10-K 1 scl-10k_20171231.htm 10-K scl-10k_20171231.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-K

 

(MARK ONE)

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

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2017

OR

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

FOR THE TRANSITION PERIOD FROM                      TO                     

Commission File Number 1-4462

 

STEPAN COMPANY

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

36-1823834

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

Edens and Winnetka Road, Northfield, Illinois

 

60093

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number including area code: 847-446-7500

Securities registered pursuant to Section 12 (b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, $1 par value

 

New York Stock Exchange

Securities registered pursuant to Section 12 (g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act    Yes      No  

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act    Yes      No  

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in part III of this Form 10-K or any amendment to this Form 10-K. .

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

 

(Check one):  Large accelerated filer  

Accelerated filer  

Non-accelerated filer  

Smaller reporting company  

Emerging growth company  

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes      No  

Aggregate market value at June 30, 2017, of voting and non-voting common stock held by nonaffiliates of the registrant: $ 1,715,568,314*

Number of shares outstanding of each of the registrant’s classes of common stock as of January 31, 2018:

 

Class

 

Outstanding at January 31, 2018

Common Stock, $1 par value

 

22,514,141

Documents Incorporated by Reference

 

Part of Form 10-K

 

Document Incorporated

Part III, Items 10-14

 

Portions of the Proxy Statement for Annual Meeting of Stockholders to be held

April 24, 2018.

* Based on reported ownership by all directors and executive officers at June 30, 2017.

 

 

 

 

 


 

STEPAN COMPANY

ANNUAL REPORT ON FORM 10-K

December 31, 2017

 

 

 

 

Page No

 

 

PART I

 

Item 1.

 

Business

3

 

 

Executive Officers of the Registrant

4

Item 1A.

 

Risk Factors

6

Item 1B.

 

Unresolved Staff Comments

14

Item 2.

 

Properties

15

Item 3.

 

Legal Proceedings

15

6Item 4.

 

Mine Safety Disclosures

17

 

 

 

 

 

PART II

 

 

 

 

Item 5.

 

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

18

Item 6.

 

Selected Financial Data

20

Item 7.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 7A.

 

Quantitative and Qualitative Disclosures About Market Risk

40

Item 8.

 

Financial Statements and Supplementary Data

41

Item 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

87

Item 9A.

 

Controls and Procedures

87

Item 9B.

 

Other Information

88

 

 

 

 

 

PART III

 

 

 

 

Item 10.

 

Directors, Executive Officers and Corporate Governance

89

Item 11.

 

Executive Compensation

89

Item 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

89

Item 13.

 

Certain Relationships and Related Transactions, and Director Independence

89

Item 14.

 

Principal Accounting Fees and Services

89

 

 

 

 

 

PART IV

 

 

 

 

Item 15.

 

Exhibits, Financial Statement Schedules

90

Item 16.

 

Form 10-K Summary

93

 

 

 

SIGNATURES

94

 

 

 

 


 

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Annual Report on Form 10-K, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company’s and its subsidiaries’ (the Company) plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, our actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “should,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company’s control, that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Annual Report on Form 10-K. Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part I-Item IA. Risk Factors” and “Part II-Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and the risks and uncertainties related to the following:

 

accidents, unplanned production shutdowns or disruptions in any of the Company’s manufacturing facilities;

 

global competition and the Company’s ability to successfully compete;

 

volatility of raw material, natural gas and electricity costs as well as any disruption in their supply;

 

disruptions in transportation or significant changes in transportation costs;

 

reduced demand for Company products due to customer product reformulations or new technologies;

 

the Company’s ability to make acquisitions of suitable candidates and successfully integrate acquisitions;

 

the Company’s ability to keep and protect its intellectual property rights;

 

international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes;

 

potentially adverse tax consequences due to the international scope of the Company’s operations;

 

the impact of changes in the tax code as a result of recent U.S. federal tax legislation and uncertainty as to how some of those changes may be applied;

 

compliance with anti-corruption, environmental, health and safety and product registration laws;

 

the Company’s inability to accurately estimate and maintain appropriate levels of recorded liabilities for existing and future contingencies;

 

the Company’s ability to operate within the limitations of debt covenants;

 

downgrades to the Company’s credit ratings or disruptions to the Company’s ability to access well-functioning capital markets;

 

downturns in certain industries and general economic downturns;

 

conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations;

 

cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects;

 

interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data;

 

unfavorable resolution of litigation against the Company;

 

the Company’s ability to retain its executive management and other key personnel; and

 

the other factors set forth under “Risk Factors.”

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These factors are not necessarily all of the important factors that could cause the Company’s actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of the Company’s forward-looking statements. Other unknown or unpredictable factors also could harm the Company’s results. All forward-looking statements attributable to us or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and we do not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If we update one or more forward-looking statements, no inference should be drawn that we will make additional updates with respect to those or other forward-looking statements.

The “Company,” “we,” “our” or “us” means Stepan Company and one or more of its subsidiaries only.

 

 

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PART I

 

 

Item 1.  Business

Stepan Company, which was incorporated under the laws of the state of Delaware on February 19, 1959, and its subsidiaries produce specialty and intermediate chemicals, which are sold to other manufacturers and used in a variety of end products.  The Company has three reportable segments: Surfactants, Polymers and Specialty Products.

Surfactants are chemical agents that affect the interaction between two surfaces; they can provide actions such as detergency (i.e., the ability of water to remove soil from another surface), wetting and foaming, dispersing, emulsification (aiding two dissimilar liquids to mix), demulsification, viscosity modifications and biocidal disinfectants. Surfactants are the basic cleaning agent in detergents for washing clothes, dishes, carpets, fine fabrics, floors and walls.  Surfactants are also used for the same purpose in shampoos, body wash and conditioners, fabric softeners, toothpastes, cosmetics and other personal care products.  Commercial and industrial applications include emulsifiers for agricultural products, emulsion polymers such as floor polishes and latex foams and coatings, wetting and foaming agents for wallboard manufacturing and surfactants for enhanced oil recovery.  

Polymers, which include polyurethane polyols, polyester resins and phthalic anhydride, are used in a variety of applications.  Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry.  They are also a raw material base for coatings, adhesives, sealants and elastomers (CASE) applications.  Polyester resins, which include liquid and powdered products, are used in CASE applications. Phthalic anhydride is used in polyester resins, alkyd resins, and plasticizers for applications in construction materials and components of automotive, boating, and other consumer products and internally in the Company’s polyols.  

Specialty Products are chemicals used in food, flavoring, nutritional supplement and pharmaceutical applications.  

MARKETING AND COMPETITION

Principal customers for surfactants are manufacturers of detergents, shampoos, body wash, fabric softeners, toothpastes and cosmetics.  In addition, surfactants are sold to the producers of agricultural herbicides and insecticides and lubricating products.  Surfactants are also sold into the oilfield market to aid production, drilling and hydraulic fracking.  Polymers are used in the construction and appliance industries, as well as in applications for the coatings, adhesives, sealants and elastomers industries.  Phthalic anhydride, a Polymer product, is also used by automotive, boating and other consumer product companies. Specialty products are used primarily by food, nutritional supplement and pharmaceutical manufacturers.

The Company does not sell directly to the retail market, but sells to a wide range of manufacturers in many industries and has many competitors.  The principal methods of competition are product performance, price, technical assistance and ability to meet the specific needs of individual customers.  These factors allow the Company to compete on bases other than price alone, reducing the severity of competition as experienced in the sales of commodity chemicals having identical performance characteristics.  The Company is one of the leading merchant producers of surfactants in the world.  In the case of surfactants, much of the Company’s competition comes from several large global and regional producers and the internal divisions of larger customers.  In the manufacture of polymers, the Company competes with the chemical divisions of several large companies, as well as with other small specialty chemical manufacturers.  In specialty products, the Company competes with several large firms plus numerous small companies.  

MAJOR CUSTOMER AND BACKLOG

The Company did not have any one customer whose business represented more than 10 percent of the Company’s consolidated revenue in 2017, 2016 or 2015.  The Company has contract arrangements with certain customers, but volumes are generally contingent on purchaser requirements. Much of the Company’s business is essentially on a “spot delivery basis” and does not involve a significant backlog.  

ENERGY SOURCES

Substantially all of the Company’s manufacturing plants operate on electricity and interruptible natural gas.  During peak heating demand periods, gas service to all plants may be temporarily interrupted for varying periods ranging from a few days to several months.  The plants operate on fuel oil during these periods of interruption.  The Company’s operations have not experienced any plant shutdowns or adverse effects upon its business in recent years that were caused by a lack of available energy sources, other than temporary service interruptions brought on by mechanical failure and severe weather conditions.  

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RAW MATERIALS

The principal raw materials used by the Company are petroleum or plant based.  For 2018, the Company has contracts with suppliers that cover the majority of its forecasted requirements for major raw materials and is not substantially dependent upon any one supplier.  

RESEARCH AND DEVELOPMENT

The Company maintains an active research and development program to assist in the discovery and commercialization of new knowledge with the intent that such efforts will be useful in developing a new product or in bringing about a significant improvement to an existing product or process.  Total expenses for research and development during 2017, 2016 and 2015 were $33.2 million, $34.9 million, and $30.3 million, respectively. The remainder of research, development and technical service expenses reflected in the consolidated statements of income relates to technical services, which include routine product testing, analytical methods development and sales support service.

ENVIRONMENTAL COMPLIANCE

Compliance with applicable country, state and local regulations regarding the discharge of materials into the environment, or otherwise relating to the protection of the environment, resulted in capital expenditures by the Company of approximately $3.2 million during 2017.  These expenditures represented approximately 4 percent of the Company’s total 2017 capital expenditures.  Capitalized environmental expenditures are depreciated and charged on a straight-line basis to pretax earnings over their estimated useful lives, which are typically 10 years.  Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at our manufacturing locations were approximately $28.2 million in 2017.  Compliance with such regulations is not expected to have a material adverse effect on the Company’s earnings and competitive position in the foreseeable future.

EMPLOYMENT

At December 31, 2017 and 2016, the Company employed 2,096 and 2,145 persons, respectively. The Company has collective bargaining agreements with employees at some of its manufacturing locations. While the Company has experienced occasional work stoppages as a result of the collective bargaining process and may experience some work stoppages in the future, management believes that it will be able to negotiate all labor agreements on satisfactory terms. Past work stoppages have not had a significant impact on the Company’s operating results. Overall, the Company believes it has good relationships with its employees.

