Exhibit 13
Financial Highlights
(In thousands, except per share % Change % Change
and stockholder amounts) 2000 1999 (2000 vs. 1999) 1998 (1999 vs. 1998)
- -------------------------------------------------------------------------------------------------------------------------
Net Sales * $698,937 $694,659 +1 $635,756 +9
Net Income 15,008 22,129 -32 23,454 -6
Per Share (Diluted) 1.47 2.08 -29 2.12 -2
Percent of Net Sales 2.1% 3.2% -34 3.7% -14
Percent Return on Beginning Equity 9.7% 15.0% -35 17.0% -12
Depreciation and Amortization 39,277 39,452 -- 37,347 +6
Capital Expenditures 28,442 32,697 -13 44,056 -26
Dividends Per Common Share 66.25c 61.25c +8 56.25c +9
Working Capital 68,872 68,615 -- 61,814 +11
Current Ratio 1.6 1.7 -6 1.7 --
Long-term Debt, less current maturities 96,466 107,420 -10 107,708 --
Stockholders' Equity 154,176 155,064 -1 147,984 +5
Stockholders' Equity Per Share 15.57 15.20 +2 14.18 +7
Average Common Shares Outstanding 9,355 9,592 -2 9,843 -3
Number of Stockholders 1,357 1,514 -10 1,587 -5
* Prior years Net Sales have been restated to conform to the requirements of
EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs".
Net Sales Net Income
(Dollars in thousands) (Dollars in thousands)
------------------------------- ------------------------------
1995 548,196 1995 16,119
1996 557,973 1996 19,067
1997 605,574 1997 20,410
1998 635,756 1998 23,454
1999 694,659 1999 22,129
2000 698,937 2000 15,008
Compound Annual Growth Compound Annual Growth
Five Years +5% Five Years -1%
Net Income Per Dividends Per
Common Share (Diluted) Common Share
(Dollars) (Dollars)
------------------------------- ----------------------
1995 1.46 1995 .4475
1996 1.71 1996 .4775
1997 1.86 1997 .5125
1998 2.12 1998 .5625
1999 2.08 1999 .6125
2000 1.47 2000 .6625
Compound Annual Growth Compound Annual Growth
Five Years +0% Five Years +8%
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
2000 Compared with 1999
Net sales for 2000 increased one percent from $694.7 million in 1999 to $698.9
million in 2000 (prior year data has been reclassified to conform to 2000
presentation). The increase was due to a three percent rise in sales volume.
Net sales by segment were as follows:
Percent
(Dollars in thousands) 2000 1999 Change
- --------------------------------------------------------------
Surfactants $537,006 $547,359 -2
Polymers 140,786 126,774 +11
Specialty Products 21,145 20,526 +3
-------- --------
Total $698,937 $694,659 +1
======== ========
Surfactants are a principal ingredient in consumer and industrial cleaning
products such as detergents, shampoos, lotions, toothpastes and cosmetics.
Other applications include lubricating ingredients and emulsifiers for
agricultural products, and plastics and composites.
Surfactants net sales, representing 77 percent of the company's revenue,
decreased $10.4 million, or two percent, from $547.4 million in 1999 to $537.0
million in 2000. Foreign operations' net sales decreased $13.2 million, or 10
percent, from $133.0 million in 1999 to $119.8 million in 2000, which accounted
for the overall net sales decline. The decrease was mainly due to a decline in
revenue reported by the company's Mexican and European subsidiaries. Mexican
operations reported lower revenue due to decreased sales volume. Despite a
volume gain between years, European operations' net sales decreased. Weaker
selling prices and lower exchange rates contributed to the overall decline.
Domestic sales increased $2.8 million, or one percent, from $414.4 million in
1999 to $417.2 million in 2000. A six percent rise in sales volume offset a five
percent drop in average selling prices. Average selling prices declined largely
due to sales mix, increased market competition and the non-recurring favorable
impact in 1999 of the settlement of a contract cancellation. Sales volume grew
six percent due to higher demand for the company's laundry and cleaning products
and rising export sales to Asia.
The polymers product group includes phthalic anhydride (PA), polyurethane
systems and polyurethane polyols. PA is used in polyester 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
2
the manufacture of laminate board for the construction industry. Polyurethane
polyols are also sold to the appliance, coatings, adhesives, sealants and
elastomers markets.
Polymer net sales, accounting for 20 percent of the company's revenue,
increased 11 percent, from $126.8 million in 1999 to $140.8 million in 2000. The
increase was due to a five percent rise in sales volume coupled with increased
average selling prices. Globally, polyurethane polyols' net sales rose $6.7
million, or ten percent, from $70.0 million in 1999 to $76.7 million in 2000.
The increase was entirely due to a nine percent rise in sales volume. Both
domestic and foreign operations sales increased between years. PA's net sales
increased 14 percent from $36.3 million in 1999 to $41.4 million in 2000. The
improvement was entirely due to a 14 percent rise in average selling prices. The
higher prices were due to increased raw material costs, which were passed on to
customers. Sales volume was flat between years. Polyurethane systems reported a
$2.2 million, or 11 percent, increase in net sales. A nine percent rise in sales
volume coupled with a two percent increase in average selling prices caused an
overall improvement.
Specialty products include flavors, emulsifiers and solubilizers used in
the food and pharmaceutical industry. Net sales for the year were $21.1 million,
a rise of $0.6 million, or three percent over 1999. Higher average selling
prices led to the growth.
Gross profit decreased to $112.0 million in 2000 from $120.9 million in
1999. Surfactants gross profit was down $8.3 million, or nine percent, from
$87.6 million in 1999 to $79.3 million in 2000. Domestic operations reported a
$6.6 million, or nine percent, decrease due to lower average margins.
Termination of the previously mentioned supply contract coupled with lower
pricing in the higher volume product lines led to the margin decline. Gross
profit for foreign operations decreased $1.7 million, or 11 percent, between
years. Decreased sales volume for Mexican operations coupled with lower margins
reported by the company's French subsidiary led to the overall decline. Weaker
exchange rates in Europe and strong competition contributed to the decrease.
Polymers' gross profit increased slightly between years to $27.9 million in 2000
from $27.8 million in 1999. Lower margins offset the impact of increased sales
volume. Globally, polyurethane polyols gross profit was down $2.6 million, or 12
percent, between years. Decreased domestic and European margins, due to higher
raw material costs, caused the drop in gross profit. PA's gross profit was up
$1.9 million, or 42 percent, between years, despite a $0.9 million write-off of
damaged catalyst. Improved margins accounted for the increase. A rise in margins
and sales volume also led to a $0.7 million, or 17 percent, increase in
polyurethane systems gross profit. Specialty products gross profit decreased by
$0.7 million, or 13 percent, between years mainly due to lower sales of higher
margin products.
Operating income was $32.0 million, a $9.8 million, or 23 percent, decrease
from 1999. Operating expenses, consisting of marketing, administrative and
research and development expenses, increased one percent between years.
Marketing expenses rose $1.4 million, or six percent, primarily due to increased
bad debt provision. Administrative expenses decreased just $0.6 million, or two
percent, despite unusually high 1999 expenses that resulted from a $10.2 million
legal settlement charge. 2000 administrative expenses included $6.1 million of
legal and environmental-related charges, most of which related to potential
future remediation costs at the company's Maywood, New Jersey, plant (see
Environmental and Legal Matters section of this discussion for additional
information). General legal expense was also up $1.4 million between years.
3
Philippine joint venture equity income fell $0.7 million, or 51 percent,
between years. An $0.8 million unfavorable swing in foreign currency exchange
losses, due to a weaker Philippine peso, caused the decline. The impact from
foreign exchange fluctuations excluding the joint venture was immaterial to the
results of the company's operations.
Pretax income declined $10.4 million, or 30 percent, to $24.4 million in
2000 from $34.8 million in 1999.
The effective tax rate was 38.5 percent in 2000 compared to 36.5 percent in
1999. The higher effective tax rate was primarily attributable to the inability
to tax benefit losses in Germany and Mexico. A lower tax benefit realized on
Philippine income during 2000 also contributed to the higher effective tax rate
(see Note 6 of the Notes to the Consolidated Financial Statements for a
reconciliation of the statutory rate to the effective tax rate).
Net income for the year was $15.0 million, or $1.47 per share diluted,
compared with $22.1 million, or $2.08 per share diluted, a year ago.
