UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------
FORM 10-Q
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
1-4462
------------------------------
COMMISSION FILE NUMBER
STEPAN COMPANY
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36 1823834
- --------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Edens and Winnetka Road, Northfield, Illinois 60093
- --------------------------------------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number (847) 446-7500
---------------------
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 X No
----- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at April 30, 1998
- -------------------------- -----------------------------
Common Stock, $1 par value 9,849,000 shares
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, 1998 and December 31, 1997
Unaudited
(Dollars in Thousands) 3/31/98 12/31/97
-------- ---------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 5,245 $ 5,507
Receivables, net 86,553 81,018
Inventories (Note 2) 46,598 48,999
Deferred income taxes 6,636 6,636
Other current assets 3,526 4,322
-------- ---------
Total current assets 148,558 146,482
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 533,345 527,666
Less: Accumulated depreciation 329,627 321,065
-------- ---------
203,718 206,601
-------- ---------
OTHER ASSETS 21,384 21,853
-------- ---------
Total assets $373,660 $ 374,936
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 5,937 $ 5,957
Accounts payable 42,839 42,894
Accrued liabilities 34,635 33,842
-------- ---------
Total current liabilities 83,411 82,693
-------- ---------
DEFERRED INCOME TAXES 31,803 32,258
-------- ---------
LONG-TERM DEBT, less current maturities 93,263 94,898
-------- ---------
OTHER NON-CURRENT LIABILITIES 23,909 27,489
-------- ---------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative,
voting without par value; authorized 2,000,000 shares;
issued 786,827 shares in 1998 and 788,434 shares in 1997 19,671 19,711
Common stock, $1 par value; authorized 15,000,000 shares;
issued 10,353,786 shares in 1998 and 10,341,952 shares in 1997 10,354 10,342
Additional paid-in capital 8,707 8,091
Cumulative translation adjustments (7,936) (7,337)
Retained earnings (approximately $38,830 unrestricted in 1998
and $52,623 in 1997) 124,993 120,854
-------- ---------
155,789 151,661
Less: Treasury stock, at cost 14,515 14,063
-------- ---------
Stockholders' equity 141,274 137,598
-------- ---------
Total liabilities and stockholders' equity $373,660 $ 374,936
======== =========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended March 31, 1998 and 1997
Unaudited
(In Thousands, except per share amounts) Three Months
Ended March 31
1998 1997
-------- --------
NET SALES $150,388 $139,670
Cost of Sales 122,559 115,625
-------- --------
Gross Profit 27,829 24,045
-------- --------
Operating Expenses:
Marketing 5,953 4,866
Administrative 5,174 4,765
Research, Development and Technical Services 5,304 4,909
-------- --------
16,431 14,540
-------- --------
Operating Income 11,398 9,505
Other Income (Expense):
Interest, Net (1,907) (1,870)
Income (Loss) from Equity Joint Ventures 47 (96)
-------- --------
(1,860) (1,966)
-------- --------
Income Before Income Taxes 9,538 7,539
Provision for Income Taxes 3,816 3,062
-------- --------
NET INCOME $ 5,722 $ 4,477
======== ========
Net Income Per Common Share (Note 3)
Basic $ 0.56 $ 0.43
======== ========
Diluted $ 0.52 $ 0.41
======== ========
Dividends per Common Share $ 0.1375 $ 0.1250
======== ========
Average Common Shares Outstanding 9,846 9,839
======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 1998 and 1997
Unaudited
(Dollars In Thousands) 3/31/98 3/31/97
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 5,722 $ 4,477
Depreciation and amortization 9,318 8,876
Deferred revenue recognition (1,081) (724)
Customer prepayments - 2,000
Deferred income taxes (406) (599)
Non-current environmental and legal liabilities (548) (540)
Other non-cash items 87 284
Changes in Working Capital:
Receivables, net (5,535) 823
Inventories 2,401 5,202
Accounts payable and accrued liabilities (1,213) (5,308)
Other 796 50
-------- --------
Net Cash Provided by Operating Activities 9,541 14,541
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (6,401) (9,332)
Other non-current assets 125 228
-------- --------
Net Cash Used for Investing Activities (6,276) (9,104)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net (1,610) (3,729)
Other debt repayments (57) (1,247)
Sales of treasury stock, net (452) (381)
Dividends paid (1,583) (1,500)
Other non-cash items 175 (325)
-------- --------
Net Cash Used for Financing and Other Related
Activities (3,527) (7,182)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS (262) (1,745)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,507 4,778
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,245 $ 3,033
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 887 $ 855
Income taxes $ 896 $ 1,872
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998 and December 31, 1997
Unaudited
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The condensed consolidated financial statements included herein have been
prepared by the company, without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations, although
management believes that the disclosures are adequate and make the
information presented not misleading. It is suggested that these condensed
consolidated financial statements be read in conjunction with the financial
statements and the notes thereto included in the company's latest Annual
Report to Stockholders and the Annual Report to the Securities and Exchange
Commission on Form 10-K for the year ended December 31, 1997. In the
opinion of management all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the consolidated financial
position of Stepan Company as of March 31, 1998, and the consolidated
results of operations and cash flows for the three months then ended, have
been included.