FOREIGN OPERATIONS AND REPORTING SEGMENTS

See Note 17, Segment Reporting, of the Consolidated Financial Statements (Item 8 of this Form 10-K).

 

ACQUISITIONS AND DISPOSITIONS

See Note 20, Acquisitions, of the Consolidated Financial Statements (Item 8 of this Form 10-K). See also Note 21, Sale of Product Line, of the Consolidated Financial Statements (Item 8 of this Form 10-K).

WEBSITE

The Company’s website address is www.stepan.com.  The Company makes available free of charge on or through its website its code of conduct, annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission.  The website also includes the Company’s corporate governance guidelines and the charters for the audit, nominating and corporate governance and compensation and development committees of the Board of Directors.

Executive Officers of the Registrant

The Company’s executive officers are elected annually by the Board of Directors at the first meeting following the Annual Meeting of Stockholders to serve through the next annual meeting of the Board and until their respective successors are duly elected and qualified.

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The executive officers of the Company, their ages and certain other information as of February 27, 2018, are as follows:

 

Name

 

Age

 

Title

 

Year First

Elected

Officer

 

 

 

 

 

 

 

F. Quinn Stepan, Jr.

 

57

 

Chairman, President and Chief Executive Officer

 

1997

Frank Pacholec

 

62

 

Vice President, Strategy and Corporate Development

 

2003

Gregory Servatius

 

58

 

Vice President, Human Resources

 

2006

Arthur W. Mergner

 

54

 

Vice President, Supply Chain

 

2014

Scott R. Behrens

 

48

 

Vice President and General Manager – Surfactants

 

2014

Debra A. Stefaniak

 

56

 

Vice President, Business Transformation

 

2015

Jennifer A. Hale

 

56

 

Vice President, General Counsel, Chief Compliance Officer and Secretary

 

2016

Robert V. Slone

 

46

 

Vice President, Corporate Technology and Sustainability

 

2016

Sean T. Moriarty

 

48

 

Vice President and General Manager – Polymers

 

2017

Matthew J. Eaken

 

55

 

Vice President, Corporate Controller and Interim Chief Financial Officer

 

2018

 

F. Quinn Stepan, Jr. assumed the position of Chairman of the Company’s Board of Directors on of January 1, 2017. He continues to serve the Company as President and Chief Executive Officer, as he has done since January 2006.  He served the Company as President and Chief Operating Officer from 1999 through 2005.  

Frank Pacholec has served the Company as Vice President, Strategy and Corporate Development since June 2016. He served as Vice President, Research and Development and Corporate Sustainability Officer from May 2010 until June 2016.

Gregory Servatius has served the Company as Vice President, Human Resources since February 2006.  From April 2003 until January 2006, he served as Vice President, Surfactant Sales.  

Arthur W. Mergner has served the Company as Vice President, Supply Chain since August 2017. From April 2014 until August 2017, he served as Vice President and General Manager - Polymers. From June 2013 until April 2014, he served as Vice President - North America Polymers.  

Scott R. Behrens has served the Company as Vice President and General Manager – Surfactants since September 2014.  From January 2010 to September 2014 he served as Vice President – Business Management.  

Debra A. Stefaniak has served the Company as Vice President, Business Transformation since February 2014.  From May 2009 to February 2014, she served as Vice President, Global Logistics.  

Jennifer A. Hale has served the Company as Vice President, General Counsel and Secretary since January 2016 and as Chief Compliance officer since April 2017.   From 2013 through 2015, she served as Vice President, Global General Counsel and Strategic Business Consultant at Vita-Mix Holdings Company.  From 2007 to 2013, she served as Vice President, General Counsel and Secretary at Dyson, Inc.

Robert V. Slone has served the Company as Vice President, Chief Technology and Sustainability Officer since June 2016.  From November 2013 until June 2016, he served as Vice President of Surfactants Product Development.  From 2011 to 2013, he served as Director of Technology at British Petroleum/Castrol innoVentures.  

Sean T. Moriarty has served the Company as Vice President and General Manager – Polymers since September 2017.  From September 2014 through September 2017, he served as Vice President and General Manager – North America Surfactants.  From January 2012 through September 2014 he served as Vice President - Global Consumer Products.    

Effective January 1, 2018, Matthew J. Eaken was appointed Interim Chief Financial Officer of the Company, in addition to continuing his current role as the Company’s Vice President and Corporate Controller, until such time as a permanent replacement is named.  Mr. Eaken has served the Company as Vice President and Corporate Controller since January 2011.

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Item 1A. Risk Factors

The following discussion identifies the most significant factors that may materially and adversely affect the Company’s business, financial condition, results of operations and cash flows.  These and other factors, many of which are beyond the Company’s control, may cause future results of operations to differ materially from past results or those results currently expected or desired.  The following information should be read in conjunction with Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and related notes included in this Form 10-K.

RISKS RELATED TO OUR BUSINESS

Chemical manufacturing is inherently hazardous and may result in accidents or may require planned or unplanned production shutdowns, which may disrupt our operations or expose us to significant losses or liabilities, which may have a material impact on our business, financial position, results of operations and cash flows.

Manufacturing facilities in the Company’s industry are subject to planned and unplanned production shutdowns, turnarounds and outages.  Unplanned production disruptions may occur for external reasons, such as natural disasters, weather, disease, strikes, transportation interruption, government regulation, political unrest or terrorism, or internal reasons, such as fire, maintenance or other manufacturing problems.  Certain of our production facilities are, and production facilities acquired or built in the future may be, located in areas where unplanned disruptions are more likely.  Alternative facilities with sufficient capacity may not be available, may cost substantially more or may take a significant amount of time to increase production or qualify with Company customers, each of which could negatively impact the Company’s business, financial position, results of operations and cash flows. Further, some of the Company’s products cannot currently be made, or made in the volume required, at more than one of the Company’s locations. For some of these products, the Company has access to external market suppliers, but the Company cannot guarantee that these products will be available to it in amounts sufficient to meet its requirements or at a cost that is competitive with the Company’s cost of manufacturing these products. Long-term production disruptions may cause Company customers to seek alternative supply, which could further adversely affect Company profitability.

Although the Company takes precautions to enhance the safety of its operations and minimize the risk of disruptions, the hazards associated with chemical manufacturing and the related storage and transportation of raw materials, products and wastes are inherent in our operations. We cannot eliminate the risk of accidental contamination, discharge or injury resulting from those materials. Also, our suppliers and customers may use and/or generate hazardous materials, and we may be required to indemnify our suppliers, customers or waste disposal contractors against damages and other liabilities arising out of the production, handling or storage of our products or raw materials or the disposal of related wastes. Potential risks include explosions and fires, chemical spills and other discharges or releases of toxic or hazardous substances or gases, and pipeline and storage tank leaks and ruptures. Those hazards may result in personal injury and loss of life, damage to property, damages to public health and contamination of the environment, which may result in a suspension of operations and the imposition of civil or criminal fines, penalties and other sanctions, cleanup costs, and claims by governmental entities or third-parties. Furthermore, the Company is subject to present and future claims with respect to workplace exposure, exposure of contractors on Company premises as well as other persons located nearby, workers' compensation and other matters.

We are dependent on the continued operation of our production facilities and the loss or shutdown of operations over an extended period could have a material adverse effect on our financial condition, or results of operations. The Company maintains property, business interruption, products liability and casualty insurance policies which we believe are in accordance with customary industry practices, as well as insurance policies covering other types of risks, including pollution legal liability insurance.  However, some of these potential manufacturing hazards and risks may not be insurable. Moreover, even when insurable, the insurance coverage may not be sufficient to cover all losses resulting from the occurrence of any of these events.  Each of these insurance policies is subject to customary exclusions, deductibles and coverage limits, in accordance with industry standards and practices.  As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. There is also a risk, beyond the reasonable control of the Company, that an insurance carrier may not have the financial resources to cover an insurable loss.  As a result, the occurrence of any of these events could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

The Company faces significant global competition in each of its operating segments.  If the Company cannot successfully compete in the marketplace, its business, financial position, results of operations and cash flows may be materially and adversely affected.

The Company faces significant competition from numerous global companies as well as national, regional and local companies in the markets it serves.  Many of the Company’s competitors have access to greater financial resources, which may enable them to invest significant capital into their businesses, including expenditures for research and development.  Some of the Company’s competitors have their own raw material resources and may be able to produce products more economically.  In addition, some of the Company’s customers have internal manufacturing capabilities that allow them to achieve make-versus-buy economics, which may result at times in the Company gaining or losing business with these customers in volumes that could adversely affect its profitability.

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To achieve expected profitability levels, the Company must, among other things, maintain the service levels, product quality and performance and competitive pricing necessary to retain existing customers and attract new customers.  The Company’s inability to do so could place it at a competitive disadvantage relative to its competitors and if the Company cannot successfully compete in the marketplace, its business, financial position, results of operations and cash flows may be materially and adversely affected.

The volatility of raw material, natural gas and electricity costs as well as any disruption in their supply may result in increased costs and materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

The costs of raw materials, natural gas and electricity represent a substantial portion of the Company’s operating costs.  The principal raw materials used in the Company’s products are petroleum-based or plant-based.  Natural gas is used in the Company’s manufacturing sites primarily to generate steam for its manufacturing processes.  The prices of many of these raw materials have recently increased and been very volatile.  These fluctuations in prices may be affected by supply and demand factors, such as general economic conditions, manufacturers’ ability to meet demand, restrictions on the transport of raw material (some of which may be viewed as hazardous), currency exchange rates, political instability or terrorist attacks, all of which are beyond the Company’s control.  The Company may not be able to pass increased raw material or energy costs on to customers through increases in product prices as a result of arrangements the Company has with certain customers and competitive pressures in the market.  If the Company is unable to minimize the effects of increased raw material and energy costs or pass such increased costs on to customers, or manage any interruption to the supply of raw materials or energy, its business, financial position, results of operations and cash flows may be materially and adversely affected.

The Company relies heavily on third party transportation to deliver raw materials to Company manufacturing facilities and ship products to Company customers. Disruptions in transportation or significant changes in transportation costs could affect the Company’s business, financial position, results of operations and cash flows.

The Company relies heavily on railroads, ships, barges, tank trucks and other over-the-road shipping methods to transport raw materials to its manufacturing facilities and to ship finished product to customers. Transport operations are exposed to various risks, such as extreme weather conditions, natural disasters, work stoppages, personnel shortages and operating hazards, as well as interstate and international transportation requirements. If the Company experiences transportation problems, or if there are significant changes in the cost of these services, the Company may not be able to arrange efficient alternatives and timely means to obtain raw materials or ship finished product, which could result in an adverse effect on Company revenues, costs and operating results.