1999 Compared with 1998
Net sales for 1999 increased nine percent to $694.7 million. The increase was
primarily the result of a nine percent growth in sales volume. Net sales by
segment were as follows (prior year data has been reclassified to conform to
2000 presentation):
Percent
(Dollars in thousands) 1999 1998 Change
- -----------------------------------------------------------------
Surfactants $547,359 $493,930 +11
Polymers 126,774 122,148 +4
Specialty Products 20,526 19,678 +4
-------- --------
Total $694,659 $635,756 +9
======== ========
Surfactants net sales, accounting for 79 percent of the company's revenue,
increased $53.4 million, or 11 percent, due mainly to a 10 percent rise in sales
volume. Domestic and foreign operations contributed to the overall growth.
Domestic operations increased $25.5 million, or seven percent, due to a six
percent gain in sales volume. Rising demand for personal care and laundry and
cleaning products was the main contributor to the improved sales volume. Exports
to Asia also experienced a solid recovery from the weakness of a year ago.
Foreign operations reported a $27.9 million, or 27 percent, increase in net
sales, due largely to higher sales volume. All foreign operations posted net
sales increases. Canadian operations benefited from the fourth quarter 1998
acquisition of the anionic and cationic surfactants business from Boehme-Filatex
Canada, Inc. Mexican operations' net sales increase also was aided by a major
customer switching from consigning raw material and paying a processing fee to
buying finished products inclusive of raw materials costs. 1999 was the first
full-year consolidation of Stepan Colombia.
Polymers' net sales, accounting for 18 percent of the company's revenue,
increased four percent, mainly due to a four percent rise in sales volume.
Globally,
4
polyurethane polyols accounted for most of the growth with a gain in net sales
of $5.3 million, or eight percent, due to a 12 percent growth in sales volume.
North American, South American and European sales all increased between years.
Polyurethane systems reported a $1.0 million, or five percent, growth in net
sales based on improved sales volume. PA's sales volume drop of four percent,
coupled with decreased average selling prices, caused a $1.7 million, or four
percent, decline in net sales.
Specialty products net sales were $20.5 million, a rise of $0.8 million, or
four percent, over 1998. Increased volume and higher average selling prices
contributed to the growth.
Gross profit increased to $120.9 million in 1999 from $111.6 million in
1998. 1999 surfactants gross profit of $87.6 million rose 11 percent from $79.7
million in 1998. The increase was due to a nine percent growth in sales volume.
Domestic operations reported a $5.9 million, or nine percent, rise based on a
six percent improvement in sales volume. In addition, the early termination of a
sales contract resulted in the recognition of $2.7 million of income. Higher
sales volumes and margins for French and Canadian operations coupled with the
whole year consolidation of the Colombian subsidiary led to the increase in
foreign operations. Weakness in the German results adversely affected gross
profit from foreign subsidiaries. Polymers' gross profit remained flat at $27.8
million between years despite record results from domestic polyurethane polyols
and higher polyurethane systems profit. Globally, polyurethane polyols' profit
rose $2.6 million, or 13 percent. Improved domestic margins and higher sales
volume led to the gain. Decreased margins in Europe dampened polyurethane
polyols results. Higher volumes and margins also caused a $0.5 million, or 14
percent, profit increase for polyurethane systems. Lower PA gross profit, due to
decreased volume and margins, offset the gains reported by polyurethane polyols
and systems. Specialty products gross profit grew by $0.5 million, or 11
percent, to $5.5 million in 1999. Improved margins caused the increase.
Average raw material costs increased approximately two percent from 1998 to
1999. Manufacturing labor costs increased due to higher fringe benefit costs and
normal annual pay raises. Total number of company employees decreased to 1,365
during 1999 from 1,372 in 1998. Depreciation expenses increased to $36.2 million
in 1999 from $34.8 million in 1998.
Operating income was $41.8 million, a $3.6 million, or eight percent,
decrease from 1998. Operating expenses, consisting of marketing, administrative
and research expenses, increased $13.0 million, or 20 percent. Administrative
expenses climbed 50 percent due to a $10.2 million charge related to the
settlement of a lawsuit (see Environmental and Legal Matters section of this
discussion for additional information). Research expenses rose eight percent
between years mainly due to increased staffing levels to support development and
commercialization of high value added products. Marketing expenses grew two
percent over 1998.
Pre-tax income declined 10 percent between years due mainly to the lawsuit
settlement. Interest expense increased 12 percent due to decreased capitalized
interest and higher average levels of debt partially offset by lower average
interest rate.
The effective tax rate was 36.5 percent in 1999 compared to 39.5 percent in
1998. The lower effective tax rate primarily was attributable to tax losses
utilized in Europe. An overall lower state apportionment factor and a higher tax
benefit realized
5
on Philippine income during 1999 also contributed to the lower effective tax
rate (see Note 6 of the Notes to the Consolidated Financial Statements for a
reconciliation of the statutory rate to the effective tax rate).
Net income for the year was $22.1 million, or $2.08 per share diluted,
compared with $23.5 million, or $2.12 per share diluted, in 1998. Excluding the
effect of the previously discussed lawsuit settlement ($6.3 million after-tax
charge), net income would have been $28.4 million, a 21 percent increase over
1998.
Fourth Quarter 2000 Compared with 1999
For the quarter ended December 31, 2000, the company reported a net loss of $2.1
million, or a $0.25 loss per share diluted, compared to a record $8.0 million,
or $0.76 per share diluted, in the fourth quarter of 1999. Approximately $6.1
million ($3.7 million after-tax) of legal and environmental charges were
included in the fourth quarter results of 2000. Most of the charges were related
to potential future remediation costs at the company's Maywood, New Jersey,
plant. Net sales for the quarter decreased four percent to $169.4 million from
$176.1 million a year ago. Gross profit was down 20 percent from $31.4 million
in the fourth quarter of 1999 to $25.2 million in the fourth quarter of 2000.
Surfactants gross profit decreased $6.3 million, or 27 percent, due primarily to
lower average domestic margins and to lower foreign sales volumes and margins.
Polymers reported a $1.9 million, or 35 percent, increase in gross profit.
Increased average margins more than offset a three percent decline in sales
volume. Gross profit for specialty products was down $1.8 million between
quarters. A drop in sales volume of higher margin products led to the decline.
Operating expenses rose $8.5 million, or 46 percent, in comparison to the fourth
quarter of 1999. Higher administrative expenses ($8.1 million), which included
the previously mentioned legal and environmental charges, accounted for most of
the increase. Acquisition investigation ($0.6 million), other legal ($0.5
million) and severance ($0.5 million) expenses contributed to the administrative
expense increase. Marketing expenses also rose between quarters ($0.6 million)
largely due to an increased provision for bad debts. Philippine joint venture
equity income fell $0.5 million between quarters. Foreign currency exchange
losses, due to a weaker Philippine peso, accounted for about $0.4 million of the
decline.
Liquidity and Financial Condition
For the 12 months ended December 31, 2000, net cash from operations totaled
$53.5 million, up by $2.9 million from the total in 1999. Net income decreased
by $7.1 million from year to year. However, non-cash income items were up by
$4.2 million from 1999 levels, primarily due to a $5.1 million increase in
environmental and legal liabilities. Working capital netted to a cash source of
$1.4 million for the current year, compared to a cash use of $4.4 million in
1999. Accounts payable and accrued liabilities increased by $10.9 million while
inventories and accounts receivables increased by $8.3 million and $1.4 million,
respectively. Other working capital, mainly prepaid expenses, decreased by $0.2
million. Capital spending totaled $28.4 million, down by $4.3 million from the
1999 total.
6
Consolidated debt decreased by $9.0 million during 2000, ending the year at
$106.1 million. As of December 31, 2000, the ratio of long-term debt to long-
term debt plus shareholders' equity was 38.5 percent compared to 40.9 percent
one year earlier.
The company maintains contractual relationships with its domestic banks that
provide for $60 million of committed, revolving credit which may be drawn upon
as needed for general corporate purposes.
The company also meets short-term liquidity requirements through
uncommitted bank lines of credit. 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 and acquisitions.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
Market Risk Analysis
FOREIGN CURRENCY EXCHANGE RISK
Because the company operates in the global marketplace, its cash flows and
operating results are exposed to foreign currency fluctuations. 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. As such, exposure to
exchange rate risk on foreign currency financial instruments is insignificant.
