
increased at a modest rate reflecting the recent low levels of inflation which
are expected to continue in the near term. Depreciation expense increased to
$27.0 million in 1994 from $25.7 million in 1993 as a result of bringing into
service capacity expansion projects in recent years, as well as continuing
capital spending for plant improvements.
Operating income, pre-tax income before net interest expense, was $29.6
million in 1994, an 8.4 percent increase from 1993. Operating expenses declined
three percent reflecting lower administrative expenses in 1994. Administrative
expenses decreased $1.3 million, or seven percent due primarily to $3.1 million
of insurance recoveries relating to legal costs previously incurred in defending
environmental cases against the company. See Note 12 of the Notes to
Consolidated Financial Statements. Net of these favorable recoveries, provision
for legal and environmental costs was $.7 million in 1994 compared with $2.2
million recorded in 1993. Marketing expenses increased a modest one percent
which was essentially offset by a decrease in research and product development
expenses. Excluding the insurance recoveries, operating expenses for 1994
increased $1.8 million, or a moderate three percent. Continued insurance
reimbursement of ongoing environmental legal defense costs is expected to
minimize the company's share of future defense costs. Other cost containment
efforts, including a voluntary early retirement program offered in 1994, are
expected to keep 1995 operating expense increases to a modest level.
Net income in 1994 benefited from a substantially lower tax rate than
1993. The effective tax rate was 38.5 percent in 1994 compared to 45.1 percent
in 1993. The 1993 tax rate was unusually high because of a U.S. tax rate hike
and the resulting upward restatement of deferred tax liabilities. A recognition
in the current year of tax benefits on loss carryforwards of foreign
subsidiaries also contributed to the lower tax provision. See Note 5 of the
Notes to the Consolidated Financial Statements for a reconciliation of the
statutory to the effective tax rate.
Net income for 1994 rose 28 percent to $13.8 million, or $1.29 per share,
compared to $10.8 million, or $.98 per share in 1993. As a result of the
two-for-one common stock split on December 15, 1994, earnings per share for 1993
and prior have been restated.
1993 COMPARED WITH 1992
Sales for 1993 grew one percent to a record $439 million. The increase was
the result of a one percent increase in sales volume. Sales by product group
were:
Percent
(Dollars in Thousands) 1993 1992 Change
------------------------------------------------------------------------------------------------
Surfactants $324,809 $317,522 +2
Polymers 79,071 87,060 -9
Specialty products 34,945 31,182 +12
------------------------------------------------------------------------------------------------
Total $438,825 $435,764 +1
================================================================================================
Surfactant sales volume rose two percent. Domestic volume represented 87
percent of total surfactant sales volume and grew by two percent over 1992.
Sales of foreign subsidiaries representing 13 percent
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of surfactant sales volume declined by two percent. Mexico's sales decreased
as a result of a 13 percent drop in volume which was largely offset by
increased sales volume in Canada. Europe's sales decreased two percent,
despite higher volume as a result of a six percent decline in the value of the
French franc and increased competitive pressure on prices. The weaker Canadian
dollar also negatively affected the foreign subsidiaries' revenue growth.
Polymer sales declined due to a nine percent decrease in volume. Phthalic
anhydride, which represents 54 percent of polymer volume, experienced a 17
percent decrease in sales due primarily to increased competition from imports
which forced volumes and selling prices down. Polyurethane polyols, which
represent 35 percent of total polymer volume, experienced an eight percent
decline in volume due to lower export business. Polyurethane systems sales
increased seven percent as a result of higher volume and improved selling
prices.
Specialty products revenues grew 12 percent with most of the improvement
coming from higher volume. Average selling prices were essentially unchanged.
Gross profit in 1993 was $80.0 million, or 18.2 percent of net sales, a
decrease from $81.8 million, or 18.8 percent of net sales in 1992. Surfactants
gross profit was $63.0 million for 1993, a decrease of one percent from 1992.
Domestic surfactants were down $.3 million, or one percent, as a result of a
slight decrease in gross profit margins. Foreign operations were down $.2
million as Stepan Europe continued to face increased competitive pressure in a
recessionary European economy. Canada and Mexico both showed improvement over
1992. Polymers gross profit dropped by $4.7 million to $9.7 million for 1993
representing a 33 percent decrease from 1992. Phthalic anhydride accounted for
most of the decreased polymer gross profit showing significantly reduced gross
profit margins as a result of increased competition from imports in the
marketplace. Higher repair and maintenance expenses in the production of
phthalic anhydride also contributed to the lower margins. Polyurethane polyols
gross profit also decreased despite higher margins as a result of lower volumes.
Polyurethane systems gross profit increased on improved margins. Specialty
products gross profit grew by $3.4 million to $7.4 million for 1993 representing
an 85 percent increase over 1992. Contributing to this performance were higher
selling prices for lubricant additives, higher volumes for oil field chemicals
and improved margins for food ingredients.
Raw material costs declined slightly during 1993. Labor costs increased at
a modest rate reflecting the recent low levels of inflation. Depreciation
expense increased to $25.7 million in 1993 from $22.4 million in 1992 as a
result of bringing into service significant capacity expansion projects in
recent years, as well as continuing capital spending for plant improvements.
Operating income, pre-tax income before net interest expense, was $27.3
million in 1993, a 13.8 percent increase from 1992. Operating income in 1992
included a $6.5 million charge relating to environmental expenses and the write
down of the company's investment in Mexico. See Note 11 of the Notes to the
Consolidated Financial Statements. Excluding the environmental and restructuring
charge in 1992, operating expenses for 1993 increased $1.5 million or three
percent. Administrative expenses decreased $1.7 million or nine percent
primarily due to decreased legal costs and lower office space costs
as 1992 was unusually high due to the consolidating of personnel into a newly
leased corporate facility. Marketing expenses increased four percent largely due
to increased travel by sales personnel and a higher bad debt provision. Research
and development costs increased by 17 percent due to planned staffing increases
as well as greater travel requirements of research personnel. Cost containment
efforts undertaken in prior years have resulted in a moderate increase in
operating expenses in 1993.
The effective tax rate was 45.1 percent in 1993 compared to 40.0 percent in
1992 on income before the effects of accounting changes. The increase in the tax
provision was attributable to the higher corporate tax rate which resulted from
the Revenue Reconciliation Act of 1993. Previously deferred tax liabilities were
restated to reflect the higher tax rate resulting in an addition to
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the 1993 provision. See Note 5 of the Notes to the Consolidated Financial
Statements for a reconciliation of the statutory to the effective tax rate.
Net income for 1993 increased three percent to $10.8 million, or $.98 per
share, compared to 1992 net income of $10.4 million, or $.95 per share before
accounting changes. The 1992 net income reflected the retroactive adoption of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" and a change from the deferred method to the flow-through method of
accounting for investment tax credits. The cumulative effect of these changes
was a favorable $5.4 million, or $.51 per share in 1992. See Note 5 of the
Notes to the Consolidated Financial Statements for a further explanation of
the accounting changes. Net income for 1992 was $15.8 million, or $1.46 per
share.