Customer product reformulations or new technologies can reduce the demand for the Company’s products.

The Company’s products are used in a broad range of customer product applications. Customer product reformulations or development and use of new technologies may lead to reduced consumption of Company-produced products or make some Company products obsolete. It is imperative that the Company continue to develop new products to replace the sales of products that mature and decline in use. The Company’s business, financial position, results of operations and cash flows could be materially and adversely affected if the Company is unable to successfully manage the maturation of existing products and the introduction of new products.

To the extent the Company seeks acquisition opportunities, it may not be able to make acquisitions of suitable candidates or integrate acquisitions successfully.

To the extent the Company seeks acquisition opportunities to expand into new markets and to enhance its position in existing markets throughout the world, it may not be able to successfully identify suitable candidates, negotiate appropriate acquisition terms, obtain financing needed to consummate those acquisitions, complete proposed acquisitions or successfully integrate acquired businesses into its existing operations. In addition, any acquisition, once successfully integrated, may not perform as planned, be accretive to earnings, or otherwise prove beneficial to the Company.

Acquisitions involve numerous risks, including the assumption of undisclosed or unindemnified liabilities, difficulties in the assimilation of the operations and the transfer of all necessary licenses and permits, technologies, services and products of the acquired companies and the diversion of management’s attention from other business concerns. In addition, prior acquisitions have resulted, and future acquisitions could result, in the incurrence of substantial additional indebtedness and other expenses.

If the Company is unable to keep and protect its intellectual property rights, the Company’s ability to compete may be negatively impacted.

The Company’s patents and other intellectual property may not prevent competitors from independently developing or selling similar or duplicative products and services, and there can be no assurance that the resources the Company invests to protect its

7


 

intellectual property will be sufficient or that the Company’s intellectual property portfolio will adequately deter misappropriation or improper use of its technology. The Company could also face competition in some countries where it has not invested in an intellectual property portfolio, or where intellectual property rights are more difficult to obtain and/or assert. In addition, the Company may be the target of aggressive and opportunistic enforcement of patents by third parties, including non-practicing entities. Regardless of the merit of such claims, responding to infringement claims can be expensive and time-consuming. If the Company is found to infringe any third-party rights, it could be required to pay substantial damages or it could be enjoined from offering some of its products and services. Also, there can be no assurances that the Company will be able to obtain or renew from third parties the licenses it may need in the future, and there is no assurance that such licenses can be obtained on reasonable terms.

The Company’s results of operations may be adversely affected by international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes.

The Company has substantial operations outside the U.S.  In the year ended December 31, 2017, the Company’s sales outside of the U.S. constituted approximately 42 percent of the Company’s net sales.  In addition to the risks described in this Annual Report on Form 10‑K that are common to both the Company’s U.S. and non-U.S. operations, the Company faces, and will continue to face, risks related to the Company’s foreign operations such as:

 

variability of intellectual property laws outside the U.S. may impact enforceability and consistency of protection of intellectual property assets;

 

high levels of inflation;

 

fluctuations in foreign currency exchange rates may affect product demand and may adversely affect the profitability in U.S. Dollars of products and services the Company provides in international markets where payment for the Company’s products and services is made in the local currency;

 

political, economic, financial and market conditions may be unstable;

 

changes in labor conditions and difficulties in staffing and managing international operations;

 

differing economic cycles and adverse economic conditions;

 

trade and currency restrictions, including tariffs and currency exchange controls imposed by foreign countries;

 

changes in foreign laws and tax rates or U.S. laws and tax rates (including as a result of the implementation of recent U.S. federal income tax reform) with respect to foreign income may unexpectedly increase the rate at which the Company’s income is taxed, impose new and additional taxes on remittances, repatriation or other payments by subsidiaries, or cause the loss of previously recorded tax benefits;

 

greater difficulty enforcing contracts and collecting accounts receivable;

 

enforceability and compliance with U.S. and foreign laws affecting operations outside of the U.S., including the Foreign Corrupt Practices Act (and foreign equivalents), export controls and regulations administered by the Office of Foreign Assets Control.

 

evolving laws and regulations over chemicals and chemical production and transportation (including, but not limited to, the June 2016 amendments to the U.S. Toxic Substances Control Act, the EU REACH regulation and changing laws related to operating permits and licenses) that could result in material costs relating to regulatory compliance, liabilities, litigation proceedings, or other impacts, such as restrictions or prohibitions on our products.

The actual occurrence of any or all of the foregoing could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows in the future.

Fluctuations in foreign currency exchange rates could affect Company financial results.

The Company is also exposed to fluctuations in exchange rates.  The Company’s results of operations are reported in U.S. dollars.  However, outside the U.S., the Company’s sales and costs are denominated in a variety of currencies including the European euro, British pound, Canadian dollar, Mexican peso, Colombian peso, Philippine peso, Brazilian real, Polish zloty, Singapore dollar and Chinese RMB.  The Company translates its local currency financial results into U.S. dollars based on average exchange rates prevailing during the reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, the Company’s reported international sales and earnings may be reduced because the local currency may translate into fewer U.S. dollars.  Fluctuations in exchange rates may materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

8


 

In all jurisdictions in which the Company operates, the Company is also subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions.  These laws and regulations may limit the Company’s ability to repatriate cash as dividends or otherwise to the U.S. or to efficiently allocate cash to support strategic initiatives, and may limit the Company’s ability to convert foreign currency cash flows into U.S. dollars.  A weakening of the currencies in which the Company generates sales relative to the foreign currencies in which the Company’s costs are denominated may lower the Company’s operating profits and cash flows.

The international scope of the Company’s operations and corporate structure may expose the Company to potentially adverse tax consequences.

The Company is subject to taxation in and to the tax laws and regulations of multiple jurisdictions as a result of the international scope of its operations and corporate structure. The Company is also subject to intercompany pricing laws, including those relating to the flow of funds between its entities pursuant to, for example, purchase agreements, licensing agreements or other arrangements. Adverse developments in these laws or regulations (including pursuant to recent U.S. tax legislation, described below), or any change in position regarding the application, administration or interpretation of these laws or regulations in any applicable jurisdiction could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows. In addition, the tax authorities in any applicable jurisdiction may disagree with the positions the Company has taken or intends to take regarding the tax treatment or characterization of any of the Company’s transactions, including the tax treatment or characterization of the Company’s indebtedness. If any applicable tax authorities were to successfully challenge the tax treatment or characterization of any of the Company’s transactions, it could result in the disallowance of deductions, the imposition of withholding taxes on internal deemed transfers or other consequences that could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

 

Recent U.S. tax legislation may materially adversely affect our financial condition, results of operations and cash flows.

Recently enacted U.S. tax legislation has significantly changed the U.S. federal income taxation of U.S. corporations, including by reducing the U.S. corporate income tax rate,  adopting elements of a territorial tax system, imposing a one-time transition tax (Transition Tax) on all undistributed earnings and profits of certain U.S.-owned foreign corporations, introducing new anti-base erosion provisions, revising the rules governing net operating losses and the rules governing foreign tax credits, limiting interest deductions, permitting immediate expensing of certain capital expenditures, repealing the corporate alternative minimum tax, eliminating the domestic production activity deduction and repealing the deduction of certain performance-based compensation paid to an expanded group of executive officers. Many of these changes are effective immediately, without any transition periods or grandfathering for existing transactions. The legislation is unclear in many respects and could be subject to potential amendments and technical corrections, as well as interpretations and implementing regulations by the Treasury and Internal Revenue Service (“IRS”), any of which could lessen or increase certain adverse impacts of the legislation. In addition, it is unclear how these U.S. federal income tax changes will affect state and local taxation, which often uses federal taxable income as a starting point for computing state and local tax liabilities.

Our analysis and interpretation of this legislation is preliminary and ongoing. Based on our current evaluation, we estimate that the Transition Tax will result in a material amount of additional U.S. tax liability, the total amount of which must be reflected as tax expense in 2017, when the tax legislation was enacted, despite the fact that the resulting tax may be paid over eight years. Such tax expense may be subject to adjustment in subsequent periods throughout 2018 in accordance with recent interpretive guidance issued by the SEC. Further, the changes to the deductibility of performance-based compensation may negatively impact our cash flows going forward. Finally, there may be other material adverse effects resulting from the legislation that we have not yet identified.

While some of the changes made by the tax legislation may adversely affect the Company in one or more reporting periods and prospectively, other changes may be beneficial on a going forward basis. We continue to work with our tax advisors to determine the full impact that the recent tax legislation as a whole will have on us.

The Company’s failure to comply with the anti-corruption laws of the United States and various international jurisdictions could negatively impact its reputation and results of operations.

Doing business on a worldwide basis requires the Company to comply with anti-corruption laws and regulations imposed by governments around the world with jurisdiction over our operations, which may include the U.S. Foreign Corrupt Practices Act (“FCPA”) and the U.K. Bribery Act 2010 (the “Bribery Act”), as well as the laws of the countries where the Company does business. These laws and regulations can apply to companies and individual directors, officers, employees and agents, and may restrict the Company’s operations, trade practices, investment decisions and partnering activities. Where they apply, the FCPA and the Bribery Act prohibit, among other things, the Company and its officers, directors, employees and business partners, including joint venture partners and agents acting on the Company’s behalf, from corruptly offering, promising, authorizing or providing anything of value to

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“foreign officials” for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment. The Bribery Act also prohibits non-governmental “commercial” bribery and accepting bribes. Part of the Company’s business may involve dealings with governments and state-owned business enterprises, the employees and representatives of which may be considered “foreign officials” for purposes of the FCPA and the Bribery Act. The Company is also subject to the jurisdiction of various governments and regulatory agencies around the world, which may bring Company personnel and agents into contact with “foreign officials” responsible for issuing or renewing permits, licenses, or approvals or for enforcing other governmental regulations. The Company’s global operations, including in countries with high levels of perceived corruption, expose it to the risk of violating, or being accused of violating, anti-corruption laws. Any failure on the part of the Company to successfully comply with these laws and regulations may expose the Company to reputational harm as well as significant sanctions, including criminal fines, imprisonment of its employees or representatives, civil penalties, disgorgement of profits, injunctions and debarment from government contracts, as well as other remedial measures. Investigations of alleged violations can be expensive and disruptive. Compliance with these laws can increase the cost of doing business globally.  The Company maintains policies and procedures designed to assist the Company and its subsidiaries in complying with applicable anti-corruption laws. However, there can be no guarantee that these policies and procedures will effectively prevent violations by Company employees or representatives for which the Company may be held responsible, and any such violation could adversely affect the Company’s reputation, business, financial position and results of operations.