The company's 50 percent owned Philippine joint venture has U.S. dollar-
denominated debt with the potential for future translation gains or losses. A
10 percent change in this exchange rate would not have a material effect on the
company's operating results or cash flow. A substantial majority of the
revenues of the Philippine joint venture is also denominated in U.S. dollars.
INTEREST RATES
The company's debt was composed of fixed-rate and variable-rate borrowings
totaling $92.4 million and $13.7 million, respectively, as of December 31, 2000.
For 2001, it is projected that interest on variable-rate borrowings will
comprise about 21 percent of the company's total interest expense. A 10 percent
increase or decrease to short-term interest rates would be immaterial to the
company's operating results or cash flow.
The fair value of the company's fixed-rate debt, including current maturities,
was estimated to be $88.7 million as of December 31, 2000, which was
approximately $3.7 million below 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, 2000, or $2.7 million. Such a rate decrease
would be immaterial to future operating results or cash flow.
7
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 and other
unpredictable factors. In many cases, the company has the ability to pass on raw
material price increases to customers. Therefore, commodity financial
instruments are generally not used. Periodically, firm purchase commitments are
entered into which fix the price of a specific commodity that will be delivered
at a future time. Such commitments usually cover only a portion of the company's
anticipated requirements. At December 31, 2000, the company had no significant
firm commitments and, as a result, the price risk is not material to the
company's consolidated financial position, results of operations or cash flow.
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 2000, the company's
expenditures for capital projects related to the environment were $2.1 million.
These projects are capitalized and depreciated over their estimated useful
lives, which is 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 $7.9 million for 2000 compared to $7.5 million for
1999. 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 16 waste disposal sites where cleanup 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. After partial remediation payments at certain sites,
the company has estimated a range of possible environmental and legal losses
from $7.5 million to $35.0 million at December 31, 2000, compared to $4.2
million to $25.2 million at December 31, 1999. At December 31, 2000, the
company's reserve was $16.6 million for legal and environmental matters compared
to $11.6 million at December 31, 1999. The increase in the reserve was primarily
due to additional potential remediation costs at the company's Maywood, New
Jersey, plant (see Footnote 12, Contingencies, in the Notes to Consolidated
Financial Statements). During 2000, non-capital expenditures related to legal
and environmental matters approximated $2.5 million compared to $15.8 million,
net of insurance recoveries, expended in 1999. While it is difficult to forecast
the timing of the expenditures, the company believes that
8
$3.0 million of the $16.6 million reserve is likely to be paid out in 2001. The
balance of the reserve would probably be paid out over many years.
For certain 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 2000
Form 10-K Annual Report and in other filings of the company with the Securities
and Exchange Commission, which are available upon request from the company. See
also Footnote 12, Contingencies, in the Notes to Consolidated Financial
Statements for a summary of the environmental proceedings related to the
company's Maywood, New Jersey, and Ewan and D'Imperio environmental sites.
New Accounting Standard
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities", effective for fiscal years beginning after
June 15, 1999. In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date to fiscal years beginning after June 15, 2000. The new standard
establishes accounting and reporting requirements for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. Such instruments are to be recognized on the balance sheet
as either an asset or a liability measured at fair value. Changes in fair value
must be recognized currently in earnings or in other comprehensive income if
specific hedge criteria are met. Special accounting for qualifying hedges allows
a derivative instrument's gains and losses to offset related results on the
hedged item in the statement of income, to the extent effective. If a
transaction is designated to receive hedge accounting, the company must
establish at the inception of the hedge the method it will use for assessing the
effectiveness of the hedge and the measurement approach for determining the
ineffective aspect of the hedge. Stepan Company has analyzed its activities and
has determined that it has limited transactions that fall under the accounting
rules of SFAS No. 133. As a result, the adoption of SFAS No. 133 in the first
quarter of 2001 will not have a material effect on the company's consolidated
results of operations or financial position.
In January 2001, the Emerging Issues Task Force (EITF), issued EITF Issue
No. 00-22 "Accounting for `Points' and Certain Other Time-Based or Volume-Based
Sales Incentive Offers, and Offers for Free Products or Services to Be Delivered
in the Future." EITF Issue No. 00-22 provides guidance regarding timing of
recognition and income statement classification of costs incurred in connection
with offers of volume-based sales incentives that are provided to customers at a
future date upon reaching certain volume purchase levels. This guidance
requires certain volume rebate offers delivered subsequent to the related
transactions in which they are earned, be
9
recognized when incurred and reported as a reduction of revenue in the statement
of operations. The effective date of EITF No. 00-22 is the first quarter ending
after February 15, 2001. The company's accounting policies are currently
consistent with the guidance provided in this EITF; therefore, this standard
will have no impact on the company's statements of income or financial position.
10
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
F. Quinn Stepan, Jr.
President and Chief Operating Officer
Walter J. Klein
Vice President - Finance
February 16, 2001
11
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, 2000 and 1999, and
the related consolidated statements of income, cash flows and stockholders'
equity, for each of the three years in the period ended December 31, 2000.
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 auditing standards generally
accepted in the United States. 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 also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit 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, 2000 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 2000, in conformity with accounting principles generally
accepted in the United States.
Chicago, Illinois
February 16, 2001
12
Consolidated Balance Sheets
December 31, 2000 and 1999
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 3,536 $ 3,969
Receivables, less allowances of $3,154 in 2000 and $2,389 in 1999 98,488 97,089
Inventories (Note 3) 60,132 51,849
Deferred income taxes (Note 6) 10,866 9,361
Other current assets 4,191 4,392
-------- --------
Total current assets 177,213 166,660
======== ========
Property, Plant and Equipment:
Land 5,786 5,905
Buildings and improvements 69,654 68,560
Machinery and equipment 530,564 514,397
Construction in progress 13,292 8,042
-------- --------
619,296 596,904
Less: Accumulated depreciation 420,149 387,423
-------- --------
Property, plant and equipment, net 199,147 209,481
-------- --------
Other Assets 38,689 38,435
-------- --------
Total assets $415,049 $414,576
======== ========
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 9,586 $ 7,663
Accounts payable 57,255 48,676
Accrued liabilities (Note 10) 41,500 41,706
-------- --------
Total current liabilities 108,341 98,045
-------- --------
Deferred Income Taxes (Note 6) 39,170 41,975
-------- --------
Long-term Debt, less current maturities (Note 4) 96,466 107,420
-------- --------
Other Non-current Liabilities (Note 11) 16,896 12,072
-------- --------
Stockholders' Equity (Note 7):
5 1/2 percent convertible preferred stock, cumulative, voting, without par value;
authorized 2,000,000 shares; issued 583,469 in 2000 and 783,003
shares in 1999 14,587 19,575
Common stock, $1 par value; authorized 30,000,000 shares; issued
9,411,106 shares in 2000 and 9,684,600 shares in 1999 9,411 9,685
Additional paid-in capital 13,343 11,909
Accumulated other comprehensive loss (12,402) (10,631)
Retained earnings 133,308 134,224
-------- --------
158,247 164,762
Less: Treasury stock, at cost 4,071 9,698
-------- --------
Stockholders' equity 154,176 155,064
-------- --------
Total liabilities and stockholders' equity $415,049 $414,576
======== ========
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
13
Consolidated Statements of Income
For the years ended December 31, 2000, 1999 and 1998
(In thousands, except per share amounts) 2000 1999 1998
- --------------------------------------------------------------------------------------------------------------
Net Sales (Note 1) $698,937 $694,659 $635,756
-------- -------- --------
Cost of Sales 586,911 573,714 524,161
-------- -------- --------
Gross Profit 112,026 120,945 111,595
-------- -------- --------
Operating Expenses:
Marketing 25,166 23,799 23,365