FOURTH QUARTER, 1994 COMPARED WITH 1993
For the quarter ended December 31, 1994, the company announced net income
of $3.6 million, or $.34 per share, compared to a net loss of $.4 million, or
$.08 per share in the fourth quarter of 1993 (as restated for the two-for-one
common stock split on December 15, 1994). Net sales for the quarter increased 11
percent to $113.6 million from $102.5 million recorded in 1993. Gross profit was
$20.3 million, up 32 percent in the fourth quarter compared to the same quarter
of 1993. Polymers made the largest contribution as a result of considerably
higher phthalic anhydride sales volume and margins. Surfactants recorded higher
quarterly gross profit due to increased domestic surfactant sales and higher
foreign sales volume, most notably in Mexico. Specialty products also posted
higher gross profit. Total operating expenses, including net interest expense,
declined seven percent in the fourth quarter compared with the same quarter of
1993. The decline was favorably impacted by insurance recoveries of $1.1 million
related to previously incurred legal and environmental costs.
LIQUIDITY AND FINANCIAL CONDITION
Cash provided by operating activities totaled $51.0 million during 1994, up
by $15.7 million compared to $35.3 million for 1993. Contributing heavily to the
1994 increase was $12.9 million in customer prepayments under long-term
contracts. During 1994, working capital items comprised a $5.7 million use of
cash compared to $6.1 million during 1993. Net income, adjusted for non-cash
items, increased by $2.4 million from year to year.
Capital expenditures for 1994 totaled $42.9 million, up by $17.5 million
from $25.4 million during 1993 when spending was at a five-year low. The
company's 1995 capital spending program calls for approximately $42 million in
expenditures, including $38 million at domestic facilities.
Total debt increased by $.7 million during 1994, closing the year at $97.8
million. From year to year, domestic borrowings increased by $2.4 million while
debt of foreign subsidiaries decreased by $1.7 million. During 1994, the company
repaid a $1.0 million note to its Colombian joint venture. The year-end ratio of
long-term debt to long-term debt plus shareholder's equity was 44.7 percent for
1994, compared to 46.2 percent for 1993 and 47.6 percent for 1992.
The company maintains contractual relationships with its domestic banks
which provide for $45 million of revolving credit which may be drawn upon as
needed for general corporate purposes. During 1994, the company negotiated an
extension of the revolving portion of this loan facility to May 31, 1998. See
Note 3 of the Notes to the Consolidated Financial Statements for a discussion of
the terms of this agreement. The company also meets domestic short-term
liquidity requirements through uncommitted bank lines of credit and bankers'
acceptances.
The company's foreign subsidiaries maintain committed and uncommitted bank
lines of credit in their respective countries to meet working capital
requirements as well as to fund capital expenditure programs.
The company anticipates that cash from operations and from available credit
facilities will be sufficient to meet
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anticipated capital expenditure programs, dividend requirements and other
planned financial commitments for both its domestic operations and its foreign
subsidiaries during 1995 and for the foreseeable future.
ENVIRONMENTAL AND LEGAL MATTERS
The company is subject to extensive federal, state and local environmental
laws and regulations. Although the company's environmental policies and
practices are designed to ensure compliance with these laws and regulations,
future developments and increasingly stringent environmental regulation could
require the company to make additional unforeseen environmental expenditures.
The company will continue to invest in the equipment and facilities necessary to
comply with existing and future regulations. During 1994, company expenditures
for capital projects related to the environment were $5.0 million and should
approximate $8.9 million for 1995. These projects are capitalized and typically
depreciated over ten years. Capital spending on such projects is likely to
continue at these levels in future years. Recurring costs associated with the
operation and maintenance of environmental protection facilities for ongoing
operations were approximately $7.1 million for 1994 compared to $8.0 million for
1993. While difficult to project, it is not anticipated that these recurring
expenses will increase significantly in the future.
The company has been named by the government as a potentially responsible
party at 15 waste disposal sites where clean-up costs have been or may be
incurred under the federal Comprehensive Environmental Response, Compensation
and Liability Act and similar state statutes. In addition, damages are being
claimed against the company in general liability actions for alleged personal
injury or property damage in the case of some disposal and plant sites. The
company believes that it has made adequate provisions for the costs it may incur
with respect to the sites. The company has estimated a range of possible
environmental and legal losses from $5.5 million to $21.6 million at December
31, 1994, compared to $4.4 million to $22.8 million at December 31, 1993. At
December 31, 1994, the company's reserve was $6.9 million for legal and
environmental matters compared to $7.2 million at December 31, 1993. During
1994, expenditures related to legal and environmental matters approximated $4.3
million compared to $4.5 million expended in 1993. During 1994, the company
recovered $3.1 million from insurers primarily for reimbursement of previously
incurred environmental defense costs. The recoveries are recorded as a reduction
to the current year's legal and environmental expense. It is anticipated that
the company will receive continued insurance reimbursement of ongoing
environmental legal defense costs. While it is difficult to forecast the
expenditures for 1995, the company believes that the $6.9 million reserve
balance at December 31, 1994 is more likely to be paid out over many years. See
also Note 12 of the Notes to Consolidated Financial Statements. At certain of
the sites, estimates cannot be made of the total costs of compliance or the
company's share of such costs; accordingly, the company is unable to predict the
effect thereof on future results of operations. In the event of one or more
adverse determinations in any annual or interim period, the impact on results of
operations for those periods could be material. However, based upon the
company's present belief as to its relative involvement at these sites, other
viable entities' responsibilities for cleanup and the extended period over which
any costs would be incurred, the company believes that these matters will not
have a material effect on the company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings in the 1994 Form 10-K Annual
Report and in other filings of the company with the Securities and Exchange
Commission, which filings are available upon request from the company.
In addition, reference should be made to the Ten Year Summary on pages 30
and 31.
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REPORT OF MANAGEMENT
MANAGEMENT REPORT ON FINANCIAL STATEMENTS
The financial statements of Stepan Company and subsidiaries were prepared
by and are the responsibility of management. The statements have been prepared
in conformity with generally accepted accounting principles appropriate in the
circumstances and include some amounts that are based on management's best
estimates and judgments. The Board of Directors, through its Audit Committee,
assumes an oversight role with respect to the preparation of the financial
statements.
In meeting its responsibility for the reliability of the financial
statements, the company depends on its system of internal accounting control.
The system is designed to provide reasonable assurance that assets are
safeguarded and that transactions are executed as authorized and are properly
recorded. The system is augmented by written policies and procedures and an
internal audit department.
The Audit Committee of the Board of Directors, composed solely of directors
who are not officers or employees of the company, meets regularly with
management, with the company's internal auditors and with its independent
certified public accountants to discuss its evaluation of internal accounting
controls and the quality of financial reporting. The independent auditors and
the internal auditors have free access to the Audit Committee, without
management's presence.
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
Walter J. Klein
Vice President-Finance
February 10, 1995
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS OF STEPAN COMPANY:
We have audited the accompanying consolidated balance sheets of Stepan
Company (a Delaware corporation) and subsidiaries as of December 31, 1994 and
1993, and the related consolidated statements of income, cash flows and
stockholders' equity, for each of the three years in the period ended December
31, 1994. These consolidated financial statements are the responsibility of the
company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stepan
Company and subsidiaries as of December 31, 1994 and 1993, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1994, in conformity with generally accepted accounting
principles.