The Company is subject to a variety of environmental, health and safety and product registration laws dealing with the production and sale of chemicals that could require us to incur additional costs or to reformulate or discontinue certain of our products.

The Company’s operations are regulated under a number of federal, state, local and foreign environmental, health and safety laws and regulations that govern, among other things, the production and marketing of chemical substances and discharge, use, handling, transport, storage and disposal of hazardous materials into the air, soil and water.  In the U.S., these laws and regulations include, but are not limited to, the Toxic Substances Control Act (TSCA), the Federal Insecticide, Fungicide and Rodenticide Act (FIFRA), the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, the Comprehensive Environmental Response, Compensation and Liability Act and state and local laws, such as California’s Safe Drinking Water and Toxic Enforcement Act of 1986 (Proposition 65).  Analogous laws outside the U.S. apply to us in many jurisdictions, including, among others, the European Union’s Registration, Evaluation, Authorization and Restriction of Chemical Substances Act (REACH) regulation and its Biocidal Products Regulation.  Compliance with these environmental laws and regulations is a major consideration for the Company, and to comply with some of these laws, we may need to alter our product lines, which could lead to a material adverse effect on our results of operations.  In addition, the transportation of certain raw materials is highly regulated and is subject to increased regulation or restrictions. These regulations may restrict or prohibit transport of these raw materials, resulting in these raw materials not being available to the Company in quantities desired by the Company or at costs attractive to the Company, which may restrict or substantially limit the Company’s manufacturing operations.

Under the REACH regulation, we must submit registrations for certain substances between now and June 1, 2018, and may need to update previously submitted registrations for other substances.  The costs associated with these registrations and updates could be substantial. Moreover, if a registration was, or in the future is, not submitted by any applicable deadline, our ability to sell those products may be negatively impacted until the registration process has been completed. In addition, we manufacture, process and/or use substances being evaluated under the REACH regulation’s Substances of Very High Concern (SVHC) program. Impacts under this program could include requirements to discontinue certain product lines and to reformulate others, which could materially alter our marketplace position or otherwise have a material financial effect on our revenues. Some of the laws and regulations applicable to us have changed in recent years to impose new obligations that could also force us to reformulate or discontinue certain of our products. For example, the European Union is now requiring a review of existing active biocide substances, and based on this review, the European Commission or an individual member state may decide not to authorize the product for continued sale. As another example, the June 2016 amendments to TSCA now mandate that the U.S. Environmental Protection Agency must designate “high priority” chemicals and perform a risk evaluation, which could result in a finding of “unreasonable risk” and a decision to promulgate new regulations to address such risk.

Compliance with environmental laws could restrict the Company’s ability to expand its facilities or require the Company to modify its facilities and processes or acquire additional costly pollution control equipment, incur other significant expenses, or expose the Company to greater liability associated with its production processes and products.  The Company has incurred and will continue to incur capital expenditures and operating costs in complying with these laws and regulations.  In addition,  our operations currently use, and have historically used, hazardous materials and generate, and have historically generated, quantities of hazardous waste.  We are subject to regulatory oversight and investigation, remediation, and monitoring obligations at certain current and former U.S. Superfund sites, as well as third-party disposal sites, under federal laws and their state and local analogues, including the Resource Conservation and Recovery Act (RCRA), the Clean Water Act, the Clean Air Act, and the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), as well as analogous foreign laws.  In the event that new contamination is discovered, the Company may become subject to obligations.  The costs and liabilities associated with these issues may be substantial and may materially impact the financial health of the Company.

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The Company is also subject to numerous federal, state, local and foreign laws that regulate the manufacture, storage, distribution and labeling of many of the Company’s products, including some of the Company’s disinfecting, sanitizing and antimicrobial products.  Some of these laws require the Company to have operating permits for the Company’s production facilities, warehouse facilities and operations.  Various federal, state, local and foreign laws and regulations also require the Company to register the Company’s products and to comply with specified requirements with respect to those products.  Additionally, those requirements, and enforcement of those requirements, may become more stringent in the future. The ultimate cost of compliance with any such requirements could be material.

Although it is our policy to comply with such laws and regulations, it is possible that we have not been or may not be at all times in material compliance with all of those requirements. If the Company fails to comply with any of these laws and regulations, including permitting and licensing requirements, it may be liable for damages and the costs of remedial actions in excess of the Company’s recorded liabilities, and may also be subject to fines, injunctions or criminal sanctions or to revocation, non-renewal or modification of the Company’s operating permits and revocation of the Company’s product registrations.  Any such revocation, modification or non-renewal may require the Company to cease or limit the manufacture and sale of its products at one or more of the Company’s facilities, which may limit or prevent the Company’s ability to meet product demand or build new facilities and may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows. Any such revocation, non-renewal or modification may also result in an event of default under the indenture for the Company’s notes or under the Company’s credit facilities, which, if not cured or waived, may result in the acceleration of all the Company’s indebtedness.

In addition to the costs of complying with environmental, health and safety requirements, the Company has incurred and may incur in the future costs defending against environmental litigation and/or investigations brought by government agencies and private parties, including administrative proceedings.  The Company is, and may be in the future, a defendant in lawsuits brought by parties alleging environmental damage, personal injury or property damage. A significant judgment or settlement, to the extent not covered by existing insurance policies, against the Company could have a material adverse effect on its business, financial position, results of operations and cash flows. Although the Company has insurance that may cover some of these potential losses, there is always uncertainty as to whether such insurance may be available to the Company based on case-specific factors and the specific provisions of the Company’s insurance policies.

The potential cost to the Company relating to environmental, health and safety and product registration matters is uncertain due to factors such as the complexity and evolving nature of laws and regulations relating to the environment, health and safety and product registration, including those outside of the U.S. Environmental and product registration laws may also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, as well as restricting or prohibiting the sale of existing or new products, which may also negatively impact the Company’s operating results.  Without limiting the foregoing, these laws or regulations may restrict or prohibit the use of non-renewable or carbon-based substances, or impose fees or penalties for the use of these substances. Accordingly, the Company may become subject to additional liabilities and increased operating costs in the future under these laws and regulations. The impact of any such changes, which are unknown at this time, may have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

The Company’s inability to accurately estimate and maintain appropriate levels of recorded liabilities for existing and future contingencies may materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

The liabilities recorded by the Company for pending and threatened legal proceedings are estimates based on various assumptions.  An adverse ruling or external forces, such as changes in the rate of inflation, the regulatory environment and other factors that could prove such assumptions to be no longer appropriate, may affect the accuracy of these estimates.  Given the uncertainties inherent in such estimates, the Company’s actual liabilities could differ significantly from the estimated amounts the Company records in its financial statements with respect to existing and future contingencies.  If the Company’s actual liability is higher than estimated or any new legal proceeding is initiated or other contingency occurs, it could materially and adversely affect the Company’s business, financial position, results of operations and cash flows.

The Company has a significant amount of indebtedness and may incur additional indebtedness, or need to refinance existing indebtedness, in the future, which may adversely affect the Company’s business, financial position, results of operations and cash flows.

The Company has a significant amount of indebtedness and may incur additional indebtedness in the future.  As of December 31, 2017, the Company had $290.8 million of debt on its balance sheet.  U.S. debt included $289.0 million in unsecured promissory notes with maturities extending from 2018 until 2027.  In addition, on December 31, 2017 the Company was party to a $125 million credit facility.  On January 30, 2018, the Company entered into a $350 million five-year credit facility replacing the prior facility.

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Certain of the Company’s foreign subsidiaries also maintain bank term loans and short-term bank lines of credit in their respective countries to meet working capital requirements as well as to fund capital expenditure programs and acquisitions.  As of December 31, 2017, the Company’s foreign subsidiaries’ aggregate outstanding debt totaled $ 1.8 million.

The Company’s current indebtedness and any additional indebtedness incurred in the future may materially and adversely affect its business, financial position, results of operations and cash flows.  For example, such indebtedness could:

 

require the Company to dedicate a substantial portion of cash flow from operations to pay principal and interest on the Company’s debt, which would reduce funds available to fund future working capital, capital expenditures and other general operating requirements;  

 

limit the Company’s ability to borrow funds that may be needed to operate and expand its business;

 

limit the Company’s flexibility in planning for or reacting to changes in the Company’s business and the industries in which the Company operates;

 

increase the Company’s vulnerability to general adverse economic and industry conditions or a downturn in the Company’s business; and

 

place the Company at a competitive disadvantage compared to its competitors that have less debt.

The Company’s loan agreements contain provisions, which, among others, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends.  Failure to comply with these loan agreements would require debt restructuring that could be materially adverse to the Company’s financial position, results of operations and cash flows.  

An increase in interest rates could limit the ability of the Company to incur additional debt to fund the Company’s strategic plans or to refinance maturing debt without incurring significant additional cost, and could make borrowings under the Company’s credit facility or other floating rate debt materially more expensive.  Additionally, any future disruptions in the credit and financial markets may reduce the availability of debt financing or refinancing and increase the costs associated with such financing.  If the Company is unable to secure financing on satisfactory terms, or at all, its business financial position, results of operations and cash flows may be materially and adversely affected.

The Company could be adversely affected by downgrades to its credit ratings or disruptions in its ability to access well-functioning capital markets.

Historically, the Company has relied on the debt capital markets to fund portions of its capital investments and access to bank credit facilities as part of its working capital management strategy. The Company’s continued access to these markets, and the terms of such access, depend on multiple factors including the condition of debt capital markets, the Company’s operating performance, and its credit ratings. These ratings are based on a number of factors, which include rating agencies’ assessment of the Company’s financial strength and financial policies. There can be no assurance that any particular rating assigned to the Company will remain in effect for any given period of time or that a rating will not be changed or withdrawn by a rating agency, if in that rating agency’s judgment, future circumstances relating to the basis of the rating so warrant. Incurrence of additional debt by the Company could adversely affect its credit ratings. The Company depends on banks and other financial institutions to provide credit to its business and perform under the Company’s agreements with them. Defaults by one or more of these counterparties on their obligations to the Company could materially and adversely affect it. Any downgrade of the Company’s credit ratings could materially adversely affect its cost of funds, liquidity, competitive position and access to capital markets and increase the cost of and counterparty risks associated with existing facilities, which could materially and adversely affect Company business operations, financial condition, and results of operations.