2. INVENTORIES
Inventories include the following amounts:
(Dollars in Thousands) 3/31/98 12/31/97
-------- ---------
Inventories valued primarily on LIFO basis -
Finished products $ 29,286 $ 31,110
Raw materials 17,312 17,889
-------- ---------
Total inventories $ 46,598 $ 48,999
======== =========
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$11,700,000 and $11,900,000 higher than reported at March 31, 1998, and
December 31, 1997, respectively.
3. NET INCOME PER COMMON SHARE
In 1997, the company adopted Statement of Financial Accounting Standards
No. 128 (SFAS No. 128), "Earnings per Share", effective December 15, 1997.
Accordingly, basic net income per common share amounts are computed by
dividing net income less the convertible preferred stock dividend
requirement by the weighted average number of common shares outstanding.
Diluted net income per share amounts are based on an increased number of
common shares that would be outstanding assuming the exercise of
certain outstanding stock options and the conversion of the convertible
preferred stock, when such conversion would have the effect of reducing net
income per share. The adoption of SFAS No. 128 had no effect on the net
income per common share amounts reported for the first quarter of 1997;
therefore, no restatement was necessary. For computation of earnings per
share, reference should be made to Exhibit 11.
4. CONTINGENCIES
There are a variety of legal proceedings pending or threatened against the
company. Some of these proceedings may result in fines, penalties,
judgments or costs being assessed against the company at some future time.
The company's operations are subject to extensive local, state and federal
regulations, including the federal Comprehensive Environmental Response,
Compensation and Liability Act of 1980 ("Superfund") and the Superfund
amendments of 1986. The company, and others, have been named as potentially
responsible parties at affected geographic sites. As discussed in
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in this filing, the company believes that it has made
adequate provisions for the costs it may incur with respect to these sites.
The company has estimated a range of possible environmental and legal
losses from $4.1 million to $25.7 million at March 31, 1998. At March 31,
1998, the company's reserve was $20.1 million for legal and environmental
matters compared to $20.6 million at December 31, 1997.
For certain sites, estimates cannot be made of the total costs of
compliance, or the company's share of such costs; accordingly, the company
is unable to predict the effect thereof on future results of operations. In
the event of one or more adverse determinations in any annual or interim
period, the impact on results of operations for those periods could be
material. However, based upon the company's present belief as to its
relative involvement at these sites, other viable entities'
responsibilities for cleanup and the extended period over which any costs
would be incurred, the company believes that these matters will not have a
material effect on the company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings, in the 1997 Form 10-K
Annual Report and in other filings of the company with the Securities and
Exchange Commission, which are available upon request from the company.
5. COMPREHENSIVE INCOME
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
(SFAS No. 130), which is effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 requires that comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements (although for interim financial
reporting footnote disclosure of comprehensive income is acceptable).
Comprehensive income includes net income and all other nonowner changes in
equity that are not reported in net income.
The company adopted SFAS No. 130 in 1998. For the quarters ended March 31,
1998 and 1997, the company's comprehensive income included net income and
foreign currency translation losses. The foreign currency translation
losses totaled $599,000 and $1,382,000 for the quarters ended March 31,
1998 and 1997, respectively. Therefore, total comprehensive income was
$5,123,000 for the quarter ended March 31, 1998, compared to $3,095,000 for
the same quarter of 1997.
STEPAN COMPANY
Management's Discussion and Analysis of
Financial Condition and Results of Operations
The following is management's discussion and analysis of certain significant
factors which have affected the company's financial condition and results of
operations during the interim period included in the accompanying condensed
consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
For the first quarter of 1998, net cash from operations totaled $9.5 million, a
decrease of $5.0 million from the same period in 1997. Net income was up by
$1.2 million for the current quarter while customer prepayments credited to
deferred revenue fell to zero from $2.0 million last year. During 1998, changes
in working capital have resulted in a $3.6 million use of cash compared to $0.8
million source for the same period in 1997.
Capital expenditures totaled $6.4 million for first quarter, down by $2.9
million, or 31%, from $9.3 million for the comparable period last year.
