| STEPAN CO Item 1A Risk Factors There are many factors that affect the Company’s business, operating results and financial conditions, many of which are beyond its control |
| The following is a description of the most significant factors that might cause the actual results of operations in future periods to differ materially from those currently expected or desired |
| The Company’s forecasts and other forward-looking statements are based on a variety of assumptions that are subject to significant uncertainties |
| The Company’s performance may not be consistent with these forecasts and forward-looking statements |
| From time to time in press releases and otherwise, the Company publishes forecasts or other forward-looking statements regarding its future results, including estimated revenues, net earnings and other operating and financial metrics |
| Any forecast of the Company’s future performance reflects various assumptions |
| These assumptions are subject to significant uncertainties, and, as a matter of course, any number of them may prove to be incorrect |
| The achievement of any forecast depends on numerous risks and other factors, including those described in this Annual Report on Form 10-K, many of which are beyond the Company’s control |
| As a result, the Company cannot assure you that its performance will meet any management forecasts or that the variation from such forecasts will not be material and adverse |
| You are cautioned not to base your entire analysis of the Company’s business and prospects upon isolated predictions, but instead are encouraged to utilize the entire mix of publicly available historical and forward-looking information, as well as other available information affecting the Company, the Company’s services, and the Company’s industry when evaluating the Company’s forecasts and other forward-looking statements relating to the Company’s operations and financial performance |
| Natural disasters, including earthquakes, fires and floods, could severely damage or interrupt the Company’s systems and operations and result in an adverse effect on the Company’s business, financial condition or results of operations |
| Natural disasters such as fire, flood, earthquake, tornado, power loss, break-in or similar event could severely damage or interrupt the Company’s systems and operations and/or result in temporary or permanent loss of manufacturing capability |
| 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 supplies, but the Company cannot guarantee that the products will be available to it in the market or at a cost that is competitive with the Company’s cost of manufacturing the product |
| The Company has in place business interruption insurance coverage, but there can be no assurance that such insurance would be sufficient in the event of a disaster |
| Any such disaster or similar event could have a material adverse effect on the Company’s business, financial condition and results of operations |
| 4 ______________________________________________________________________ [32]Table of Contents The Company faces significant competition and will face more competition in the future |
| The worldwide market for the Company’s products is highly competitive |
| The Company also faces significant competition from numerous national, regional and local companies within some or all of our product categories in each sector it serves |
| The Company must be able to compete on pricing and product performance to be successful |
| Some of the Company’s customers have internal manufacturing capabilities that allow them to achieve make-versus-buy economics |
| Periodically, this may result in the Company gaining or losing business at these customers in volumes that could adversely affect profitability |
| To achieve expected profitability levels, the Company must, among other things, maintain the service levels and competitive pricing necessary to retain existing customers and attract new customers |
| The volatility of the Company’s raw material and energy costs may adversely affect the Company’s operations |
| The principal raw materials used in the Company’s products are petroleum or plant based |
| The prices of many of these raw materials are cyclical |
| Natural gas is used in the Company’s manufacturing sites primarily to generate steam for its manufacturing processes |
| Supply and demand factors, which are beyond the Company’s control, generally affect the price of the Company’s raw materials and natural gas |
| The Company tries to minimize the effect of price increases through production efficiency, the use of alternative suppliers and, in the case of natural gas, the use of forward contracts |
| If the Company is unable to minimize the effects of increased raw material and energy costs, its business, financial condition, results of operations and cash flows may be materially adversely affected |
| 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 has intellectual property rights in both its surfactants and polymers segments |
| Loss of protection of these intellectual property rights could adversely affect the future results of operations and cash flows of the Company |
| The Company is subject to risks related to its operations outside the US The Company has substantial operations outside the US In addition to the risks described in this annual report on Form 10-K that are common to both the Company’s US and non-US operations, the Company face risks related to the Company’s foreign operations such as: • foreign currency fluctuations; • unstable political, economic, financial and market conditions; • import and export license requirements; • trade restrictions; • increases in tariffs and taxes; • high levels of inflation; 5 ______________________________________________________________________ [33]Table of Contents • restrictions on repatriating foreign profits back to the US; • greater difficulty collecting accounts receivable and longer payment cycles; • less favorable intellectual property laws; • unfamiliarity with foreign laws and regulations; and • changes in labor conditions and difficulties in staffing and managing international operations |
| All of these risks have affected the Company’s business in the past and may have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows in the future |
| The Company’s results of operations are reported in US dollars |
| However, outside the US, the Company’s sales and costs are denominated in a variety of currencies including the euro, British pound, Canadian dollar, Mexican peso, Colombian peso, Brazilian real and Chinese RMB Fluctuations in exchange rates may materially adversely affect the Company’s business, financial condition, results of operations and cash flows |
| In all jurisdictions in which the Company operates, the Company is also subject to laws and regulations that govern foreign investment, foreign trade and currency exchange transactions |
| These laws and regulations may limit the Company’s ability to repatriate cash as dividends or otherwise to the US and may limit the Company’s ability to convert foreign currency cash flows into US dollars |
| A weakening of the currencies in which the Company generates sales relative to the currencies in which the Company’s costs are denominated may lower the Company’s operating profits and cash flows |