Downturns in certain industries and general economic downturns may have an adverse effect on the Company’s business, financial position, results of operations and cash flows.      

Economic downturns may adversely affect users of some end products that are manufactured using the Company’s products and the industries in which such end products are used.  These users may reduce their volume of purchases of such end products during economic downturns, which would reduce demand for the Company’s products.  Additionally, uncertain conditions in the credit markets pose a risk to the overall economy that may impact consumer and customer demand of some of the Company’s products, as well as the Company’s ability to manage normal commercial relationships with its customers, suppliers and creditors.  Some of the Company’s customers may not be able to meet the terms of sale and suppliers may not be able to fully perform their contractual obligations due to tighter credit markets or a general slowdown in economic activity.  

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In the event that economic conditions worsen or result in a prolonged downturn or recession, the Company’s business, financial position, results of operations and cash flows may be materially and adversely affected.

Conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations related to our industry, could adversely affect the Company’s business.

Conflicts, military actions and terrorist attacks have precipitated economic instability and turmoil in financial markets. Instability and turmoil, particularly in energy-producing nations, may result in raw material cost increases. The uncertainty and economic disruption resulting from hostilities, military action or acts of terrorism may impact any or all of the Company’s facilities and operations or those of its suppliers or customers. Accordingly, any conflict, military action or terrorist attack that impacts the Company or any of its suppliers or customers, could have a material adverse effect on the Company’s business, results of operations, financial position, results of operations and cash flows.

Cost overruns, delays and miscalculations in capacity needs with respect to the Company’s expansion or other capital projects could adversely affect the Company’s business, financial position, results of operations and cash flows.

From time to time, the Company initiates expansion and other significant capital projects. Projects of this type are subject to risks of delay or cost overruns inherent in any large construction project resulting from numerous factors, including the following: shortages of equipment, materials or skilled labor; work stoppages; unscheduled delays in the delivery of ordered materials and equipment; unanticipated cost increases; difficulties in obtaining necessary permits or in meeting permit conditions; difficulties in meeting regulatory requirements or obtaining regulatory approvals; availability of suppliers to certify equipment for existing and enhanced regulations; design and engineering problems; and failure or delay of third party service providers, civil unrest and labor disputes. Significant cost overruns or delays in completing a project could have a material adverse effect on the Company’s return on investment, results of operations and cash flows. In addition, if the Company misjudges its future capacity needs, this too could negatively impact its operations, financial condition and results of operations.

The Company relies extensively on information technology (IT) systems to conduct its business. Interruption of, damage to or compromise of the Company’s IT systems and failure to maintain the integrity of customer, colleague or Company data could harm the Company’s reputation and have an adverse effect on the Company’s business, financial position, results of operations and cash flows.

The Company relies on IT systems in its operations, including production, supply chain, research and development, finance, human resource and regulatory functions. The Company’s ability to effectively manage its business depends on the security, reliability and adequacy of these systems.  IT system failures due to events including but not limited to network disruptions, programming errors, computer viruses and security breaches (e.g., cyber-attacks) could impact production activities, impede shipment of products, cause delays or cancellations of customer orders, or hamper the processing of transactions or reporting of financial results.  These or similar occurrences, whether accidental or intentional, could result in theft, unauthorized use or publication of our intellectual property and/or confidential business information, which could harm our reputation and competitive position, reduce the value of our investment in research and development and other strategic initiatives, result in a loss of business, as well as remedial and other costs, fines, investigations, enforcement actions or lawsuits or otherwise adversely affect our business.

The Company continues to develop and enhance controls and security measures to protect against the risk of theft, loss or fraudulent or unlawful use of customer, colleague or company data, and it maintains an ongoing process to re-evaluate the adequacy of its controls and measures. The Company may also be required to expend additional resources to continue to enhance its information privacy and security measures and/or to investigate and remediate any information security vulnerabilities. The Company maintains what it believes to be adequate and collectible insurance in the event of the theft, loss, fraudulent or unlawful use of customer, colleague or company data, but any such occurrences could result in costs which may not be covered or may be in excess of any available insurance that the Company may have procured. While the Company has a comprehensive program in place for continuously reviewing, maintaining, testing and upgrading its IT systems and security, there can be no assurance that such efforts will prevent breakdowns or breaches in Company systems that could adversely affect the Company’s business, financial position, results of operations and cash flows.

Various liability claims could materially and adversely affect the Company’s financial position, operating results and cash flows.

The Company may be required to pay for losses or injuries purportedly caused by its products.  The Company faces an inherent exposure to various types of claims including general liability, product liability, product recall, toxic tort and environmental (“claims”), among others, if its products, or the end products that are manufactured with the Company’s products, result in property damage, injury or death.  In addition, because the Company conducts business in multiple jurisdictions, the Company also faces an inherent exposure to other general claims based on its operations in those jurisdictions and the laws of those jurisdictions, including but not

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limited to claims arising from its relationship with employees, distributors, agents and customers, and other parties with whom it has a business relationship, directly or indirectly.  Many of these claims may be made against the Company even if there is no evidence of a loss from that claim, and these claims may be made by individual persons, groups of persons, or groups of plaintiffs in a class action.  Defending these claims could result in significant legal expenses relating to defense costs and/or damage awards and diversion of management’s time and the Company’s resources.  Any claim brought against the Company could materially and adversely affect the Company’s business financial position, results of operations and cash flows.

The Company’s success depends on its executive management and other key personnel.

The Company’s future success depends to a significant degree on the skills, experience and efforts of its executive management and other key personnel and their ability to provide the Company with uninterrupted leadership and direction. The availability of highly qualified talent is limited, and the competition for talent is robust and the Company may not be able to recruit and retain the personnel it needs if it were to lose an existing member of senior management. The Company’s future success will depend on its ability to have adequate succession plans in place and to attract, retain and develop qualified personnel. A failure to efficiently replace executive management members and other key personnel and to attract, retain and develop new qualified personnel could have an adverse effect on the Company’s business financial position, results of operations and cash flows.

 

Item 1B. Unresolved Staff Comments

None

 

 

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Item 2.  Properties

The following are the Company’s principal plants and other important physical properties. Unless otherwise noted, the listed properties are owned by the Company. Management believes that the facilities are suitable and adequate for the Company’s current operations. 

 

 

Name of Facility

Location

Site Size

Segment

1.

Millsdale

Millsdale (Joliet), Illinois

492 acres

Surfactants/Polymers

2.

Fieldsboro

Fieldsboro,

New Jersey

45 acres

Surfactants

3.

Anaheim

Anaheim,

California

8 acres

Surfactants

4.

Winder

Winder,

Georgia

202 acres

Surfactants

5.

Maywood

Maywood,

New Jersey

19 acres

Surfactants /

Specialty Products

6.

Columbus

Columbus, Georgia

29.8 acres

Polymers

7.

Pasadena

Pasadena, Texas

50 acres

Surfactants

8.

Stepan France

Voreppe, France

20 acres

Surfactants

9.

Stepan Mexico

Matamoros,

Mexico

13 acres

Surfactants

10.

Stepan Germany

Wesseling,

Germany

12 acres

Surfactants/Polymers

11.

Stepan UK

Stalybridge,

United Kingdom

11 acres

Surfactants

12.

Stepan Colombia

Manizales,

Colombia

5 acres

Surfactants

13.

Stepan China

Nanjing, China (Nanjing Chemical Industrial Park)

13 acres (right of use arrangement)

Polymers

14.

Stepan Brazil

Vespasiano, Minas Gerais, Brazil

27 acres

Surfactants

15.

Tebras Tensoativos Do Brasil Ltda. and PBC Industria Quimica Ltda.

Salto, Sao Paulo, Brazil

7 acres

Surfactants

16.

Stepan Philippines

Bauan, Batangas, Philippines

9 acres (leased)

Surfactants

17.

Stepan Poland

Brzeg Dolny, Poland

   4 acres (perpetual use right)

Polymers

18.

Stepan Asia

Jurong Island, Singapore

8 acres (leased)

Surfactants

19.

Company Headquarters and Central Research Laboratories

Northfield,

Illinois

8 acres

N/A

20.

Company Corporate Supply Chain, Human Resources, Legal and Finance Functions

Northbrook,

Illinois

3.25 acres

N/A

 

 

Item 3. Legal Proceedings

There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company’s business, the majority of which relate to environmental matters.  Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time.  The Company’s operations are subject to extensive local, state and federal regulations, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund) as well as comparable regulations applicable to the Company’s foreign locations.  Over the years, the Company has received requests for information relative to or has been named by government authorities as a potentially responsible party (PRP) at a number of sites where cleanup costs have been or may be incurred under CERCLA and similar state statutes.  In addition, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites.  The Company believes that it has made adequate provisions for the costs it may incur with respect to these sites.  For most of these sites, the involvement of the Company is expected to be minimal.  Material legal proceedings are described below:

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Maywood, New Jersey Site

The Company’s property in Maywood, New Jersey and property formerly owned by the Company adjacent to its current site and other nearby properties (Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of certain alleged chemical contamination.  Pursuant to an Administrative Order on Consent entered into between the U.S. Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company, and the issuance of an order by USEPA to the Company for property currently owned by the Company, the Company has completed various Remedial Investigation Feasibility Studies (RI/FS), and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated soil.  USEPA has not yet issued a ROD for chemically-contaminated groundwater for the Maywood site.  Based on the most current information available, the Company believes its recorded liability represents its best estimate of the cost of remediation for the Maywood site.  The best estimate of the cost of remediation for the Maywood site could change as the Company continues to hold discussions with USEPA, as the design of the remedial action progresses, if a groundwater ROD is issued or if other PRPs are identified.  The ultimate amount for which the Company is liable could differ from the Company’s current recorded liability.

In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil.  Based on the Company’s review and analysis of this order, no changes to the Company’s current recorded liability for claims associated with soil remediation of chemical contamination were required.

In addition, under the terms of a settlement agreement reached on November 12, 2004, the United States Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985 under which the United States will take title to and responsibility for radioactive waste removal at the Maywood site, including past and future remediation costs incurred by the United States.  As such, the Company recorded no liability related to this settlement agreement.