Administrative (Note 13) 32,152 32,775 21,825
Research, development and technical services (Note 1) 22,680 22,593 20,982
-------- -------- --------
79,998 79,167 66,172
-------- -------- --------
Operating Income 32,028 41,778 45,423
Other Income (Expenses):
Interest, net (Note 4) (8,328) (8,376) (7,453)
Income from equity joint venture (Note 1) 703 1,427 796
-------- -------- --------
(7,625) (6,949) (6,657)
-------- -------- --------
Income Before Provision for Income Taxes 24,403 34,829 38,766
Provision for Income Taxes (Note 6) 9,395 12,700 15,312
-------- -------- --------
Net Income $ 15,008 $ 22,129 $ 23,454
======== ======== ========
Net Income Per Common Share (Note 15):
Basic $ 1.52 $ 2.22 $ 2.29
======== ======== ========
Diluted $ 1.47 $ 2.08 $ 2.12
======== ======== ========
Shares Used to Compute Net Income
Per Common Share (Note 15):
Basic 9,355 9,592 9,843
======== ======== ========
Diluted 10,236 10,632 11,043
======== ======== ========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
14
Combined Sales
(Dollars in thousands)
Specialty Consolidated
Surfactants Polymers Products Total
1996 431,362 108,191 18,420 557,973
1997 475,585 110,753 19,236 605,574
1998 493,930 122,148 19,678 635,756
1999 547,359 126,774 20,526 694,659
2000 537,006 140,786 21,145 698,937
2000 Sales Dollar Distribution
(Dollars in thousands)
Material 415,707 59.5%
Other Expenses 122,288 17.5%
Payroll and Fringes 97,262 13.9%
Depreciation and Amortization 39,277 5.6%
Income Taxes 9,395 1.3%
Net Income 15,008 2.2%
15
Consolidated Statements of Cash Flows
For the years ended December 31, 2000, 1999 and 1998
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
Net Cash Flows from Operating Activities
Net income $ 15,008 $ 22,129 $ 23,454
Depreciation and amortization 39,277 39,452 37,347
Deferred revenue recognition (1,761) (5,165) (4,327)
Customer prepayments -- -- 800
Deferred income taxes (3,905) 3,745 4,244
Environmental and legal liabilities 5,069 (4,999) (3,035)
Other non-cash items (1,565) (98) (998)
Changes in Working Capital:
Receivables, net (1,399) (15,199) 179
Inventories (8,283) 647 (2,840)
Accounts payable and accrued liabilities 10,890 10,676 2,731
Other 201 (575) 1,292
-------- -------- --------
Net Cash Provided by Operating Activities 53,532 50,613 58,847
-------- -------- --------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (28,442) (32,697) (44,056)
Investment in acquisitions -- (450) (21,195)
Other non-current assets (1,122) (594) 1,587
-------- -------- --------
Net Cash Used for Investing Activities (29,564) (33,741) (63,664)
-------- -------- --------
Cash Flows from Financing and Other Related Activities
Revolving debt and notes payable to banks, net (1,500) 11,400 (10,310)
Other debt borrowings -- -- 30,000
Other debt repayments (7,531) (10,832) (6,151)
Purchases of treasury stock, net (8,732) (8,255) (8,402)
Dividends paid (7,004) (6,727) (6,432)
Stock option exercises 1,397 1,088 2,473
Other non-cash items (1,031) (560) (885)
-------- -------- --------
Net Cash Provided by (Used for)
Financing and Other Related Activities (24,401) (13,886) 293
-------- -------- --------
Net Increase (Decrease) in Cash and Cash Equivalents (433) 2,986 (4,524)
Cash and Cash Equivalents at Beginning of Year 3,969 983 5,507
-------- -------- --------
Cash and Cash Equivalents at End of Year $ 3,536 $ 3,969 $ 983
======== ======== ========
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 13,262 $ 10,564 $ 9,295
Cash payments of interest $ 8,775 $ 8,780 $ 7,781
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
16
Capital Expenditures
(Dollars in thousands)
1995 39,247
1996 44,923
1997 35,589
1998 44,056
1999 32,697
2000 28,442
Compound Annual Growth
Five Years -6%
Equity Per Share
(Dollars)
1995 11.25
1996 12.24
1997 13.01
1998 14.18
1999 15.20
2000 15.57
Compound Annual Growth
Five Years +7%
17
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 2000, 1999 and 1998
Accumulated
Convertible Additional Other
Preferred Common Paid-in Treasury Comprehensive Retained Comprehensive
(Dollars in thousands) Stock Stock Capital Stock Income (Loss) Earnings Income
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1998 $19,711 $10,342 $ 8,091 $(14,063) $ (7,337) $120,854 --
Sale of 151,200 shares
under stock option plan -- 151 2,322 -- -- -- --
Purchase of 288,744 shares of common
treasury stock, net of sales -- -- 462 (8,402) -- -- --
Retirement of 500,000 shares of common
treasury stock -- (500) (552) 11,450 -- (10,398) --
Conversion of preferred stock
to common stock (100) 5 96 -- -- -- --
Net income -- -- -- -- -- 23,454 $23,454
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,713) -- (1,713)
-------
Comprehensive income -- -- -- -- -- -- $21,741
=======
Cash dividends paid: -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (896) --
Common stock (56.25c per share) -- -- -- -- -- (5,536) --
Non-qualified stock option tax benefit -- -- 543 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 19,611 9,998 10,962 (11,015) (9,050) 127,478 --
Sale of 85,250 shares
under stock option plan -- 85 1,003 -- -- -- --
Purchase of 317,048 shares of common
and 38,646 shares of preferred treasury
stock, net of sales -- -- 4 (8,255) -- -- --
Retirement of 400,000 shares of common
treasury stock -- (400) (516) 9,572 -- (8,656) --
Conversion of preferred stock
to common stock (36) 2 34 -- -- -- --
Net income -- -- -- -- -- 22,129 $22,129
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,581) -- (1,581)
-------
Comprehensive income -- -- -- -- -- -- $20,548
=======
Cash dividends paid: -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (858) --
Common stock (61.25c per share) -- -- -- -- -- (5,869) --
Non-qualified stock option tax benefit -- -- 422 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 19,575 9,685 11,909 (9,698) (10,631) 134,224 --
Sale of 113,950 shares
under stock option plan -- 114 1,283 -- -- -- --
Purchase of 386,709 shares of common
and 16,015 shares of preferred treasury
stock, net of sales -- -- (260) (8,732) -- -- --
Retirement of shares of treasury stock:
400,000 shares of common stock -- (400) (565) 8,975 -- (8,010) --
188,535 shares of preferred stock (4,713) -- 239 5,384 -- (910) --
Conversion of preferred stock
to common stock (275) 12 262 -- -- -- --
Net income -- -- -- -- -- 15,008 $15,008
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,771) -- (1,771)
-------
Comprehensive income -- -- -- -- -- -- $13,237
=======
Cash dividends paid: -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (815) --
Common stock (66.25c per share) -- -- -- -- -- (6,189) --
Non-qualified stock option tax benefit -- -- 475 -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $14,587 $ 9,411 $13,343 $ (4,071) $(12,402) $133,308 --
===================================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
18
Notes to Consolidated Financial Statements
For the years ended December 31, 2000, 1999 and 1998
1. Summary of Significant Accounting Policies
Nature of Operations
The company's 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,
toothpastes and household cleaners), paints, cosmetics, food and beverages,
agricultural products, plastics, furniture, automotive equipment, insulation and
refrigeration.
The company grants credit to its customers who are widely distributed
across the Americas, Europe, Asia and the Pacific. 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 subsidiaries. All significant intercompany balances and
transactions have been eliminated in consolidation. The investment in the 50
percent owned joint venture in the Philippines is accounted for on the equity
method and is included in the "Other Assets" caption on the Consolidated Balance
Sheet. The company's share of the net earnings of the investment is included in
consolidated net income.
Cash and Cash Equivalents
The company considers all highly liquid investments with original maturities of
six 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, 2000 and 1999, amounted to 86 percent of total
inventories.
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 ($18,472,000, $17,815,000 and
19
$18,350,000 in 2000, 1999 and 1998, 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.
Included in property, plant and equipment are costs related to the
acquisition and development of internal-use software. Capitalized costs 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 life of the software, which is generally three to five
years. Costs incurred in the preliminary project phase are expensed.
Interest charges on borrowings applicable to major construction projects
are capitalized and subsequently amortized over the lives of the related assets.
Revenue Recognition
Revenue is recognized upon shipment of goods to customers.
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. Legal costs related to environmental
matters are expensed as incurred. Expenditures that mitigate or prevent
environmental contamination and that benefit future operations are capitalized.
Capitalized expenditures are depreciated generally utilizing a 10 year life. See
Note 12 for contingency information.
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
generally ranging from five to 15 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
20
significant improvement to an existing product or process. Total expenses were
$13,383,000, $13,113,000 and $12,219,000 in 2000, 1999 and 1998, 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
The provision for income taxes includes federal, foreign, state and local income
taxes currently payable and those deferred because of temporary differences
between the financial statement and tax bases of assets and liabilities.