As discussed in Notes 1 and 5 to the consolidated financial statements,
effective January 1, 1992, Stepan Company changed its methods of accounting for
investment tax credits and for income taxes.
Arthur Andersen LLP
Chicago, Illinois,
February 10, 1995
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CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 2,452 $ 1,515
Receivables, less allowances of $1,585 in 1994 and $1,739 in 1993 70,385 57,250
Inventories (Note 2) 45,464 48,918
Deferred income taxes (Note 5) 8,218 7,498
Other current assets 2,852 3,979
----------------------------------------------------------------------------------------------
Total current assets 129,371 119,160
----------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 4,576 4,533
Buildings and improvements 52,558 50,143
Machinery and equipment 343,629 313,010
Construction in progress 16,891 11,142
----------------------------------------------------------------------------------------------
417,654 378,828
Less accumulated depreciation 233,997 208,558
----------------------------------------------------------------------------------------------
Property, plant and equipment, net 183,657 170,270
----------------------------------------------------------------------------------------------
Other Assets 11,920 11,058
----------------------------------------------------------------------------------------------
Total assets $324,948 $300,488
==============================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 3) $ 8,043 $ 7,447
Accounts payable 37,904 34,832
Accrued liabilities (Note 9) 34,509 28,312
----------------------------------------------------------------------------------------------
Total current liabilities 80,456 70,591
----------------------------------------------------------------------------------------------
Deferred Income Taxes (Note 5) 32,976 36,020
----------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 3) 89,795 89,660
----------------------------------------------------------------------------------------------
Deferred Revenue (Note 10) 10,419 --
----------------------------------------------------------------------------------------------
Stockholders' Equity (Note 6):
5 1/2 percent convertible preferred stock, cumulative, voting,
without par value; authorized 2,000,000 shares; issued
799,196 shares in 1994 and 799,684 shares in 1993 19,980 19,992
Common stock, $1 par value; authorized 15,000,000 shares; issued
10,028,544 shares in 1994 and 10,226,048 shares in 1993 (a) 10,029 5,113
Additional paid-in capital 3,983 3,781
Cumulative translation adjustments (3,491) (2,058)
Retained earnings 82,445 82,475
----------------------------------------------------------------------------------------------
112,946 109,303
Less: Treasury stock, at cost 1,644 4,863
Deferred ESOP compensation (Note 7) -- 223
----------------------------------------------------------------------------------------------
Stockholders' equity 111,302 104,217
----------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $324,948 $300,488
==============================================================================================
(a) Restated for the two-for-one common stock split effective December 15, 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
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CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1994, 1993 and 1992
(Dollars in Thousands, except per share amounts) 1994 1993 1992
-----------------------------------------------------------------------------------------------
Net Sales $443,948 $438,825 $435,764
-----------------------------------------------------------------------------------------------
Cost and Expenses:
Cost of sales 362,848 358,790 353,950
Marketing 16,972 16,738 16,061
Administrative 17,082 18,378 20,110
Research, development and technical services (Note 1) 17,398 17,669 15,134
Interest, net (Note 3) 7,136 7,626 6,644
Environmental and restructuring charges (Note 11) -- -- 6,500
-----------------------------------------------------------------------------------------------
421,436 419,201 418,399
Income Before Provision for Income Taxes and Cumulative
Effect of Accounting Changes 22,512 19,624 17,365
Provision for Income Taxes (Note 5) 8,667 8,848 6,942
-----------------------------------------------------------------------------------------------
Income Before Cumulative Effect of Accounting Changes 13,845 10,776 10,423
Cumulative Effect of Accounting Changes (Notes 1 and 5) -- -- 5,406
-----------------------------------------------------------------------------------------------
Net Income $ 13,845 $ 10,776 $ 15,829
===============================================================================================
Primary Earnings Per Share:
Income before cumulative effect of accounting changes 1.29 .98 .95
Cumulative effect of accounting changes (Notes 1 and 5) -- -- .51
-----------------------------------------------------------------------------------------------
Net Income per Common Share $ 1.29 $ .98 $ 1.46
===============================================================================================
Fully Diluted Earnings Per Share:
Income before cumulative effect of accounting changes 1.26 .96 .93
Cumulative effect of accounting changes (Notes 1 and 5) -- -- .49
-----------------------------------------------------------------------------------------------
Net Income per Common Share $ 1.26 $ .96 $ 1.42
===============================================================================================
Average Common Shares Outstanding (Note 1) 9,924 9,894 10,572
===============================================================================================
All share and per share data have been restated for the two-for-one common stock
split effective December 15, 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(COMBINED SALES chart appears here)
(1994 SALES DOLLAR DISTRIBUTION chart appears here)
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CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1994, 1993 and 1992
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
Net Cash Flow from Operating Activities
Net income $ 13,845 $ 10,776 $ 15,829
Depreciation and amortization 28,935 27,679 23,914
Cumulative effect of accounting changes (Notes 1 and 5) -- -- (5,406)
Provision for environmental and restructuring charges
(Note 11) -- -- 6,500
Deferred income taxes 410 2,735 2,409
Prepaid pension cost (Note 8) (190) (567) (645)
Other non-cash items 817 830 271
Deferred revenue (Note 10) 12,883 -- --
Changes in Working Capital:
Receivables, net (13,135) (220) (2,985)
Inventories 3,454 (1,140) (3,823)
Accounts payable and accrued liabilities 4,106 (4,788) 3,000
Other (96) 1 (250)
-----------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 51,029 35,306 38,814
-----------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (42,884) (25,435) (34,440)
Investment in joint ventures (Note 1) (2,314) (1,422) --
Other non-current assets (711) (963) (1,960)
-----------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (45,909) (27,820) (36,400)
-----------------------------------------------------------------------------------------------
Cash Flows from Financing and Other Related Activities
Revolving debt and notes payable to banks, net 13,313 (20,631) 11,129
Other debt borrowings -- 30,000 --
Other debt repayments (11,455) (12,633) (6,556)
Purchases of treasury stock, net (327) (244) (2,034)
Dividends paid (5,294) (5,105) (4,172)
Other non-cash items (420) (273) (141)
-----------------------------------------------------------------------------------------------
Net Cash Used for Financing and Other Related
Activities (4,183) (8,886) (1,774)
-----------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents 937 (1,400) 640
Cash and Cash Equivalents at Beginning of Year 1,515 2,915 2,275
-----------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 2,452 $ 1,515 $ 2,915
===============================================================================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 8,554 $ 6,327 $ 6,568
Cash payments of interest $ 8,536 $ 8,002 $ 8,289
===============================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
(CAPITAL SPENDING chart appears here)
(EQUITY PER SHARE chart appears here)
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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1994, 1993 and 1992
Convertible Additional Cumulative Deferred
Preferred Common Paid-in Treasury Translation ESOP Retained
(Dollars in Thousands) Stock Stock Capital Stock Adjustments Compensation Earnings
-----------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1992 $ -- $ 5,551 $ 3,565 $ (2,585) $ 385 $ (667) $84,617