D’Imperio Property Site

During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances at several sites in New Jersey.  The Company was named as a PRP in a lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Property Site located in New Jersey.  In 2016, the PRPs were provided with updated remediation cost estimates which were considered in the Company’s determination of its range of estimated possible losses and liability balance.  The changes in range of possible losses and liability balance were immaterial.  Remediation work is continuing at this site.  Based on current information, the Company believes that its recorded liability represents its best estimate of the cost of remediation for the D’Imperio site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

Wilmington Site

The Company is currently contractually obligated to contribute to the response costs associated with the Company’s formerly-owned site in Wilmington, Massachusetts.  Remediation at this site is being managed by its current owner, to whom the Company sold the property in 1980.  Under the agreement, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to five percent of future response costs associated with this site with no limitation on the ultimate amount of contributions. The Company had paid the current owner $2.5 million for the Company’s portion of environmental response costs through December 31, 2017.  The Company has recorded a liability for its portion of the estimated remediation costs for the site.  Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

The Company and other prior owners also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site.  While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed.

The Company believes that based on current information it has adequate reserves for the claims related to this site.  However, depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ from the current estimates.

16


 

Federal Insecticide, Fungicide and Rodenticide Act

On March 22, 2017, the Company received a prefiling notice from USEPA for alleged violations of the Federal Insecticide, Fungicide, and Rodenticide Act (FIFRA) associated with three of the Company’s biocide products sold by a licensed distributor.  On January 9, 2018, USEPA issued a Consent Agreement and Final Order (CAFO) to the Company for the alleged FIFRA violations.  The CAFO assessed a civil penalty of $131,440, which the Company paid on January 16, 2018.

Other Matters

The Company has been named as a de minimis PRP at other sites, and as such the Company believes that a resolution of its liabilities will not have a material impact on the financial position, results of operations or cash flows of the Company.

Item 4. Mine Safety Disclosures

Not Applicable.

 

 

 

17


 

PART II

 

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

(a)

The Company’s common stock is listed and traded on the New York Stock Exchange.  As of the close of trading on January 31, 2018, the market price for the Company’s common stock was $78.42. See the table below for New York Stock Exchange quarterly market price information.

 

Quarterly Stock Data

 

 

 

Stock Price Range

 

 

 

2017

 

 

2016

 

Quarter

 

High

 

 

Low

 

 

High

 

 

Low

 

First

 

$

82.93

 

 

$

68.51

 

 

$

56.50

 

 

$

41.42

 

Second

 

$

90.66

 

 

$

75.38

 

 

$

63.32

 

 

$

54.00

 

Third

 

$

92.97

 

 

$

75.36

 

 

$

73.90

 

 

$

56.89

 

Fourth

 

$

89.18

 

 

$

77.79

 

 

$

87.00

 

 

$

67.85

 

Year

 

$

92.97

 

 

$

68.51

 

 

$

87.00

 

 

$

41.42

 

 

On February 19, 2013, the Company’s Board of Directors authorized the Company to repurchase up to 1,000,000 shares of its outstanding common stock.  During 2017, 57,963 shares of Company common stock were purchased in the open market and 18,827 shares of Company common stock were purchased from the Company’s retirement plans.  These shares were recorded as treasury stock in the Company’s balance sheet.  At December 31, 2017, 641,139 shares remained available for repurchase under the February 19, 2013, authorization. The timing and amount of the repurchases are determined by the Company’s management based on its evaluation of market conditions and share price. Shares will be repurchased with cash in open market or private transactions in accordance with applicable securities and stock exchange rules.

(b)

On January 31, 2018, there were 1,674 holders of record of the Company’s common stock.

(c)

Below is a summary by month of shares purchases by the Company during the fourth quarter of 2017:

 

Period

 

Total Number of

Shares Purchased

 

 

Average Price

Paid per Share

 

 

Total Number of Shares

Purchased as Part of

Publicly Announced

Plans or Programs

 

 

Maximum Number

of Shares that May

Yet Be Purchased

Under the Plans

or Programs

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

October

 

 

349 (a)

 

 

$

87.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November

 

 

18,827 (b)

 

 

$

79.67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

19,176

 

 

$

79.81

 

 

 

 

 

 

 

 

 

(a)

Represents shares tendered by employees to settle statutory withholding taxes related to the distribution of restricted stock awards.

 

(b)

Represents purchase of shares from the Company’s retirement plans.

 

(d)

See the table below for quarterly dividend information.

Dividends Declared Per Common Share

 

Quarter

 

2017

 

 

2016

 

First

 

$

0.21

 

 

$

0.19

 

Second

 

$

0.21

 

 

$

0.19

 

Third

 

$

0.21

 

 

$

0.19

 

Fourth

 

$

0.23

 

 

$

0.21

 

Year

 

$

0.86

 

 

$

0.78

 

 

18


 

The Company has increased its dividends for 50 consecutive years.

 

The Company has material debt agreements that restrict the payment of dividends. See the Liquidity and Financial Condition section of Part II, Item 7, Management’s Discussion and Analysis, for a description of the restrictions. See also Note 6, Debt, of the consolidated financial statements (Item 8 of this Form 10-K) for the amount of retained earnings available for dividend distribution at December 31, 2017.

(e)

Stock Performance Graph

The following stock performance graph compares the yearly change since December 31, 2012, in cumulative return on the common stock of the Company on a dividend reinvested basis to the Dow Jones Chemical Industry Index and the Russell 2000 Index. The Dow Jones Chemical Industry Index is a market-capitalization weighted grouping of 35 chemical companies, including major manufacturers of both basic and specialty products. The Company is not included in the Dow Jones Chemical Industry Index. The Russell 2000 Index is a market-capitalization weighted grouping of 2,000 small to medium sized companies in a broad range of industries. The Company has been included in the Russell 2000 Index since 1992. The graph assumes $100 was invested on December 31, 2012, and shows the cumulative total return as of each December 31 thereafter.

 

 

 

19


 

Item 6. Selected Financial Data

(In thousands, except per share data)

 

For the Year

 

2017

 

 

2016

 

 

2015

 

 

2014

 

 

2013

 

Net Sales

 

$

1,925,007

 

 

$

1,766,166

 

 

$

1,776,167

 

 

$

1,927,213

 

 

$

1,880,786

 

Operating Income

 

 

146,160

 

 

 

126,193

 

 

 

122,790

 

 

 

90,694

 

 

 

109,153

 

Percent of Net Sales

 

 

7.6

%

 

 

7.1

%

 

 

6.9

%

 

 

4.7

%

 

 

5.8

%

Income Before Provision for Income Taxes

 

 

139,237

 

 

 

113,816

 

 

 

102,856

 

 

 

75,535

 

 

 

95,630

 

Percent of Net Sales

 

 

7.2

%

 

 

6.4

%

 

 

5.8

%

 

 

3.9

%

 

 

5.1

%

Provision for Income Taxes

 

 

47,690

 

 

 

27,618

 

 

 

26,819

 

 

 

18,454

 

 

 

23,293

 

Net Income Attributable to Stepan Company

 

 

91,578

 

 

 

86,191

 

 

 

75,968

 

 

 

57,101

 

 

 

72,828

 

Per Diluted Share

 

 

3.92

 

 

 

3.73

 

 

 

3.32

 

 

 

2.49

 

 

 

3.18

 

Percent of Net Sales

 

 

4.8

%

 

 

4.9

%

 

 

4.3

%

 

 

3.0

%

 

 

3.9

%

Percent to Total Stepan Company

   Stockholders’ Equity (a)

 

 

13.3

%

 

 

14.5

%

 

 

13.9

%

 

 

10.5

%

 

 

14.1

%

Cash Dividends Paid

 

 

18,907

 

 

 

17,329

 

 

 

16,300

 

 

 

15,387

 

 

 

14,474

 

Per Common Share

 

 

0.8600

 

 

 

0.7800

 

 

 

0.7300

 

 

 

0.6900

 

 

 

0.6500

 

Depreciation and Amortization

 

 

79,022

 

 

 

74,967

 

 

 

66,985

 

 

 

63,804

 

 

 

56,400

 

Capital Expenditures

 

 

78,613

 

 

 

103,076

 

 

 

119,349

 

 

 

101,819

 

 

 

92,865

 

Weighted-average Common Shares

   Outstanding (Diluted)

 

 

23,377

 

 

 

23,094

 

 

 

22,858

 

 

 

22,917

 

 

 

22,924

 

As of Year End

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Working Capital

 

$

468,483

 

 

$

388,276

 

 

$

376,329

 

 

$

326,043

 

 

$

339,557

 

Current Ratio

 

 

2.5

 

 

 

2.3

 

 

 

2.5

 

 

 

2.3

 

 

 

2.3

 

Property, Plant and Equipment, Net

 

 

598,443

 

 

 

582,714

 

 

 

555,463

 

 

 

524,195

 

 

 

494,042

 

Total Assets

 

 

1,470,861

 

 

 

1,353,890

 

 

 

1,239,661

 

 

 

1,162,014

 

 

 

1,167,202

 

Long-term Debt Obligations, Less Current

   Maturities

 

 

268,299

 

 

 

288,859

 

 

 

313,817

 

 

 

246,897

 

 

 

235,246

 

Total Stepan Company Stockholders’ Equity

 

 

740,096

 

 

 

634,604

 

 

 

556,984

 

 

 

535,546

 

 

 

552,286

 

(a)

Based on average equity.

 

 

20


 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the annual periods included in the accompanying consolidated financial statements.

Overview

The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business comprises three reportable segments:

 

Surfactants – Surfactants, which accounted for 68 percent of Company consolidated net sales in 2017, are principal ingredients in consumer and industrial cleaning products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five North American sites, three European sites (United Kingdom, France and Germany), four Latin American sites (Mexico, Colombia and two sites in Brazil) and two Asian sites (Philippines and Singapore). In 2016, the Company shut down its production facility in Canada, moving the production of goods previously manufactured in Canada to other Company North American production sites. Manufacturing operations at that facility ceased in the fourth quarter of 2016 but decommissioning activities continued throughout 2017. In October 2016, the Company’s subsidiary in Brazil acquired the commercial business of Tebras Tensoativos do Brasil Ltda. (Tebras) and the sulfonation production facility of PBC Industria Quimica Ltda. (PBC).  In late 2016, a major customer of the Company’s Bahia, Brazil, plant exited the product line for which the Company was supplying them product.  As a result, asset impairments were required in 2016 (see Note 22 to the consolidated financial statements for additional information).  

 

Polymers – Polymers, which accounted for 28 percent of consolidated net sales in 2017, include polyurethane polyols, polyester resins and phthalic anhydride.  Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications.  CASE and polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols.  In the United States, polyurethane polyols and phthalic anhydride are manufactured at the Company’s Millsdale, Illinois, site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. In Europe, polyurethane polyols are manufactured by the Company’s subsidiary in Germany, and specialty polyols are manufactured by the Company’s Poland subsidiary. In China, polyurethane polyols and specialty polyols are manufactured at the Company’s Nanjing, China, manufacturing plant.