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.
Translation of Foreign Currencies
Assets and liabilities of consolidated foreign subsidiaries are translated into
U.S. dollars at exchange rates in effect at year end. The resulting translation
adjustments are included in stockholders' equity. Revenues and expenses are
translated at average exchange rates prevailing during the year. Gains or losses
on foreign currency transactions and the related tax effects are reflected in
net income.
Long-Lived Assets
Operating assets and associated goodwill are written down to fair value whenever
an impairment review indicates that the carrying value cannot be recovered on an
undiscounted cash flow basis. No impairment loss has needed to be recognized
for applicable assets of continuing operations.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require companies to record compensation
cost for stock-based employee compensation plans at fair value. The company has
chosen to continue to account for stock-based compensation using the intrinsic
value method prescribed in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Accordingly, compensation cost for stock options is measured as the excess, if
any, of the quoted market price of the company's stock at the date of the grant
over the amount an employee must pay to acquire the stock. See Note 8 for stock
option plan information.
Per Share Data
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 has been reduced by dividends paid to preferred stockholders.
Diluted
21
earnings per share amounts are based on the increased number of common shares
that would be outstanding assuming the exercise of certain outstanding stock
options (under the treasury stock method) and the conversion of the convertible
preferred stock, when such conversion would have the effect of reducing earnings
per share. See Note 15 for the computation of earnings per share.
Comprehensive Income
Comprehensive income includes net income and all other nonowner changes in
equity that are not reported in net income. For the twelve months ended December
31, 2000, 1999 and 1998, the company's comprehensive income included net income
and foreign currency translation gains and losses. Comprehensive income is
disclosed in the Consolidated Statements of Stockholders' Equity.
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 revenues derived from the company's products,
the geographic locations in which the company earns revenues and holds assets
and major customers (i.e. any customer accounting for 10 percent or more of the
company's revenue) is also disclosed. See Note 14 for segment reporting
information.
Shipping and Handling Fees and Costs
In September 2000, the Emerging Issues Task Force (EITF) reached a final
consensus on the classification of shipping and handling fees (Issue No. 00-10,
"Accounting for Shipping and Handling Fees and Costs"). Implementation of this
consensus was required in the fourth quarter of 2000 with all prior periods
restated to conform with current presentation. This consensus states that all
amounts billed to a customer in a sale transaction related to shipping and
handling, if any, represent revenue to the vendor and should be classified as
revenue. The consensus did not conclude on classification of costs related to
shipping and handling; however, it does suggest that all costs incurred by the
seller for shipping and handling should be classified as cost of sales. Prior to
the adoption of EITF Issue 00-10, the company netted shipping and handling costs
with shipping and handling revenues in net sales. Therefore, compliance with
EITF Issue 00-10 required the reclassification of shipping and handling costs
from net sales to cost of sales. Adoption of EITF Issue 00-10 had no impact on
the company's financial position or net income.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
22
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.
Reclassifications
Certain amounts in the 1999 and 1998 financial statements have been reclassified
to conform to the 2000 presentation.
2. Acquisitions
On May 8, 1998, the company purchased an additional 34.5 percent of the
outstanding stock of Stepan Colombia raising its stake in the Colombia company
to 84.5 percent. On August 19, 1998, the remaining shares (15.5 percent) were
acquired. As a result, Stepan Colombia became a wholly-owned subsidiary. The
transaction was accounted for as a step acquisition purchase, and Stepan
Colombia's financial results have been reported on a consolidated basis from the
date that controlling interest was acquired. Prior to the May 1998 purchase
date, the investment was accounted for under the equity method. The reported
consolidated results of operations for 1998 would not have been materially
affected had this transaction occurred at the beginning of 1998.
Effective June 30, 1998, the company acquired selected specialty surfactant
product lines from E.I. DuPont De Nemours Company. The acquired business
consists of phosphate esters, specialty ethoxylates and other specialty
quaternaries and polymers sold to the plastic and fiber industries. The product
lines supplement the company's existing surfactants and polymers businesses and
will be produced in current company manufacturing plants. The transaction was
recorded as a purchase of intangible assets, including patents, trademarks,
know-how and goodwill.
On November 11, 1998, the company's wholly owned subsidiary, Stepan Canada,
Inc., acquired the Canadian anionic and cationic surfactant business from Boehme
Filatex Canada, Inc. The acquired product lines are sold primarily into the
personal care and the institutional cleaning product markets. No manufacturing
facilities were included in this acquisition. The transaction was recorded as a
purchase of intangible assets, including goodwill, non-compete agreement, know-
how, patents and trademarks.
3. Inventories
The composition of inventories was as follows:
December 31
(Dollars in thousands) 2000 1999
- ------------------------------------------------------------------
Finished products $40,515 $32,729
Raw materials 19,617 19,120
------- -------
Total inventories $60,132 $51,849
======= =======
23
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $8,900,000 and $10,600,000 higher than
reported at December 31, 2000 and 1999, respectively.
4. Debt
Debt was composed of the following:
December 31
(Dollars in thousands) Maturity Dates 2000 1999
- --------------------------------------------------------------------------
Unsecured promissory notes
6.59% 2003-2013 $ 30,000 $ 30,000
7.77% 2001-2010 27,272 30,000
7.22% 2001-2007 21,000 24,000
7.69% 2001-2005 10,000 10,000
9.70% 2001-2003 2,667 4,000
Unsecured bank debt 2003 13,000 14,500
Debt of foreign subsidiaries
payable in foreign currency 2001-2006 2,113 2,583
-------- --------
Total debt 106,052 115,083
Less current maturities 9,586 7,663
-------- --------
Long-term debt $ 96,466 $107,420
======== ========
Unsecured bank debt at December 31, 2000, consisted of borrowings under a
committed $60,000,000 revolving credit agreement with interest at varying rates
averaging 7.10 percent during the year. The agreement requires a commitment fee
to be paid on the unused portion of the commitment which averaged 0.15 percent
during the year. Periodically, the company also had other borrowings under notes
payable to banks under which there were no outstanding balances at December 31,
2000 and 1999.
The various debt 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
$46,126,000 and $48,329,000 at December 31, 2000 and 1999, respectively. The
company is in compliance with all debt covenants.
Debt at December 31, 2000, matures as follows: $9,586,000 in 2001;
$9,025,000 in 2002; $24,393,000 in 2003; $10,724,000 in 2004; $10,724,000 in
2005 and $41,600,000 after 2005.
The fair value of the company's fixed-rate debt, including current
maturities, was estimated to be $88.7 million as of December 31, 2000.
24
Net interest expense for the years ended December 31 was composed of the
following:
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------
Interest expense $8,724 $8,661 $8,235
Interest income (124) (211) (364)
------ ------ ------
8,600 8,450 7,871
Capitalized interest (272) (74) (418)
------ ------ ------
Interest, net $8,328 $8,376 $7,453
====== ====== ======
5. Leased Properties
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $4,242,000, $3,661,000 and $3,918,000 in 2000, 1999 and 1998,
respectively.
Minimum future rental payments under operating leases with terms in excess
of one year as of December 31, 2000, are:
(Dollars in thousands) Year Amount
- --------------------------------------------------------------------
2001 $ 3,169
2002 2,380
2003 1,715
2004 1,285
2005 1,233
Subsequent to 2005 5,728
-------
Total minimum future rental payments $15,510
=======
6. Income Taxes
The provision for taxes on income and the related income before taxes are as
follows:
Taxes on Income
(Dollars in thousands) 2000 1999 1998
- -----------------------------------------------------------------------
Federal
Current $10,479 $ 6,618 $ 8,544
Deferred (4,019) 2,280 3,285
State
Current 1,890 1,301 1,704
Deferred (650) 506 718
Foreign
Current 2,104 1,983 1,047
Deferred (409) 12 14
------- ------- -------
Total $ 9,395 $12,700 $15,312
======= ======= =======
25
Income before Taxes
(Dollars in thousands) 2000 1999 1998
- --------------------------------------------------------------------------
Domestic $20,850 $29,163 $35,766
Foreign 3,553 5,666 3,000
------- ------- -------
Total $24,403 $34,829 $38,766
======= ======= =======
No federal income taxes have been provided on $32,250,000 of undistributed
earnings of the company's foreign subsidiaries. In general, the company
reinvests earnings of foreign subsidiaries in their operations indefinitely.