Sale of 160,132 shares under stock option
plan -- 80 949 -- -- -- --
Purchase of 104,846 shares of common
treasury stock, net of sales -- -- 49 (2,034) -- -- --
Issuance of preferred stock in exchange and
retirement of 1,059,602 shares of common
stock (Note 6) 20,000 (530 ) (875) -- -- -- (19,470 )
Compensation expense (Note 7) -- -- -- -- -- 222 --
Net income -- -- -- -- -- -- 15,829
Cash dividends paid
Preferred stock (31.0c per share) -- -- -- -- -- -- (244 )
Common stock (37.0c per share) -- -- -- -- -- -- (3,928 )
Translation adjustments -- -- -- -- (1,408) -- --
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1992 20,000 5,101 3,688 (4,619) (1,023) (445) 76,804
Sale of 23,800 shares under stock option
plan -- 12 132 -- -- -- --
Purchase of 44 shares of common and 8,700
shares of preferred treasury stock, net of
sales -- -- 93 (244) -- -- --
Issuance cost of preferred stock -- -- (140) -- -- -- --
Conversion of preferred stock to common
stock (8) -- 8 -- -- -- --
Compensation expense (Note 7) -- -- -- -- -- 222 --
Net income -- -- -- -- -- -- 10,776
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- -- (1,097 )
Common stock (40.5c per share) -- -- -- -- -- -- (4,008 )
Translation adjustments -- -- -- -- (1,035) -- --
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1993 19,992 5,113 3,781 (4,863) (2,058) (223) 82,475
Sale of 51,940 shares under stock option
plan -- 27 290 -- -- -- --
Purchase of 4,222 shares of common and
11,508 shares of preferred treasury stock,
net of sales -- -- 21 (327) -- -- --
Retirement of 250,000 shares of common
treasury stock -- (125 ) (121) 3,546 -- -- (3,300 )
Conversion of preferred stock to common
stock (12) -- 12 -- -- -- --
Compensation expense (Note 7) -- -- -- -- -- 223 --
Net income -- -- -- -- -- -- 13,845
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- -- (1,076 )
Common stock (42.5c per share) -- -- -- -- -- -- (4,218 )
Preferred stock dividends declared -- -- -- -- -- -- (267 )
Translation adjustments -- -- -- -- (1,433) -- --
Two-for-one common stock split (Note 6) -- 5,014 -- -- -- -- (5,014 )
-----------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1994 $ 19,980 $10,029 $ 3,983 $ (1,644) $ (3,491) $ -- $82,445
=============================================================================================================================
All share and per share data have been restated for the two-for-one common stock
split effective December 15, 1994.
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
12
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 1994, 1993 and 1992
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The company's operations consist predominantly of the production and sale
of basic 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,
toothpaste and household cleaners), paints, cosmetics, beverages, agricultural
pesticides and herbicides, plastics, furniture, automotive equipment, insulation
and refrigeration.
The company grants credit to its customers who are widely distributed
throughout North America and Europe. There is no material concentration of
credit risk.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Stepan
Company and its wholly-owned foreign subsidiary companies. All significant
intercompany balances and transactions have been eliminated in consolidation.
The equity method of accounting is used for certain 50 percent owned foreign
joint venture investments. The company's share of the net earnings of the
investments is included in consolidated net income. Differences between the cost
of equity investments and the amount of underlying equity in net assets of the
investees are amortized systematically to income. The financial results of the
joint ventures are not material to the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments with original
maturities of three months or less from the date of purchase to be cash
equivalents.
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 most company inventories. The first-in,
first-out (FIFO) method is used for all other inventories. Inventories priced at
LIFO as of December 31, 1994 and 1993 amounted to 87 percent and 89 percent of
total inventories, respectively.
PROPERTY, PLANT AND EQUIPMENT
Depreciation of physical properties is provided on a straight-line basis
over the estimated useful lives of various assets. Lives used for calculating
depreciation are 30 years for buildings, 15 years for building improvements and
from three to 15 years for machinery and equipment. Major renewals and
betterments are capitalized in the property accounts, while maintenance and
repairs ($16,468,000, $16,505,000 and $15,335,000 in 1994, 1993 and 1992,
respectively), which do not renew or extend the life of the respective assets,
are charged to operations currently. 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.
Interest charges on borrowings applicable to major construction projects
are capitalized and subsequently amortized over the lives of the related assets.
ENVIRONMENTAL EXPENDITURES
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and which do not contribute to current or future
revenue generation, are expensed. Liabilities are recorded when environmental
assessments and/or remedial efforts are probable and the cost or range of
possible costs can be reasonably estimated. When no amount within the range is a
better estimate than any other amount, at least the minimum is accrued.
Some of the factors on which the company bases its estimates include information
provided by feasibility studies, potentially responsible party negotiations and
the development of remedial action plans. Liabilities are recorded at gross
amounts of probable future cash outlays and are not discounted to reflect the
time value of money. While the company has insurance policies that may cover
some of its liabilities, it does not record those claims until such time as they
become probable. Expenditures that mitigate or prevent environmental
contamination that has yet to occur and that otherwise may result from future
operations are capitalized. Capitalized expenditures are depreciated generally
utilizing a ten-year life.
INTANGIBLE ASSETS
Included in other assets are intangible assets consisting of patents,
agreements not to compete, trademarks, customer lists and goodwill, all of which
were acquired as part of business acquisitions. These assets are presented net
of amortization provided on a straight-line basis over their estimated useful
lives ranging from two to ten years.
RESEARCH AND DEVELOPMENT COSTS
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 expenses were $12,281,000, $12,613,000 and $11,320,000 in 1994, 1993 and
1992, respectively. The balance of expenses reflected on the Consolidated
Statements of Income relates to technical services which include routine product
testing, quality control and sales support service.
INCOME TAXES
As discussed in Note 5, in 1992 the company adopted Statement of Financial
Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS
No. 109, deferred tax assets or liabilities are computed based on the difference
between the financial statement and income tax bases of assets and liabilities
using the enacted marginal tax rate. Deferred income tax expenses or credits are
based on the changes in the asset or liability from period to period.
24
13
TRANSLATION OF FOREIGN CURRENCIES
In general, assets and liabilities of consolidated foreign subsidiaries are
translated into U.S. dollars at exchange rates in effect at year end, while
revenues and expenses are translated at average exchange rates prevailing during
the year. The resulting translation adjustments are included in stockholders'
equity. Gains or losses on foreign currency transactions and the related tax
effects are reflected in net income.
PER SHARE DATA
Primary earnings per share amounts are computed based on the weighted
average number of common shares outstanding, 9,924,000 in 1994, 9,894,000 in
1993 and 10,572,000 in 1992. Common share equivalents resulting from dilutive
stock options have been excluded as the dilutive effect was not material. Net
income used in computing primary earnings per share has been reduced by
dividends paid to preferred shareholders. Fully diluted earnings per share
amounts are based on an increased number of common shares that would be
outstanding assuming the exercise of certain outstanding stock options and the
conversion of the convertible preferred stock, when such conversion would have
the effect of reducing earnings per share. The number of shares used in the
computations of fully diluted earnings per share were 10,972,000 in 1994,
10,100,000 in 1993 and 11,154,000 in 1992, respectively. All share and per share
data have been retroactively adjusted for the two-for-one common stock split of
December 15, 1994.