| We are subject to a variety of environmental and product registration laws that expose the Company to potential financial liability and increased operating costs |
| The Company’s operations are regulated under a number of federal, state, local and foreign environmental, health and safety laws and regulations that govern, among other things, the discharge of hazardous materials into the air, soil and water as well as the use, handling, storage and disposal of these materials |
| These laws and regulations include the Clean Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation and Liability Act, as well as analogous state, local and foreign laws |
| Compliance with these environmental laws is a major consideration for the Company because the Company uses hazardous materials in some of the Company’s manufacturing processes |
| In addition, because the Company is a generator of hazardous wastes, the Company, along with any other person who disposes or arranges for the disposal of the Company’s wastes, may be subject to financial exposure for costs associated with an investigation and any remediation of sites at which the Company has disposed or arranged for the disposal of hazardous wastes if those sites become contaminated, even if the Company fully complied with applicable environmental laws at the time of disposal |
| Furthermore, process wastewater from the Company’s manufacturing operations is discharged to various types of wastewater management systems |
| The Company may incur significant costs relating to contamination that may have been, or is currently being, caused by this practice |
| 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 6 ______________________________________________________________________ [34]Table of Contents products |
| Some of these laws require the Company to have operating permits for the Company’s production facilities, warehouse facilities and operations and the Company may not have some of these permits or some of the permits the Company have may not be current |
| 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 |
| In the event of a violation of any of these laws, the Company may be liable for damages and the costs of remedial actions, and may also be subject to fines or criminal proceedings 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 manufacture and sale of products at one or more of the Company’s facilities, and may have a material adverse effect on the Company’s business, financial condition, 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 |
| The potential cost to the Company relating to environmental and product registration matters, including the cost of complying with the foregoing legislation and remediating contamination, is uncertain due to factors such as the unknown magnitude and type of possible contamination and clean-up costs, the complexity and evolving nature of laws and regulations, including those outside of the US, and the timing, variable costs and effectiveness of clean-up and compliance methods |
| Environmental and product registration laws may also become more stringent over time, imposing greater compliance costs and increasing risks and penalties associated with any violation, which may also negatively impact the Company’s operating results |
| Accordingly, the Company may become subject to additional liabilities and increased operating costs in the future under these laws and regulations that may have a material adverse effect on the Company’s business, financial condition, results of operations and cash flows |
| The Company currently expects increased future environmental compliance obligations in its European facilities as a result of European Union Council Directive 96/61/EC of September 24, 1996, concerning Integrated Pollution Prevention and Control, or IPPC The IPPC directive imposes several requirements related to integrated pollution prevention and control on chemical manufacturing businesses located in European Union member states and requires companies to obtain authorization or permits from applicable governmental authorities before carrying out specified activities at facilities located in these countries |
| This directive became effective in October 1999 for all new facilities and for existing facilities that undergo a substantial change that may have a significant negative impact on human health or the environment |
| While all existing facilities must comply with the IPPC directive by 2007, some member states have introduced a transitional schedule, which applies the directive to specified sectors prior to 2007 in a phased manner |
| The Company’s environmental capital expenditures, costs and operating expenses will be subject to evolving regulatory requirements and will depend on the timing of the effectiveness of requirements in these various jurisdictions |
| As a result of the IPPC directive, the Company may be subject to an increased regulatory burden, and the Company expects increased future environmental compliance obligations in its European facilities |
| 7 ______________________________________________________________________ [35]Table of Contents The Company’s inability to estimate and maintain appropriate levels of reserves for existing and future contingencies may adversely affect the Company’s business, financial condition or results of operations |
| The Company’s reserves for legal proceedings pending and threatened 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 may affect the accuracy of these estimates |
| Given the uncertainties inherent in such estimates, the actual liability could differ significantly from the amounts reserved |
| If the Company’s actual liability is higher than estimated or any new legal proceeding is initiated, it could have a negative impact on the Company’s earnings per share in any particular quarter or annual period |
| We have a material amount of indebtedness and may incur additional indebtedness, or need to refinance existing indebtedness, in the future, which may adversely affect the Company’s operations |
| The Company’s domestic debt includes dlra97dtta3 million of unsecured promissory notes with maturities extending until 2018 |
| In addition, to provide liquidity, the Company has a dlra60 million revolving credit facility |
| As of December 31, 2005, there were no borrowings under the credit facility |
| The Company borrowed dlra40cmam000cmam000 on November 1, 2005, under which the Company will make annual principal payments beginning 2012 through 2018 |
| In addition, the Company’s foreign subsidiaries 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, 2005, the Company’s subsidiaries’ outstanding debt totaled dlra28dtta4 million in the aggregate |
| The Company may incur additional debt in the future |
| If the Company was to incur other additional debt in the future, it could have an adverse effect on its business and future operations |
| For example, it could: • require the Company to dedicate a substantial portion of cash flow from operations to pay principal and interest on the Company’s debt, which would reduce funds available to fund future working capital, capital expenditures and other general operating requirements; • 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 be in compliance 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 |