However, the company will repatriate earnings from a subsidiary where excess
cash has accumulated and it is advantageous for tax or foreign exchange reasons.
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
earnings reinvested indefinitely.
The variations between the effective and statutory federal income tax rates
are summarized as follows:
2000 1999 1998
(Dollars in thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------
Income tax provision at statutory tax rate $8,541 35.0 $12,190 35.0 $13,568 35.0
State taxes on income
less applicable federal tax benefit 806 3.3 1,175 3.4 1,574 4.1
Effect of equity in foreign joint venture (198) -0.8 (499) -1.4 (278) -0.7
Other items 246 1.0 (166) -0.5 448 1.1
------ ---- ------- ---- ------- ----
Total income tax provision $9,395 38.5 $12,700 36.5 $15,312 39.5
====== ==== ======= ==== ======= ====
The net deferred tax liability at December 31 is comprised of the
following:
(Dollars in thousands) 2000 1999
- -----------------------------------------------------------------------------
Current deferred income taxes
Gross assets $ 11,530 $ 10,148
Gross liabilities (664) (787)
-------- --------
Total current deferred tax assets 10,866 9,361
Non-current deferred income taxes
Gross assets 9,326 7,001
Gross liabilities (48,496) (48,976)
======== ========
Total non-current deferred tax (39,170) (41,975)
liabilities -------- --------
Net deferred tax liability $(28,304) $(32,614)
======== ========
26
At December 31, the tax effect of significant temporary differences representing
deferred tax assets and liabilities is as follows:
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------
Tax over book depreciation $(44,667) $(45,104)
Safe Harbor leases (2,338) (2,576)
SFAS No. 87 pension accounting (3,146) (2,736)
State income tax accrual 2,295 2,408
Deferred revenue 1,613 2,340
Book reserves deductible in other periods 16,758 12,456
Other, net 1,181 598
-------- ---------
Net deferred tax liability $(28,304) $(32,614)
======== =========
7. Stockholders' Equity
The company's preferred stock is convertible at the option of the holder at any
time (unless previously redeemed) into shares of common stock at a conversion 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) 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 $0.14 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. 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.
On May 11, 1999, shareholders approved an amendment to the company's
Certificate of Incorporation which increased the number of authorized shares of
common stock, par value $1 per share, from 15,000,000 shares to 30,000,000
shares.
On November 3, 2000, 400,000 shares of common stock and 188,535 shares of
preferred stock held in treasury were retired in accordance with the Board of
Directors' authorization. At December 31, 2000, treasury stock consists of no
shares of preferred stock and 183,573 shares of common stock. On December 17,
1999, 400,000 shares of common stock held in treasury were retired in accordance
with the Board of Directors' authorization. At December 31, 1999, treasury stock
consisted of 172,520 shares of preferred stock and 196,864 shares of common
stock.
27
8. Stock Option Plans
The company has three fixed stock option plans: the 1982 Plan, the 1992 Plan and
the 2000 Plan. No further grants may be made under the 1982 Plan. The 1992 Plan
extends participation to directors who are not employees of the company. It
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. The 2000 Plan
authorizes the award of 1,000,000 shares of the company's common stock for
options, SAR and stock awards. A stock award is a grant of shares of stock to an
employee, the earnings vesting or distribution of which is subject to certain
conditions established by the Compensation and Development Committee of the
Board of Directors. Options are granted at the market price on the date of
grant. An option may not be exercised within two years from the date of grant
and no option will be exercisable after 10 years from the date granted.
The company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for options
granted under these stock option plans been determined based on the fair value
at the grant date for awards in 2000, 1999 and 1998 consistent with the
provisions of SFAS No. 123, the company's net income and earnings per share
would have been reduced to the following pro forma amounts:
(Dollars in thousands, except per share data) 2000 1999 1998
- -------------------------------------------------------------------------------
Net Income - as reported $15,008 $22,129 $23,454
Net Income - pro forma 14,008 21,272 22,575
Basic Earnings per share - as reported 1.52 2.22 2.29
Basic Earnings per share - pro forma 1.41 2.13 2.20
Diluted Earnings per share - as reported 1.47 2.08 2.12
Diluted Earnings per share - pro forma 1.37 2.01 2.05
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2000, 1999 and 1998: expected dividend yield of
2.5 percent in 2000, 1999 and 1998. Expected volatility of 24.7 percent in 2000,
26.7 percent in 1999 and 27.0 percent in 1998; expected lives of 7.5 years; and
risk-free interest rate of 6.72 percent in 2000, 5.21 percent in 1999 and 5.75
percent in 1998.
28
A summary of the status of the company's stock option plans at December 31,
2000, 1999 and 1998, and changes during the years then ended is presented as
follows:
Weighted- Weighted- Weighted-
Average Average Average
2000 Exercise 1999 Exercise 1998 Exercise
Shares Price Shares Price Shares Price
- ----------------------------------------------------------------------------------------------------------------------
Options outstanding, 1,222,363 $19.38 1,247,591 $18.76 1,168,252 $16.06
beginning of year
Options exercised (113,950) 12.26 (85,250) 12.76 (151,200) 16.36
Options canceled (24,238) 25.43 (4,036) 30.97 (3,229) 30.97
Options granted 418,724 21.77 64,058 23.42 233,768 30.86
--------- --------- ---------
Options outstanding,
end of year 1,502,899 20.49 1,222,363 19.38 1,247,591 18.76
--------- --------- ---------
Option price range $ 12.563- $ 9.438- $ 9.438-
at end of year 30.969 30.969 30.969
Option price range for $ 9.438- $ 9.438- $ 9.438-
exercised shares 19.750 19.750 19.750
Options available for grant
at end of year 861,075 255,561 315,583
Weighted-average fair value
of options, granted during the
year $ 6.94 $ 6.98 $ 9.64
A summary of stock options outstanding at December 31, 2000, is as follows:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted Weighted
Number Remaining -Average Number -Average
Range of Outstanding at Contractual Exercise Exercisable Exercise
Exercise Price 12/31/00 Life Price at 12/31/00 Price
- -------------------------------------------------------------------------------------------------------------------------
$12.563 - $14.000 352,900 5.13 $13.88 352,900 $13.88
$18.219 - $30.969 1,149,999 8.83 22.52 681,768 22.87
--------- ---------
1,502,899 7.96 $20.49 1,034,668 $19.81
========= =========
9. 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 pension plan up to the
maximum amount 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, 2000 and 1999, included
$10,023,000 and $9,818,000, respectively, of the company's common stock.
29
Net 2000, 1999 and 1998 periodic pension cost for the plans consisted of the
following:
(Dollars in thousands) 2000 1999 1998
----------------------------------------------------------------------------------------------
Service cost $ 2,047 $ 2,344 $ 1,969
Interest cost on projected benefit obligation 3,970 3,629 3,262
Expected return on plan assets (5,812) (5,156) (4,658)
Amortization of unrecognized net transition
assets (567) (567) (567)
Amortization of unrecognized prior service cost 312 287 269
Amortization of unrecognized net loss/(gain) (517) 14 (5)
------- ------- -------
Net pension expense/(income) $ (567) $ 551 $ 270
======= ======= =======
Changes in benefit obligations for the years ending December 31, 2000 and 1999,
were as follows:
(Dollars in thousands) 2000 1999
----------------------------------------------------------------------
Benefit obligation at beginning of year $50,727 $53,169
Service cost 2,047 2,344
Interest cost 3,970 3,629
Plan amendments 844 515
Actuarial (gain)/loss 1,173 (7,217)
Benefits paid (2,107) (1,713)
------- -------
Benefit obligation at end of year $56,654 $50,727
======= =======
Changes in the fair value of plan assets during years 2000 and 1999 were as
follows:
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------
Fair value of plan assets at beginning of year $76,249 $67,183
Actual return on plan assets (792) 10,779
Employer contributions 314 --
Benefits paid (2,107) (1,713)
------- -------
Fair value of plan assets at end of $73,664 $76,249
the year ======= =======
The reconciliation of the funded status of the plans to the amount reported in
the company's Consolidated Balance Sheets is as follows:
(Dollars in thousands) 2000 1999
-----------------------------------------------------------------------------
Plan assets in excess of projected benefit $ 17,010 $ 25,522
obligations
Unrecognized net transition assets -- (567)
Unrecognized prior service cost 2,300 1,767
Unrecognized net gain (11,947) (20,240)
-------- --------
Prepaid benefit cost $ 7,363 $ 6,482
======== ========
30
The prepaid pension asset is included in the "Other Assets" caption in the
Consolidated Balance Sheets. The weighted-average assumptions as of December
31, 2000, 1999 and 1998, were as follows:
2000 1999 1998
- -----------------------------------------------------------------------------------------------
Discount rate 7.50% 7.75% 6.75%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 4.00%-6.00% 4.25%-6.25% 4.25%-6.25%
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.