RECLASSIFICATIONS
Certain amounts in the 1993 financial statements have been reclassified to
conform with the 1994 presentation.
2. INVENTORIES
The composition of inventories was as follows:
December 31
---------------------
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
Finished products $ 27,632 $ 27,269
Raw materials 17,832 21,649
----------------------------------------------------------------------------------------------
Total inventories $ 45,464 $ 48,918
==============================================================================================
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $13,200,000 and $9,700,000 higher than
reported at December 31, 1994 and 1993, respectively.
3. DEBT
Debt was composed of the following:
December 31
Maturity ---------------------
(Dollars in Thousands) Dates 1994 1993
-----------------------------------------------------------------------------------------------
Unsecured promissory notes
7.22% 1999-2008 $ 30,000 $ 30,000
9.52% 1995-2001 15,000 15,000
10.54% 1995-1997 10,712 17,856
9.70% 1997-2006 10,000 10,000
9.70% 1995-2000 6,000 8,000
9.40% 1995 955 2,860
Unsecured bank debt, interest at 6.92% at December 31,
1994 1998-2001 21,800 7,000
ESOP loan guarantee (Note 7) -- -- 300
Loans of foreign subsidiaries payable in foreign
currency 1995-2003 3,371 5,091
Note payable to joint venture interest in Colombia,
South America -- -- 1,000
-----------------------------------------------------------------------------------------------
Total debt 97,838 97,107
Less current maturities 8,043 7,447
-----------------------------------------------------------------------------------------------
Long-term debt $ 89,795 $ 89,660
===============================================================================================
Unsecured bank debt at December 31, 1994, consists of borrowings under a
committed $45,000,000 revolving credit agreement which bears interest at varying
rates. Borrowings under this agreement at May 31, 1998, if any, would convert to
a term loan payable over three years. The company must pay a commitment fee of
.25 percent per annum on the unused portion of the commitment. Periodically, the
company also availed itself of other borrowings under notes payable to banks of
which there were no outstanding balances at December 31, 1994 and 1993.
The various loan agreements contain provisions which, among others, require
maintenance of certain financial ratios, and place limitations on additional
debt, investments and payment of dividends. Unrestricted retained earnings were
$36,336,000 and $32,789,000 at December 31, 1994 and 1993, respectively. The
company is in compliance with all loan agreements.
Debt at December 31, 1994 matures as follows: $8,043,000 in 1995;
$7,027,000 in 1996; $8,190,000 in 1997; $9,746,000 in 1998; $14,614,000 in 1999
and $50,218,000 after 1999.
Net interest expense for the years ended December 31, was composed of the
following:
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
Interest expense $ 8,428 $ 8,552 $ 8,326
Interest income (295) (331) (150)
-----------------------------------------------------------------------------------------------
8,133 8,221 8,176
Capitalized interest (997) (595) (1,532)
-----------------------------------------------------------------------------------------------
Interest, net $ 7,136 $ 7,626 $ 6,644
===============================================================================================
25
14
4. LEASED PROPERTIES
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $2,994,000, $2,932,000 and $3,343,000 in 1994, 1993 and 1992,
respectively.
Minimum future rental payments under operating leases with terms in excess
of one year as of December 31, 1994 are:
(Dollars in Thousands) Year Amount
---------------------------------------------------------------------------------------------
1995 $ 2,518
1996 1,843
1997 1,073
1998 773
1999 432
Subsequent to 1999 1,522
---------------------------------------------------------------------------------------------
Total minimum future rental payments $ 8,161
=============================================================================================
5. INCOME TAXES
In 1992, the company adopted SFAS No. 109, "Accounting for Income Taxes,"
which requires the use of the liability method of accounting for income taxes.
As a result of adopting SFAS No. 109, the company recognized a cumulative
benefit of $4,254,000 ($.40 per primary share and $.38 per fully diluted share),
as of January 1, 1992. The benefit was included under the caption "Cumulative
Effect of Accounting Changes" in the Consolidated Statements of Income. Prior
year financial statements were not restated to reflect the new accounting
method. The effect of this new standard on income tax expense (exclusive of the
cumulative benefit) for the year ended December 31, 1992, and for each of the
quarters in the period then ended, was not material.
In 1992, the company also changed its method of accounting for investment
tax credits from the deferred method to the flow-through method. This change
resulted in the recognition of a cumulative benefit of $1,152,000 ($.11 per
primary share and per fully diluted share) as of January 1, 1992, for credits
earned but not recognized under the deferred method used prior to this date. The
benefit was included under the caption "Cumulative Effect of Accounting Changes"
in the Consolidated Statements of Income. The effect of this change on net
income (exclusive of the cumulative benefit) for the year ended December 31,
1992 and for each of the quarters in the period then ended, was not material.
The provision for taxes on income and the related income before taxes, are
as follows:
TAXES ON INCOME
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
Federal
Current $ 6,732 $ 3,818 $ 2,462
Deferred (1,524) 1,365 1,023
State
Current 2,020 1,076 692
Deferred (646) 239 359
Foreign
Current 2,299 1,426 1,643
Deferred (214) 924 763
-----------------------------------------------------------------------------------------------
Total $ 8,667 $ 8,848 $ 6,942
===============================================================================================
INCOME BEFORE TAXES AND ACCOUNTING CHANGES
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
Domestic $ 15,429 $ 14,493 $ 9,781
Foreign 7,083 5,131 7,584
-----------------------------------------------------------------------------------------------
Total $ 22,512 $ 19,624 $ 17,365
===============================================================================================
No federal income taxes have been provided on approximately $20,234,000 of
undistributed earnings of the company's foreign subsidiaries. These earnings are
expected to be reinvested indefinitely. Such earnings would become taxable upon
the sale or liquidation of the foreign subsidiaries or upon the remittance of
dividends. Because of the probable availability of foreign tax credits, it is
not practicable to estimate the amount, if any, of the deferred tax liability on
such earnings.