 

Specialty Products – Specialty Products, which accounted for four percent of consolidated net sales in 2017, include flavors, emulsifiers and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications. Specialty products are primarily manufactured at the Company’s Maywood, New Jersey, site and, in some instances, at outside contractors.

 

 

2017 Acquisition Agreement

 

On June 13, 2017, the Company announced that it had reached an agreement with BASF Mexicana, S.A. DE C.V. (BASF) to acquire BASF’s production facility in Ecatepec, Mexico, and a portion of its related surfactants business.  The facility, which is near Mexico City, has over 50,000 metric tons of capacity, 124,000 square feet of warehouse space, a laboratory and office space.  The acquisition is currently expected to be completed in 2018, subject to normal closing conditions, including necessary governmental consents.  The acquisition supports the Company’s growth strategy in Latin America.  The Company believes this acquisition should enhance its market position and supply capabilities for surfactants in Mexico and positions the Company to grow in both the consumer and functional surfactants markets.

Deferred Compensation Plans

The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company expenses and profits. Compensation expense results when the values of Company common stock and mutual fund investment assets held for the plans increase, and compensation income results when the values of Company common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are presented in the following table:

21


 

 

 

 

Income (Expense)

For the Year

Ended December 31

 

 

 

 

 

 

(In millions)

 

2017

 

 

2016

 

 

Change

 

 

Deferred Compensation (Operating expenses)

 

$

(4.8

)

 

$

(16.8

)

 

$

12.0

 

(1)

Investment Income (Other, net)

 

 

0.9

 

 

 

0.6

 

 

 

0.3

 

 

Realized/Unrealized Gains (Losses) on Investments

   (Other, net)

 

 

4.0

 

 

 

0.1

 

 

 

3.9

 

 

Pretax Income Effect

 

$

0.1

 

 

$

(16.1

)

 

$

16.2

 

 

 

 

 

Income (Expense)

For the Year

Ended December 31

 

 

 

 

 

 

(In millions)

 

2016

 

 

2015

 

 

Change

 

 

Deferred Compensation (Operating expenses)

 

$

(16.8

)

 

$

(6.5

)

 

$

(10.3

)

(1)

Investment Income (Other, net)

 

 

0.6

 

 

 

0.8

 

 

 

(0.2

)

 

Realized/Unrealized Gains on Investments

   (Other, net)

 

 

0.1

 

 

 

0.1

 

 

 

 

 

Pretax Income Effect

 

$

(16.1

)

 

$

(5.6

)

 

$

(10.5

)

 

 

 

(1)

See the applicable Corporate Expenses section of this MD&A for details regarding the period-to-period changes in deferred compensation.

 

Below are the year-end Company common stock market prices used in the computation of deferred compensation income and expense:

 

 

 

December 31

 

 

 

2017

 

 

2016

 

 

2015

 

 

2014

 

Company Stock Price

 

$

78.97

 

 

$

81.48

 

 

$

49.69

 

 

$

40.08

 

Effects of Foreign Currency Translation

The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects year-over-year comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar year-to-year local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following tables present the effects that foreign currency translation had on the year-over-year changes in consolidated net sales and various income line items for 2017 compared to 2016 and 2016 compared to 2015:

 

 

 

For the Year Ended

December 31

 

 

Increase

 

 

Increase Due

to Foreign Currency

 

(In millions)

 

2017

 

 

2016

 

 

(Decrease)

 

 

Translation

 

Net Sales

 

$

1,925.0

 

 

$

1,766.2

 

 

$

158.8

 

 

$

9.9

 

Gross Profit

 

 

338.3

 

 

 

338.5

 

 

 

(0.2

)

 

 

2.6

 

Operating Income

 

 

146.2

 

 

 

126.2

 

 

 

20.0

 

 

 

1.7

 

Pretax Income

 

 

139.2

 

 

 

113.8

 

 

 

25.4

 

 

 

1.6

 

 

 

 

For the Year Ended

 

 

 

 

 

 

(Decrease) Due

 

 

 

December 31

 

 

Increase

 

 

to Foreign Currency

 

(In millions)

 

2016

 

 

2015

 

 

(Decrease)

 

 

Translation

 

Net Sales

 

$

1,766.2

 

 

$

1,776.2

 

 

 

(10.0

)

 

$

(42.9

)

Gross Profit

 

 

338.5

 

 

 

308.2

 

 

 

30.3

 

 

 

(5.9

)

Operating Income

 

 

126.2

 

 

 

122.8

 

 

 

3.4

 

 

 

(3.7

)

Pretax Income

 

 

113.8

 

 

 

102.9

 

 

 

10.9

 

 

 

(3.6

)

22


 

Results of Operations

2017 Compared with 2016

Summary

Net income attributable to the Company for 2017 increased six percent to $91.6 million, or $3.92 per diluted share, from $86.2 million, or $3.73 per diluted share, for 2016. Adjusted net income increased 11 percent to $108.7 million, or $4.65 per diluted share, from $98.2 million, or $4.25 per diluted share in 2016 (see the “Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for reconciliations between reported net income attributable to the Company and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Below is a summary discussion of the major factors leading to the year-over-year changes in net sales, profits and expenses.  A detailed discussion of segment operating performance for 2017 compared to 2016 follows the summary.

Consolidated net sales increased $158.9 million, or nine percent, between years. Higher average selling prices favorably affected the year-over-year net sales change by $174.5 million.  The increase in average selling prices was mostly attributable to the pass through of higher raw material costs within the Surfactants and Polymers segments.  Consolidated sales volume declined one percent, which had a $25.5 million unfavorable impact on the year-over-year change in net sales.  Sales volume decreased two percent and seven percent for the Surfactants and Specialty Products segments, respectively.  Sales volume was flat year-over-year for the Polymers segment.   Foreign currency translation positively affected the year-over-year net sales change by $9.9 million. The favorable foreign currency translation effect reflected a weaker U.S. dollar against the majority of currencies for countries where the Company has foreign operations.  Unit margins improved for Surfactants and declined for Polymers and Specialty Products.  

Operating income improved $20.0 million, or 16 percent, between years.  Most of this improvement was related to lower 2017 deferred compensation expense and lower business restructuring and asset impairment charges, which declined by $11.9 million and $4.0 million, respectively. Operating income improved for the Surfactant segment and declined for the Polymers and Specialty Products segments. The Surfactant segment operating income increased 20 percent largely due to the non-recurrence of two customer claims incurred in the prior year ($7.4 million), a favorable resolution of one of the prior year claims in 2017 ($4.7 million), improved product mix, higher unit margins, savings from the prior year Canadian plant shutdown and the full year accretive impact of the October 2016 Tebras and PBC acquisitions in Brazil.  The Polymers segment operating income declined 14 percent primarily due to lower sales volume and unit margins in North America.  Foreign currency translation had a favorable $1.7 million effect on year-over-year consolidated operating income.

Operating expenses (including deferred compensation expense and business restructuring and asset impairment expenses) decreased $20.2 million, or 10 percent, between years. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

 

Selling expenses decreased $2.9 million, or five percent, year over year largely due to lower U.S. fringe benefit expenses ($2.4 million).  The lower fringe benefits were primarily due to lower incentive-based compensation expense (stock-based compensation and bonuses).  Higher expenses associated with Tebras and PBC, acquired in October 2016, partially offset the consolidated decrease in selling expenses.

 

Administrative expenses increased $0.9 million, or one percent, year over year. The increase was primarily due to higher legal and consulting expenses, partially offset by lower U.S. fringe benefit expenses resulting from lower incentive-based compensation expense.

 

Research, development and technical service (R&D) expenses decreased $2.2 million, or four percent, year over year primarily due to lower U.S. fringe benefit expenses resulting from lower incentive-based compensation expense.

 

Deferred compensation plan expense was $11.9 million lower in 2017 than in 2016 primarily due to a $2.51 per share decrease in the market price of Company common stock in 2017 versus a $31.79 per share increase in 2016.  See the “Overview” and “Corporate Expenses” sections of this MD&A for further details.

 

Business restructuring and asset impairment charges totaled $3.1 million in 2017 versus $7.1 million in 2016.  Current year restructuring charges are primarily comprised of decommissioning costs related to the Company’s Canadian plant closure ($2.0 million) and severance costs related to a partial restructuring of the Company’s production facility in Fieldsboro, New Jersey ($0.9 million). The prior year restructuring expenses primarily related to the closure of the Company’s surfactant plant in Canada ($2.8 million) and asset impairment charges of $4.3 million. See Note 22 to the consolidated financial statements for additional information. The business restructuring and asset impairment charges were excluded from the determination of segment operating income.

23


 

Net interest expense for 2017 declined $1.8 million, or 13 percent, from net interest expense for 2016. The decline in interest expense was principally attributable to higher interest income earned on excess cash and lower average debt levels due to scheduled repayments.

Other, net was income of $4.5 million for 2017 versus $0.8 million of income in 2016.   Most of this increase was attributable to investment income (including realized and unrealized gains and losses) from the Company’s deferred compensation and supplemental defined contribution mutual fund assets.  Investment income (including realized and unrealized gains and losses) was $5.1 million in 2017 versus $0.8 million in 2016, an increase of $4.4 million year-over-year.  Partially offsetting this increase was foreign exchange activity which resulted in a $0.6 million loss in 2017 versus an insignificant loss in 2016.

 

The effective tax rate was 34.3 percent in 2017 compared to 24.3 percent in 2016.  The increase was primarily attributable to the enactment of the U.S. Tax Cuts and Jobs Act (“Tax Act”) which resulted in a net tax cost of $14.9 million.  This net expense consists of a net benefit attributable to the U.S. federal corporate income tax rate reduction of $4.5 million and a net expense attributable to the Transition Tax of $19.4 million.  The increase in the effective tax rate attributable to the Tax Act was partially offset by the following favorable nonrecurring items: 1) a foreign tax credit benefit from the repatriation of foreign earnings, and 2) a tax benefit from a change in accounting method related to tax depreciation.  See Note 9 to the consolidated financial statements for a reconciliation of the statutory U.S. federal income tax rate to the effective tax rate.