10. Accrued Liabilities
Accrued liabilities consisted of:
December 31
------------------------------
(Dollars in thousands) 2000 1999
- ---------------------------------------------------------------------------
Accrued payroll and benefits $16,308 $17,421
Accrued customer discounts 9,800 8,530
Other accrued liabilities 15,392 15,755
------- -------
Total accrued liabilities $41,500 $41,706
======= =======
11. Other Non-current Liabilities
Other non-current liabilities were comprised of the following:
December 31
----------------------
(Dollars in thousands) 2000 1999
- -------------------------------------------------------------------------------
Deferred revenue $ 3,264 $ 2,508
Environmental and legal matters (Note 12) 13,632 9,564
------- -------
Total other non-current liabilities $16,896 $12,072
======= =======
During and prior to 1998, 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 recognized into income. In
1999, approximately $1.4 million of previously deferred revenue was accelerated
and recorded in net sales when a customer released the company from further
performance under a prepaid contract that originally extended into the year
2000. In 2000, the term of a current contract was extended, and the recognition
rate of deferred revenue into income was revised to correspond to the extended
term. Related deferred revenue at December 31, 2000 and 1999, are $3,767,200 and
$5,528,300, respectively, of which the amount recognizable within one year is
included in the "Accrued Liabilities" caption in the Consolidated Balance
Sheets.
31
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.
After partial remediation payments at certain sites, the company has
estimated a range of possible environmental and legal losses from $7.5 million
to $35.0 million at December 31, 2000, compared to $4.2 million to $25.2 million
at December 31, 1999. At December 31, 2000, the company's reserve was $16.6
million for legal and environmental matters compared to $11.6 million at
December 31, 1999. The increase in the reserve was primarily due to additional
potential remediation costs at the company's Maywood, New Jersey, plant (see
discussion about the Maywood, New Jersey, site below). The company made payments
of $2.5 million in 2000 and $15.8 million, net of insurance recoveries, in 1999
related to legal costs, settlements and costs related to remedial design studies
at various sites.
For certain 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 2000
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. Following are summaries of the environmental proceedings related to the
company's Maywood, New Jersey, and Ewan and D'Imperio environmental sites:
Maywood, New Jersey, Site
- -------------------------
As reported previously, the company's site in Maywood, New Jersey and property
formerly owned by the company adjacent to its current site, were listed on the
National Priorities List in September 1993 pursuant to the provisions of the
Comprehensive Environmental Response Compensation and Liabilities Act (CERCLA)
because of certain alleged chemical contamination. Pursuant to an Administrative
Order on Consent entered into between the United States Environmental Protection
Agency (USEPA) and the company for property formerly owned by the company, and
the issuance of an order by USEPA to the company for property currently owned by
the company, the company completed a Remedial Investigation Feasibility Study
(RI/FS) in 1994. In addition, the company submitted a Feasibility Study Addendum
to USEPA in
32
October 2000. The company has been awaiting the issuance of a Record of Decision
(ROD) from USEPA which would relate to both the currently owned and formerly
owned company property and would recommend the type of remediation required on
each property. The company's understanding is that USEPA anticipates that it
will issue the proposed ROD sometime during 2001 with a public comment period to
follow. The final ROD will be issued sometime after the public comment period.
In 1985, the company entered into a Cooperative Agreement with the United
States of America represented by the Department of Energy (Agreement). Pursuant
to this Agreement, the Department of Energy (DOE) took title to radiological
contaminated materials and was to remediate, at its expense, all radiological
waste on the company's property in Maywood, New Jersey. The Maywood property
(and portions of the surrounding area) was being remediated by the DOE under the
Formerly Utilized Sites Remedial Action Program, a federal program under which
the U.S. Government undertook to remediate properties which were used to process
radiological material for the U.S. Government. In 1997, responsibility for this
clean-up was transferred to the United States Army Corps of Engineers (USACE).
On January 29, 1999, the company received a copy of a USACE Report to Congress
dated January 1998 in which the USACE expressed their intention to evaluate,
with the USEPA, whether the company and/or other parties might be responsible
for cost recovery or contribution claims related to the Maywood site. Subsequent
to the issuance of that report, the USACE advised the company that it had
requested legal advice from the Department of Justice as to the impact of the
Agreement.
By letter dated July 28, 2000, the Department of Justice advised the
company that the USACE and USEPA had referred to the Justice Department claims
against the company for response costs incurred or to be incurred by the USACE,
USEPA and the DOE in connection with the Maywood site and the Justice Department
stated that the United States is entitled to recovery of its response costs from
the company under CERCLA. The letter referred to both radiological and non-
radiological hazardous waste at the Maywood site and stated that the United
States has incurred unreimbursed response costs to date of $138.0 million. Costs
associated with radiological waste at the Maywood site, which the company
believes represent all but a small portion of the amount referred to in the
Justice Department letter, could be expected to aggregate substantially in
excess of that amount. In the letter, the Justice Department invited the company
to discuss settlement of the matter in order to avoid the need for litigation.
The company believes that its liability, if any, for such costs has been
resolved by the aforesaid Agreement. Despite the fact that the company continues
to believe that it has no liability to the United States for such costs,
discussions with the Justice Department are currently ongoing to attempt to
resolve this matter.
Based upon all of the above factors, the company has increased its reserves
for claims associated with the Maywood site and believes that such increased
reserves are now adequate. However, depending on the results of the ongoing
discussions regarding the Maywood Site, the final cost of the remediation could
differ from current estimates.
33
Ewan and D'Imperio Site
- -----------------------
As reported previously, the company has been named as a potentially
responsible party (PRP) in the case USEPA v. Jerome Lightman (92 CV 4710) (JBS)
------------------------
which involves the Ewan and D'Imperio Superfund Sites located in New Jersey.
Trial on the issue of the company's liability at these sites was completed in
March 2000. The company is awaiting a decision from the court. If the company
is found liable at either site, a second trial as to the company's allocated
share of clean-up costs at these sites will likely be held in late 2001 or 2002.
The company believes it has adequate defenses to the issue of liability. In the
event of an unfavorable outcome related to the issue of liability, the company
believes it has adequate reserves.
13. Legal Settlement
On December 1, 1999, the company settled a lawsuit in New Jersey, for alleged
personal injuries related to environmental claims. All terms of the settlement
are confidential pursuant to a court order. As a result of this settlement, the
company incurred a $6.3 million after-tax charge ($0.59 per share diluted). The
charge was net of insurance recoveries and previously recorded reserves and was
included in administrative expenses in the accompanying Consolidated Statements
of Income.
14. Segment Reporting
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Each segment provides distinct products and requires
separate management due to unique markets, technologies and production
processes. Surfactants are used in a variety of consumer and industrial cleaning
compounds as well as in agricultural products, lubricating ingredients and other
specialized applications. Polymers derives its revenues from the sale of
phthalic anhydride, polyurethane polyols and polyurethane systems used in
plastics, building materials and refrigeration systems. Specialty products sells
chemicals used in food, flavoring and pharmaceutical applications.
The company evaluates the performance of its segments and allocates
resources based on operating income before interest income/expense, other
income/expense items and income tax provisions. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. There is no intersegment revenue and all
intercompany transactions are eliminated from segments' revenue.