The variations between the effective and statutory federal income tax rates
are summarized as follows:
--------------------------------------------------------------------------------------------------
1994 1993 1992
(Dollars in Thousands) Amount % Amount % Amount %
--------------------------------------------------------------------------------------------------
Income tax provision at statutory tax
rate $ 7,879 35.0 $ 6,731 34.3 $ 5,903 34.0
State taxes on income less applicable
federal tax benefit 893 4.0 864 4.4 694 4.0
Deferred tax adjustment for tax rate
change -- -- 558 2.8 -- --
Research and development credit (244) (1.1) (55) (.3) -- --
Valuation allowance 11 -- 319 1.6 390 2.2
Other items 128 .6 431 2.3 (45) (.2)
--------------------------------------------------------------------------------------------------
Total income tax provision $ 8,667 38.5 $ 8,848 45.1 $ 6,942 40.0
==================================================================================================
26
15
Pursuant to SFAS No. 109, deferred taxes are determined based on the
estimated future tax effects of differences between the financial statement and
tax bases of assets and liabilities given the provisions of the enacted tax
laws. The net deferred tax liability at December 31 is comprised of the
following:
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
Current deferred income taxes
Gross assets $ 8,413 $ 7,740
Gross liabilities (195) (242)
----------------------------------------------------------------------------------------------
Total current deferred tax assets 8,218 7,498
Non-current deferred income taxes
Gross assets 5,684 2,066
Valuation allowance (741) (730)
Gross liabilities (37,919) (37,356)
----------------------------------------------------------------------------------------------
Total non-current deferred tax liabilities (32,976) (36,020)
----------------------------------------------------------------------------------------------
Net deferred tax liability $(24,758) $(28,522)
==============================================================================================
At December 31, the tax effect of significant temporary differences
representing deferred tax assets and liabilities is as follows:
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
Tax over book depreciation $(30,748) $(29,608)
Safe Harbor leases (4,228) (4,547)
SFAS No. 87 pension accounting (2,346) (2,282)
State income tax accrual 1,188 1,437
Deferred revenue 4,837 --
Book reserves deductible in other periods 6,941 7,204
Valuation allowance (741) (730)
Other, net 339 4
----------------------------------------------------------------------------------------------
Net deferred tax liability $(24,758) $(28,522)
==============================================================================================
6. STOCKHOLDERS' EQUITY
On November 11, 1994, 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,
payable December 15, 1994, to shareholders of record on December 1, 1994. As a
result of the split, 5,014,272 additional shares were issued, and retained
earnings were reduced by $5,014,272. All share and per share data appearing in
the consolidated financial statements and notes thereto have been retroactively
adjusted for the stock split.
On April 28, 1993, the shareholders approved an increase in the authorized
shares of the 5 1/2% convertible preferred stock ("preferred stock") from
200,000 to 2,000,000 and approved an eight-for-one stock split to shareholders
of record on April 30, 1993. All share and per share data appearing in the
consolidated financial statements and notes thereto have been retroactively
adjusted for the stock split and the increased authorized shares.
In 1992, the company acquired 1,059,602 shares of its common stock in
exchange for 800,000 shares of its then newly issued preferred stock at an
exchange ratio of one share of preferred stock for each 1.3245 shares of common
stock. In connection with the exchange transaction, the company recorded
$20,000,000 of preferred stock based on the market value of the 1,059,602 shares
of common stock acquired. Simultaneously, the company retired these common
shares by reducing common stock in the amount of $529,801 (par value) and
retained earnings by $19,470,199. Additional paid-in capital was reduced by
$875,000, representing the costs related to the issuance of the preferred stock.
The preferred stock is convertible at the option of the holder at any time
(unless previously redeemed) into shares of common stock at a conversion rate of
1.14175 shares of common stock for each share of preferred stock. Dividends on
preferred stock accrue at a rate of $1.375 per share per annum which are
cumulative from the date of original issue. The company may not declare and pay
any dividend or make any distribution of assets (other than dividends or other
distribution payable in shares of common stock) on, or redeem, purchase or
otherwise acquire, shares of common stock, unless all accumulated and unpaid
preferred dividends have been paid or are contemporaneously declared and paid.
The preferred stock is subject to optional redemption by the company, in whole
or in part, at any time on or after September 1, 1997, at a redemption price of
$25.69 per share reduced annually by $.14 per share to a minimum of $25 per
share on or after September 1, 2002, plus accrued and unpaid dividends thereon
to the date fixed for redemption. The aggregate liquidation preference is
approximately $20.0 million at December 31, 1994 and 1993. Preferred stock is
entitled to 1.14175 votes per share on all matters submitted to stockholders
for action, and votes together with the common stock as a single class, except
as otherwise provided by law or the Certificate of Incorporation of the
company. There is no mandatory redemption or sinking fund obligation with
respect to the preferred stock.
In 1992, the shareholders approved the Stepan Company 1992 Stock Option
Plan ("1992 Plan"). The 1992 Plan replaces the 1982 Plan and extends
participation to directors who are not employees of the company. The 1992 Plan
authorizes the award of up to 1,600,000 shares of the company's common stock for
stock options ("options") and stock appreciation rights ("SAR"). SARs entitle
the employee to receive an amount equal to the difference between the fair
market value of a share of stock at the time the SAR is exercised and the
exercise price specified at the time the SAR is granted. Options are granted at
the market price on the date of grant and become exercisable on various dates
over a ten-year period. The purchase price per share of options currently
outstanding ranges from $8.12500 to $18.21875 with option expiration dates
ranging from April 28, 1996 to May 1, 2004. The options become exercisable as
follows: 662,304 currently exercisable and 464,400 on May 2, 1996.
27
16
A summary of option transactions during the two years ended December 31,
1994, follows:
Shares Options Outstanding
Available --------------------------------------------------
(Dollars in Thousands, except per for Aggregate
share amounts) Grant Shares Price per Share Option Price
----------------------------------------------------------------------------------------------------
Balance, January 1, 1993 1,351,696 742,444 $3.84375 -- 18.21875 $ 9,240
Exercised -- (23,800) 3.84375 -- 12.09375 (144)
Cancelled -- (4,400) 18.21875 (80)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,351,696 714,244 3.84375 -- 18.21875 9,016
Granted (464,400) 464,400 14.00000 6,502
Exercised -- (51,940) 3.84375 -- 12.09375 (318)
----------------------------------------------------------------------------------------------------
Balance, December 31, 1994 887,296 1,126,704 $8.12500 -- 18.21875 $ 15,200
====================================================================================================
Became exercisable in 1994 243,904 $18.21875 $ 4,444
====================================================================================================
Became exercisable in 1993 70,000 $12.56250 $ 879
====================================================================================================
At December 31, 1994, treasury stock consists of 20,208 shares of preferred
stock and 84,280 shares of common stock. At December 31, 1993, treasury stock
consisted of 8,700 shares of preferred stock and 330,058 shares of common stock.
7. DEFERRED ESOP COMPENSATION
In 1985, the company established an Employee Stock Ownership Plan ("ESOP").
Under the Plan, the company makes contributions to a trust for the benefit of
eligible employees. The amount of the contribution is discretionary except that
it must be sufficient to enable the trust to meet its current obligations.
The trust originally borrowed $2,000,000 to purchase 438,356 common shares
for the Plan. The company has guaranteed the loan and is obligated to contribute
sufficient cash to the Plan to repay the loan. The loan bears interest at 85
percent of the prime rate which was 6.0 percent at December 31, 1993. The
remaining balance of the loan was reported as current maturities of long-term
debt in the consolidated balance sheet of the company at December 31, 1993 (Note
3), and a related amount of deferred compensation was reported as a reduction of
stockholders' equity. Compensation expense is recognized in equal annual amounts
through 1994. As of December 31, 1994, the company had made the last
contribution and the loan was repaid. The company currently has no plan for
further ESOP contributions.