Segment Results

 

(In thousands)

 

For the Year Ended

 

 

 

 

 

 

 

 

 

Net Sales

 

December 31,

2017

 

 

December 31,

2016

 

 

Increase (Decrease)

 

 

Percent

Change

 

Surfactants

 

$

1,297,555

 

 

$

1,181,563

 

 

$

115,992

 

 

 

10

 

Polymers

 

 

546,634

 

 

 

498,826

 

 

 

47,808

 

 

 

10

 

Specialty Products

 

 

80,818

 

 

 

85,777

 

 

 

(4,959

)

 

 

-6

 

Total Net Sales

 

$

1,925,007

 

 

$

1,766,166

 

 

$

158,841

 

 

 

9

 

 

(In thousands)

 

For the Year Ended

 

 

 

 

 

 

 

 

 

Operating Income

 

December 31,

2017

 

 

December 31,

2016

 

 

Increase

(Decrease)

 

 

Percent

Change

 

Surfactants

 

$

119,990

 

 

$

99,796

 

 

$

20,194

 

 

 

20

 

Polymers

 

 

82,801

 

 

 

96,788

 

 

 

(13,987

)

 

 

-14

 

Specialty Products

 

 

9,952

 

 

 

10,698

 

 

 

(746

)

 

 

-7

 

Segment Operating Income

 

$

212,743

 

 

$

207,282

 

 

$

5,461

 

 

 

3

 

Corporate Expenses, Excluding Deferred Compensation

and Restructuring

 

 

58,657

 

 

 

57,220

 

 

 

1,437

 

 

 

3

 

Deferred Compensation Expense

 

 

4,857

 

 

 

16,805

 

 

 

(11,948

)

 

 

-71

 

Business Restructuring and Asset Impairments

 

 

3,069

 

 

 

7,064

 

 

 

(3,995

)

 

 

-57

 

Total Operating Income

 

$

146,160

 

 

$

126,193

 

 

$

19,967

 

 

 

16

 

24


 

Surfactants

Surfactants 2017 net sales increased $116.0 million, or 10 percent, from net sales reported in 2016.  Higher selling prices and the favorable effects of foreign currency translation accounted for $139.7 million and $1.8 million, respectively, of the year-over-year increase in net sales.  The increase in selling prices mostly reflected the pass through to customers of higher costs for certain raw materials and more favorable sales mix.  The favorable sales mix was primarily attributable to higher sales of products used in household, industrial and institutional (HI&I), agricultural and oilfield applications.  Sales volume decreased two percent between years, which had a $25.5 million negative effect on year-over-year net sales. All regions, except Latin America, experienced sales volume declines. The majority of the sales volume decline was attributable to lower commodity surfactant demand.  The Latin America sales volume increase was principally due to the full year impact of the region’s October 2016 acquisitions of Tebras and PBC. A year-over-year comparison of net sales by region follows:

 

 

 

For the Year Ended

 

 

 

 

 

 

 

 

 

(In thousands)

 

December 31,

2017

 

 

December 31,

2016

 

 

Increase

 

 

Percent

Change

 

North America

 

$

763,044

 

 

$

724,619

 

 

$

38,425

 

 

 

5

 

Europe

 

 

275,121

 

 

 

237,489

 

 

 

37,632

 

 

 

16

 

Latin America

 

 

190,802

 

 

 

151,229

 

 

 

39,573

 

 

 

26

 

Asia

 

 

68,588

 

 

 

68,226

 

 

 

362

 

 

 

1

 

Total Surfactants Segment

 

$

1,297,555

 

 

$

1,181,563

 

 

$

115,992

 

 

 

10

 

Net sales for North American operations increased five percent between years.  Higher selling prices and the favorable effect of foreign currency translation positively affected the year-over-year change in net sales by $58.8 million and $0.6 million, respectively.  A three percent decline in sales volume offset the impacts of selling prices and currency translations by $21.0 million.  Selling prices increased eight percent year-over-year mainly due to the pass through of certain increased raw material costs to customers and to a more favorable mix of sales.  The three percent decline in sales volume reflected decreased sales of commodity products used in laundry and cleaning and personal care applications partially offset by increased sales of products used in HI&I, agricultural and oilfield applications. The foreign currency impact reflected a weaker U.S. dollar relative to the Canadian dollar.

Net sales for European operations increased 16 percent from 2016 to 2017.  Most of this increase was attributable to higher selling prices which favorably affected the year-over-year change in net sales by $44.4 million.  The increase in selling prices primarily resulted from the pass through of higher costs for certain raw materials.  A three percent decline in sales volume and the unfavorable effect of foreign currency translation negatively affected the year-over-year change in net sales by $6.0 million and $0.8 million, respectively.  The decline in sales volume was largely attributable to lower demand for personal care commodity anionics and reduced sales volumes of general surfactants sold through our distribution partners, partially offset by higher demand for agricultural chemicals.  A weaker British pound sterling, partially offset by a stronger Euro, relative to the U.S. dollar, accounted for the foreign currency effect.  Net sales in 2016 were negatively impacted by $7.4 million of expense from two customer claims (see Note 23 to the consolidated financial statements for further information) whereas net sales in 2017 were positively impacted by $4.7 million related to a favorable resolution of one of the prior year claims.    

Net sales for Latin American operations increased 26 percent due to higher selling prices, a seven percent increase in sales volume and the favorable impact of foreign currency translation, which accounted for $23.2 million, $10.8 million and $5.6 million, respectively, of the year-over-year increase in net sales.  Selling prices increased 14 percent due to the pass through to customers of higher raw material costs and a more favorable mix of sales.  The improved sales volume reflected new business associated with the October 2016 acquisition of Tebras and PBC and higher demand for agricultural chemicals, partially offset by lower demand and lost commodity business for products used in laundry and cleaning applications.  The year-over-year strengthening of the Brazilian real and the Colombian peso against the U.S. dollar generated the favorable foreign currency effect.  Net sales in 2016 included $4.3 million of compensation for future lost revenue related to a negotiated settlement with a major customer under contract with the region’s Bahia, Brazil, plant that exited the product line for which the Company supplied them product (see Note 22 to the consolidated financial statements for further information).

Net sales for Asian operations increased one percent primarily due to a 23 percent increase in average selling prices.  Higher average selling prices, primarily resulting from the pass through of certain increased raw material costs, favorably impacted net sales by $13.3 million.  Lower sales volume and the effect of foreign currency translation negatively affected the year-over-year change in net sales by $9.2 million and $3.7 million, respectively. The 14 percent sales volume decline was primarily due to weaker demand for commodity laundry and cleaning products.  A weaker Philippine peso relative to the U.S. dollar caused the negative foreign currency translation adjustment.  

25


 

Surfactant operating income for 2017 increased $20.2 million, or 20 percent, from operating income reported in 2016.  The operating income increase was due to higher 2017 gross profit of $16.4 million and lower operating expenses of $3.8 million.  The eight percent increase in gross profit was largely due to the non-recurrence of the aforementioned European customer claims incurred in 2016, a favorable resolution of one of the customer claims in 2017 and more favorable sales mix resulting from higher sales of products used in HI&I, agricultural and oilfield applications.  Gross profit for 2016 was also negatively affected by accelerated depreciation ($4.5 million) related to the Canadian plant shutdown whereas gross profit for 2017 was negatively impacted by accelerated depreciation ($1.3 million) related to the Fieldsboro, New Jersey plant restructuring.  Lower manufacturing costs resulting from the prior year plant closures in Canada and Brazil also benefited 2017 gross profit.  The effects of foreign currency translation had a favorable $1.2 million impact on the year-over-year gross profit change. Operating expenses decreased $3.8 million, or four percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

 

 

 

For the Year Ended

 

 

 

 

 

 

 

 

 

(In thousands)

 

December 31,

2017

 

 

December 31,

2016(a)

 

 

Increase

(Decrease)

 

 

Percent

Change

 

Gross Profit and Operating Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

North America

 

$

132,568

 

 

$

124,072

 

 

$

8,496

 

 

 

7

 

Europe

 

 

31,706

 

 

 

23,246

 

 

 

8,460

 

 

 

36

 

Latin America

 

 

28,929

 

 

 

28,508

 

 

 

421

 

 

 

1

 

Asia

 

 

19,387

 

 

 

20,397

 

 

 

(1,010

)

 

 

-5

 

Surfactants Segment Gross Profit

 

$

212,590

 

 

$

196,223

 

 

$

16,367

 

 

 

8

 

Operating Expenses

 

 

92,600

 

 

 

96,427

 

 

 

(3,827

)

 

 

-4

 

Operating Income

 

$

119,990

 

 

$

99,796

 

 

$

20,194

 

 

 

20

 

 

(a)

In 2017, the Company changed its internal financial statement classification for certain transportation costs, transferring such costs from operating expenses to cost of sales. In this segment discussion, the 2016 North America gross profit and total operating expenses have been changed from the amounts presented in 2016 to make such amounts consistent with the current year classification.  Surfactant segment operating income remained unchanged.

Gross profit for North American operations increased seven percent principally due to improved product mix.  The improved product mix primarily reflects decreased sales of commodity products used in laundry and cleaning and personal care applications partially offset by increased sales of products used in HI&I, agricultural and oilfield applications.  The current year also benefited from lower manufacturing costs resulting from the closure of the Company’s Canada manufacturing operations in the fourth quarter of 2016.  The Company incurred $4.5 million of accelerated depreciation associated with the Canadian plant closure in 2016 versus $1.3 million of accelerated depreciation associated with the restructuring of the Fieldsboro, New Jersey plant in 2017.  

Gross profit for European operations increased 36 percent between years largely due to the aforementioned non-recurring $7.4 million customer claims incurred in 2016 and a favorable customer claim resolution in 2017 of $4.7 million.  Gross profit also improved due to more favorable product mix principally resulting from higher demand for agricultural chemicals. Prior year manufacturing costs also included approximately $0.6 million of expenses associated with the planned 30-day mandatory inspection shutdown of the Company’s plant in Germany.  There was no such inspection in 2017.  Foreign currency translation positively affected the change in gross profit by $0.8 million.  

Gross profit for Latin American operations improved one percent mainly due to a more profitable mix of sales, the full year contribution of the October 2016 Tebras and PBC acquisitions and lower manufacturing costs resulting from the prior year Bahia, Brazil plant closure.  Gross profit in 2016 included $4.3 million of income resulting from a negotiated customer contract termination settlement related to the Bahia, Brazil plant closure.  Foreign currency translation positively impacted the change in gross profit by $1.0 million.

Asia gross profit decreased five percent largely due to the 14 percent decrease in sales volume mostly related to the Company’s Philippine operations. Foreign currency translation, mostly related to a weaker Philippine peso relative to the U.S. dollar, negatively impacted the change in gross profit by $0.7 million.

Operating expenses f