34
Segment data for the three years ended December 31, 2000, 1999 and 1998, is as
follows (prior year data has been reclassified to conform to 2000 presentation):
Specialty Segment
(Dollars in thousands) Surfactants Polymers Products Totals
------------------------------------------------------------------------------------------------------
2000
Net sales $537,006 $140,786 $21,145 $698,937
Operating income 41,718 21,001 3,130 65,849
Assets 310,820 53,314 18,121 382,255
Capital expenditures 23,333 3,427 986 27,746
Depreciation and amortization
expenses 30,276 5,981 1,334 37,591
1999
Net sales $547,359 $126,774 $20,526 $694,659
Operating income 51,123 21,453 4,454 77,030
Assets 315,580 52,434 18,760 386,774
Capital expenditures 24,423 4,846 807 30,076
Depreciation and amortization
expenses 31,091 5,856 1,128 38,075
1998
Net sales $493,930 $122,148 $19,678 $635,756
Operating income 41,997 21,811 3,511 67,319
Assets 315,549 48,795 17,478 381,822
Capital expenditures 37,091 3,632 1,652 42,375
Depreciation and amortization
expenses 29,265 5,847 1,249 36,361
35
Below are reconciliations of segment data to the accompanying consolidated
financial statements:
(Dollars in thousands) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------
Operating income - segment totals $ 65,849 $ 77,030 $ 67,319
Unallocated corporate expenses(a) (33,821) (35,252) (21,896)
Interest expense (8,328) (8,376) (7,453)
Income from equity in joint venture 703 1,427 796
-------- -------- --------
Consolidated income before income taxes $ 24,403 $ 34,829 $ 38,766
======== ======== ========
Assets - segment totals $382,255 $386,774 $381,822
Unallocated corporate assets(b) 32,794 27,802 22,539
-------- -------- --------
Consolidated assets $415,049 $414,576 $404,361
======== ======== ========
Capital expenditures - segment totals $ 27,746 $ 30,076 $ 42,375
Unallocated corporate expenditures 696 2,621 1,681
-------- -------- --------
Consolidated capital expenditures $ 28,442 $ 32,697 $ 44,056
======== ======== ========
Depreciation and amortization expenses - segment
totals $ 37,591 $ 38,075 $ 36,361
Unallocated corporate depreciation expenses 1,686 1,377 986
-------- -------- --------
Consolidated depreciation and
amortization expenses $ 39,277 $ 39,452 $ 37,347
======== ======== ========
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to
evaluate segment performance.
(b) Includes items such as deferred tax asset, prepaid pension asset, joint
venture investment and LIFO inventory reserve which are not allocated to
segments.
Company-wide geographic data for the years ended December 31, 2000, 1999 and
1998, is as follows (net sales attributed to countries based on selling
location):
(Dollars in thousands) 2000 1999 1998
- ---------------------------------------------------------------------------
Net sales
United States $569,357 $553,966 $526,560
All foreign countries 129,580 140,693 109,196
-------- -------- --------
Total $698,937 $694,659 $635,756
======== ======== ========
Long-lived assets
United States $180,369 $193,436 $200,587
All foreign countries 18,778 16,045 14,509
-------- -------- --------
Total $199,147 $209,481 $215,096
======== ======== ========
36
15. Earnings Per Share
Below is the computation of basic and diluted earnings per share for the years
ended December 31, 2000, 1999 and 1998:
(In thousands, except per share amounts) 2000 1999 1998
- -----------------------------------------------------------------------------------------------
Computation of Basic Earnings per Share
Net income $15,008 $22,129 $23,454
Deduct dividends on preferred stock 815 858 896
------- ------- -------
Income applicable to common stock $14,193 $21,271 $22,558
Weighted-average number of shares outstanding 9,355 9,592 9,843
------- ------- -------
Basic earnings per share $ 1.52 $ 2.22 $ 2.29
======= ======= =======
Computation of Diluted Earnings per Share
Net income $15,008 $22,129 $23,454
Weighted-average number of shares outstanding 9,355 9,592 9,843
Add net shares from assumed exercise of options
(under treasury stock method) 203 324 456
Add weighted-average shares from assumed
Conversion of convertible preferred stock 678 716 744
------- ------- -------
Shares applicable to diluted earnings 10,236 10,632 11,043
------- ------- -------
Diluted earnings per share $ 1.47 $ 2.08 $ 2.12
======= ======= =======
37
Five Year Summary
(In thousands, except per share and employee data)
For the Year 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Net Sales(a) $698,937 $694,659 $635,756 $605,574 $557,973
Operating Income 32,028 41,778 45,423 44,370 40,386
Percent of net sales 4.6% 6.0% 7.1% 7.3% 7.2%
Pre-tax Income 24,403 34,829 38,766 34,874 32,261
Percent of net sales 3.5% 5.0% 6.1% 5.8% 5.8%
Provision for Income Taxes 9,395 12,700 15,312 14,464 13,194
Net Income 15,008 22,129 23,454 20,410 19,067
Per share (Diluted)(b) 1.47 2.08 2.12 1.86 1.71
Percent of net sales 2.1% 3.2% 3.7% 3.4% 3.4%
Percent to stockholders' equity(c) 9.7% 15.0% 17.0% 15.5% 15.6%
Cash Dividends Paid 7,004 6,727 6,432 6,069 5,846
Per common share .6625 .6125 .5625 .5125 .4775
Depreciation and Amortization 39,277 39,452 37,347 35,281 32,138
Capital Expenditures 28,442 32,697 44,056 35,589 44,923
Weighted-average Common
Shares Outstanding 9,355 9,592 9,843 9,831 10,002
As of Year End
- -------------------------------------------------------------------------------------------------------------------------
Working Capital $ 68,872 $ 68,615 $ 61,814 $ 63,789 $ 70,322
Current Ratio 1.6 1.7 1.7 1.8 1.8
Property, Plant and Equipment, net 199,147 209,481 215,096 206,601 207,159
Total Assets 415,049 414,576 404,361 374,936 381,012
Long-term Debt, less current maturities 96,466 107,420 107,708 94,898 102,567
Stockholders' Equity 154,176 155,064 147,984 137,598 131,615
Per share(d) 15.57 15.20 14.18 13.01 12.24
Number of Employees 1,387 1,365 1,372 1,292 1,270
(a) Prior years Net Sales have been restated to conform to the requirements of
EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and
Costs".
(b) Based on weighted-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.
38
Quarterly Stock Data (Unaudited)
Dividends Paid
Stock Price Range Per Common Share
-------------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Quarter High Low High Low
- ---------------------------------------------------------------------------------------------------
First $23 3/16 $19 7/8 $26 11/16 $22 1/4 16.25c 15.00c
Second $23 1/4 $20 15/16 25 11/16 22 1/4 16.25c 15.00c
Third $25 $19 5/8 26 1/4 22 5/8 16.25c 15.00c
Fourth $24 $18 1/2 24 1/8 22 3/16 17.50c 16.25c
----------------------
Year $25 $18 1/2 26 11/16 22 3/16 66.25c 61.25c
- ----------------------------------------------------------------------------------------------------------------------------
Quarterly Financial Data (Unaudited)
(Dollars in thousands, except per share data)
2000
--------------------------------------------------------------------------------
Quarter First Second Third Fourth Year
--------------------------------------------------------------------------------------------------------------------
Net Sales $174,988 $177,897 $176,608 $169,444 $698,937
--------------------------------------------------------------------------------------------------------------------
Gross Profit 27,083 30,680 29,025 25,238 112,026
--------------------------------------------------------------------------------------------------------------------
Interest, net (2,051) (2,186) (2,099) (1,992) (8,328)
--------------------------------------------------------------------------------------------------------------------
Pre-tax Income 7,003 10,859 9,989 (3,448) 24,403
--------------------------------------------------------------------------------------------------------------------
Net Income 4,271 6,625 6,233 (2,121) 15,008
--------------------------------------------------------------------------------------------------------------------
Net Income/(Loss) per Share 0.41 0.64 0.61 (0.25) 1.47
(Diluted)
-------------------------------------------------------------------------------------------------------------------
1999
------------------------------------------------------------------------------------
Quarter First Second Third Fourth Year
-----------------------------------------------------------------------------------------------------------------
Net Sales $170,892 $173,899 $173,789 $176,079 $694,659
-----------------------------------------------------------------------------------------------------------------
Gross Profit 28,919 32,391 28,249 31,386 120,945
-----------------------------------------------------------------------------------------------------------------
Interest, net (2,110) (2,158) (2,052) (2,056) (8,376)
-----------------------------------------------------------------------------------------------------------------
Pre-tax Income 10,148 12,963 23 11,695 34,829
-----------------------------------------------------------------------------------------------------------------
Net Income 6,142 7,956 14 8,017 22,129
-----------------------------------------------------------------------------------------------------------------
Net Income/(Loss) per Share 0.57 0.75 (0.02) 0.76 2.08
(Diluted)
-----------------------------------------------------------------------------------------------------------------
39