8. PENSION PLANS
The company has non-contributory defined benefit plans covering
substantially all employees. The benefits under these plans are based primarily
on years of service and compensation levels. The company funds the annual
provision deductible for income tax purposes. The plans' assets consist
principally of marketable equity securities and government and corporate debt
securities. The plans' assets at December 31, 1994, include $6,300,000 of the
company's common stock.
Net 1994, 1993 and 1992 periodic pension cost for the plans consists of the
following:
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
Service cost $ 1,639 $ 1,251 $ 1,095
Interest cost on projected benefit obligation 2,454 2,228 1,997
Actual return on plan assets 1,190 (3,222) (3,372)
Net amortization and deferral (5,449) (824) (365)
-----------------------------------------------------------------------------------------------
Net prepaid pension cost $ (166) $ (567) $ (645)
===============================================================================================
The reconciliation of the funded status of the plans to the amount reported
in the company's consolidated balance sheet is as follows:
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
Vested benefit obligation $(18,583) $(24,388)
----------------------------------------------------------------------------------------------
Accumulated benefit obligation (21,127) (27,190)
----------------------------------------------------------------------------------------------
Projected benefit obligation (27,129) (32,818)
Plan assets at fair value 38,830 46,471
----------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 11,701 13,653
Unrecognized net gain (3,616) (3,855)
Unamortized net transitional assets (3,402) (4,755)
Unamortized prior service cost 1,058 508
----------------------------------------------------------------------------------------------
Prepaid pension asset $ 5,741 $ 5,551
==============================================================================================
The prepaid pension asset is included in the "Other Assets" caption on the
Consolidated Balance Sheets.
The projected benefit obligations were determined using a discount rate of
8.5 and 7.0 percent for 1994 and 1993, respectively. The projected benefit
obligations were determined under assumed compensation increases ranging from
5.0 percent to 7.0 percent for different employee groups for 1994 and 1993. The
assumed long-term rate of return on plan assets was 8.5 percent for 1994 and
1993. The plans' net transitional assets are being amortized over a period of 15
years. The prior service costs are being amortized over an average of 12 years.
In 1994, the company offered a one-time early retirement program to certain
employees with whom the company settled its pension obligation by acquiring an
annuity contract for vested benefits as of December 31, 1994. The gain of
$24,000 associated with this settlement is included
28
17
in consolidated net income for 1994. In connection with the early retirement
program, the company provides 50 percent of the cost of health insurance to
electing retirees up to normal retirement age. The company has accrued the
present value of the health insurance for these retirees under this one-time
early retirement program.
9. ACCRUED LIABILITIES
Accrued liabilities consisted of:
December 31
---------------------
(Dollars in Thousands) 1994 1993
----------------------------------------------------------------------------------------------
Accrued payroll and benefits $ 10,514 $ 9,583
Provision for uninsured risks 8,741 8,786
Other accrued liabilities 15,254 9,943
----------------------------------------------------------------------------------------------
Total accrued liabilities $ 34,509 $ 28,312
==============================================================================================
10. DEFERRED REVENUE
During 1994, the company received prepayments on certain multi-year
commitments for future shipments of products. As the commitments are fulfilled,
a proportionate share of the deferred revenue is taken into income. Related
deferred revenue at December 31, 1994 is $12.8 million of which $2.4 million is
included in the "Accrued liabilities" caption of the Consolidated Balance
Sheets.
11. ENVIRONMENTAL AND RESTRUCTURING CHARGES
In 1992, the company recorded a provision for environmental expenditures of
$5.0 million and a write-down of certain assets of $1.0 million and the related
restructuring reserve of $.5 million. The purpose of the environmental provision
was to bring the company's reserve for existing claims to a more conservative
level of probability. These future expenditures are indicative of the company's
commitment to improve and maintain the environment in which it operates.
Environmental accruals are included in the "Accrued liabilities" caption of the
company's consolidated balance sheets. In connection with a realignment of its
operation in late 1992, the company conducted a review of its operating
subsidiaries and determined that certain assets should be written down, which
resulted in non-recurring charges of $1.5 million. These charges included a $1.0
million write-down of certain non-performing assets of its subsidiary located in
Matamoros, Mexico, and an accrual of $.5 million for related restructuring
costs. This wholly owned subsidiary continues to serve the surfactant market
throughout Mexico.
12. CONTINGENCIES
There are a variety of legal proceedings pending or threatened against the
company. Some of these proceedings may result in fines, penalties, judgments or
costs being assessed against the company at some future time. The company's
operations are subject to extensive local, state and federal regulations,
including the federal Comprehensive Environmental Response, Compensation and
Liability Act of 1980 ("Superfund") and the Superfund amendments of 1986. The
company, and others, have been named as potentially responsible parties at
affected geographic sites. As discussed in Management's Discussion and Analysis
of Financial Condition and Results of Operations, the company believes that it
has made adequate provisions for the costs it may incur with respect to these
sites. The company has estimated a range of possible environmental and legal
losses from $5.5 million to $21.6 million at December 31, 1994, compared to $4.4
million to $22.8 million at December 31, 1993. At December 31, 1994, the
company's reserve was $6.9 million for legal and environmental matters compared
to $7.2 million at December 31, 1993. The company made payments of $4.3 million
in 1994 and $4.5 million in 1993 related to legal costs, settlements and costs
related to remedial design studies at various sites. While the company has
insurance policies that may cover some of its environmental costs, it does not
record those claims until such time as they become probable. During 1994, the
company received $3.1 million from insurers related to legal costs previously
incurred by the company. The recoveries reduced administrative expense in the
Consolidated Statements of Income. There were no insurance recoveries recorded
in 1993 or 1992.
At certain of the sites, estimates cannot be made of the total costs of
compliance, or the company's share of such costs; accordingly, the company is
unable to predict the effect thereof on future results of operations. In the
event of one or more adverse determinations in any annual or interim period, the
impact on results of operations for those periods could be material. However,
based upon the company's present belief as to its relative involvement at these
sites, other viable entities' responsibilities for cleanup and the extended
period over which any costs would be incurred, the company believes that these
matters will not have a material effect on the company's financial position.
Certain of these matters are discussed in Item 3, Legal Proceedings, in the
1994 Form 10-K Annual Report and in other filings of the company with the
Securities and Exchange Commission, which filings are available upon request
from the company.
13. GEOGRAPHIC DATA
(Dollars in Thousands) 1994 1993 1992
-----------------------------------------------------------------------------------------------
Net Sales
United States $372,261 $368,461 $365,666
Other 71,687 70,364 70,098
-----------------------------------------------------------------------------------------------
$443,948 $438,825 $435,764
===============================================================================================
Operating Income
United States $ 22,504 $ 22,122 $ 21,998
Other 7,144 5,128 8,511
-----------------------------------------------------------------------------------------------
$ 29,648 $ 27,250 $ 30,509
===============================================================================================
Identifiable Assets
United States $279,919 $256,398 $255,696
Other 45,029 44,090 41,384
-----------------------------------------------------------------------------------------------
$324,948 $300,488 $297,080
===============================================================================================
Operating income is calculated as income before net interest expense,
environmental and restructuring charges, provision for income taxes and
cumulative effect of accounting changes. Other includes subsidiaries in Canada,
Europe and Mexico.
29
18
TEN YEAR SUMMARY
(In Thousands, except per share and employee data)
For the Year 1994 1993 1992
--------------------------------------------------------------------------------------------------
Net Sales $443,948 $438,825 $435,764
--------------------------------------------------------------------------------------------------
Income from Operations 22,512 19,624 23,865(g)
Percent of net sales 5.1% 4.5% 5.5%
--------------------------------------------------------------------------------------------------
Gain on Sale of Assets -- -- --
Environmental and Restructuring Charges -- -- 6,500
Pre-tax Income 22,512 19,624 17,365
Percent of net sales 5.1% 4.5% 4.0%
--------------------------------------------------------------------------------------------------
Provision for Income Taxes 8,667 8,848 6,942
--------------------------------------------------------------------------------------------------
Net Income 13,845 10,776 15,829(h)
Per share (a) (b) 1.29 .98 1.46
Percent of net sales 3.1% 2.5% 3.6%
Percent to stockholders' equity (c) 13.3% 10.8% 17.4%
--------------------------------------------------------------------------------------------------
Cash Dividends Paid 5,294 5,105 4,172
Per common share (a) .4250 .4050 .3700
--------------------------------------------------------------------------------------------------
Depreciation and Amortization 28,935 27,679 23,914
Capital Expenditures 42,884 25,435 34,440
Average Common Shares Outstanding (a) 9,924 9,894 10,572
--------------------------------------------------------------------------------------------------
As of Year End
--------------------------------------------------------------------------------------------------
Working Capital $ 48,915 $ 48,569 $ 44,265
Current Ratio 1.6 1.7 1.6
--------------------------------------------------------------------------------------------------
Property, Plant and Equipment (net) 183,657 170,270 167,930
Total Assets 324,948 300,488 297,080
Long-term Debt 89,795 89,660 90,505
--------------------------------------------------------------------------------------------------
Stockholders' Equity 111,302 104,217 99,506
Per share (a) (d) 10.27 9.65 9.22
Number of Employees 1,265 1,302 1,317
==================================================================================================
(a) Adjusted for two-for-one common stock splits in 1988 and 1994.
(b) Based on average number of common shares outstanding during the year.
(c) Based on equity at beginning of year.
(d) Based on common shares and the assumed conversion of the convertible
preferred shares outstanding at year end.
(e) Change in method of accounting for pensions increased net income in 1986 by
$467 or $.04 per share.
(f) Pre-tax income before gain on sale of assets.
(g) Pre-tax income before environmental and restructuring charges and cumulative
effect of accounting changes.
(h) Reflected cumulative effect of accounting changes for income taxes and
investment tax credits of $5.4 million, or $.51 per primary share and $.49
per fully diluted share.
QUARTERLY STOCK DATA (UNAUDITED)
Dividends Paid
Stock Price Range Per Common Share
----------------------------------------------------------------------------
1994 1993
Quarter High Low High Low 1994 1993
-------------------------------------------------------------------------------------------------
First $ 16 $ 13-5/16 $ 18-13/16 $ 15-3/8 10.5c 10.0c
Second 14-5/16 13 18-9/16 15-13/16 10.5c 10.0c
Third 17-5/8 12-3/8 16-13/16 14-1/2 10.5c 10.0c
Fourth 17-11/16 14-1/2 14-13/16 12-9/16 11.0c 10.5c
------------------
Year 17-11/16 12-3/8 18-13/16 12-9/16 42.5c 40.5c
==================================================================================================================================
30
19
1991 1990 1989 1988 1987 1986 1985
-----------------------------------------------------------------------------
$414,069 $389,612 $346,350 $333,033 $288,935 $259,787 $235,919
-----------------------------------------------------------------------------
18,866 21,420(f) 11,701 20,554 19,230 14,037 9,231
4.6% 5.5% 3.4% 6.2% 6.7% 5.4% 3.9%
-----------------------------------------------------------------------------
-- 874 -- -- -- -- --
-- -- -- -- -- -- --
18,866 22,294 11,701 20,554 19,230 14,037 9,231
4.6% 5.7% 3.4% 6.2% 6.7% 5.4% 3.9%
-----------------------------------------------------------------------------
6,319 7,803 3,861 7,126 8,271 6,524 3,760
-----------------------------------------------------------------------------
12,547 14,491 7,840 13,428 10,959 7,513(e) 5,471
1.15 1.32 .71 1.19 .91 .63(e) .47
3.0% 3.7% 2.3% 4.0% 3.8% 2.9% 2.3%
15.2% 20.5% 11.7% 22.4% 19.9% 15.2% 11.5%
-----------------------------------------------------------------------------
3,603 3,190 2,919 2,658 2,386 2,145 2,000
.3300 .2900 .2650 .2375 .2075 .1850 .1725
-----------------------------------------------------------------------------
21,108 19,391 17,061 15,393 13,815 11,630 9,949
33,728 38,375 34,090 20,442 25,705 14,322 19,189
10,916 10,992 11,034 11,216 11,954 11,888 11,586
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
$ 41,972 $ 38,943 $ 36,952 $ 28,498 $ 26,637 $ 23,386 $ 20,602
1.7 1.7 1.8 1.6 1.7 1.6 1.6
-----------------------------------------------------------------------------
157,063 143,342 122,509 104,697 98,994 85,607 82,796
271,442 246,992 215,351 185,601 172,726 152,794 139,307
89,759 77,326 68,568 45,369 44,399 34,868 36,962
-----------------------------------------------------------------------------
90,866 82,698 70,741 66,790 59,936 55,029 49,575
8.35 7.57 6.45 6.06 5.32 4.76 4.28
1,317 1,311 1,152 1,028 1,002 948 894
=============================================================================
QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in Thousands, except per share data)
1994 1993
-----------------------------------------------------------------------------------------------------------
Quarter First Second Third Fourth Year First Second Third Fourth Year
---------------------------------------------------------------------------------------------------------------------------------
Net Sales $107,279 $112,305 $110,761 $113,603 $443,948 $114,620 $110,578 $111,111 $102,516 $438,825
---------------------------------------------------------------------------------------------------------------------------------
Gross Profit 19,143 20,657 20,983 20,317 81,100 22,868 20,662 21,149 15,356 80,035
---------------------------------------------------------------------------------------------------------------------------------
Interest, net (1,918) (1,803) (1,639) (1,776) (7,136) (1,887) (1,904) (1,869) (1,966) (7,626)
---------------------------------------------------------------------------------------------------------------------------------
Pre-tax Income
(Loss) 3,427 6,912 6,939 5,234 22,512 7,975 5,760 6,688 (799) 19,624
---------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss) 2,022 4,078 4,112 3,633 13,845 4,687 3,368 3,170 (449) 10,776
---------------------------------------------------------------------------------------------------------------------------------
Net Income (Loss)
per Share (a) .18 .38 .39 .34 1.29 .44 .31 .29 (.08) .98
==================================================================================================================================
(a) Restated for the two-for-one common stock split effective December 15, 1994.
31