However, it is projected that total year spending for 1998 will exceed last
year's total of $35.6 million.
Since last year-end, total company debt has decreased by $1.7 million, to $99.2
million. At March 31, 1998, the ratio of long-term debt to long-term debt plus
shareholders' equity was 39.8 percent, down from 40.8 percent as of last year
end.
The company maintains contractual relationships with its domestic banks which
provide for $45 million of revolving credit which may be drawn upon as needed
for general corporate purposes. At March 31, 1998, the company had $11.8
million outstanding under this revolving credit line. The company also meets
short-term liquidity requirements through uncommitted bank lines of credit. The
company's foreign subsidiaries maintain committed and uncommitted bank lines of
credit in their respective countries to meet working capital requirements as
well as to fund capital expenditure programs and acquisitions.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends and other planned financial commitments for the foreseeable future.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1998 and 1997
Net income for the first quarter ended March 31, 1998, was $5.7 million, or $.56
per share, up 28 percent from $4.5 million, or $.43 per share reported for the
same quarter a year earlier. Net
sales increased eight percent to $150.4 million from $139.7 million reported
last year. Net sales by product group were:
(Dollars in Thousands) Three Months
Ended March 31
--------------------------------------------
1998 1997 % Change
------------ ------------- --------------
Net Sales:
Surfactants $116,703 $107,718 +8%
Polymers 25,729 24,928 +3%
Specialty Products 7,956 7,024 +13%
-------- --------
Total $150,388 $139,670 +8%
======== ========
Surfactants net sales increased eight percent between years. Domestic
operations, which accounted for about 80 percent of total surfactant revenues,
reported net sales that were $6.3 million, or seven percent, greater than those
of a year ago. An 11 percent increase in sales volume, due largely to stronger
demand for personal care products, led to the improvement. The company
continued to benefit from last year's second quarter acquisition of Lonza Inc.'s
West Coast anionic surfactant business and from some consolidation in the
surfactant marketplace. Foreign operations net sales grew $2.7 million, or 13
percent, on a 28 percent increase in sales volume. The company's Mexican,
Canadian and European subsidiaries posted volume increases of 86 percent, 24
percent and seven percent, respectively.
Surfactants gross profit increased 20 percent from $17.3 million for the first
quarter of 1997 to $20.8 million for the first quarter of 1998. Both domestic
and foreign operations contributed to the improvement. Domestic gross profit
increased $2.4 million, or 17 percent, on the strength of the sales volume noted
earlier. Better margins, arising from an improved sales mix also contributed to
the higher domestic gross profit. Foreign operations gross profit increased $1.1
million, or 41 percent. Most of the increase was attributable to the greater
sales volumes for the company's Mexican and Canadian subsidiaries. The European
subsidiaries continued to be hurt by weak margins.
Polymers net sales increased three percent between years. Sales volume grew 15
percent. Volumes for polyurethane polyols and phthalic anhydride (PA) improved
18 percent and 15 percent, respectively, and volume for polyurethane systems
decreased three percent. The polyurethane polyols volume growth led to a $2.0
million, or 21 percent, increase in revenues. Despite its volume increase, PA's
net sales fell by $.6 million, or five percent. Lower average selling prices,
due in part to competitive pressures arising from oversupply in the PA
marketplace, led to the net sales decline. Polyurethane systems net sales
decreased $.6 million, or 14 percent, due to sales mix and lower sales volumes.
Polymers gross profit decreased 11 percent to $5.0 million in the first quarter
of 1998 from $5.7 million in the first quarter of 1997. Reduced margins for PA,
arising from the earlier noted competitive pressures, more than offset the
polymer sales volume gain. Gross profit for polyurethane systems also fell due
to sales mix and lower sales volumes. Improved gross profit
for polyurethane polyols, attributable to increased volume and margins,
partially offset the declines in PA and polyurethane systems.
Specialty products net sales were up 13 percent due to higher sales volumes.
Gross profit increased to $1.9 million for the first three months of 1998 from
$1.0 million for the first three months of 1997.
Operating expenses increased 13 percent between years. Marketing, administrative
and research, development and technical services expenses increased 22 percent,
nine percent and eight percent, respectively. Higher salary and fringe benefit
costs led to the increases in each of the expense classifications.
1998 OUTLOOK
The company is optimistic about achieving record sales and earnings in 1998.
Surfactant sales volumes and profit are expected to remain strong, particularly
in North America. Polymer earnings should improve on gains in the polyurethane
polyol business even if PA pricing remains weak.
ENVIRONMENTAL AND LEGAL MATTERS
The company is subject to extensive federal, state and local environmental laws
and regulations. Although the company's environmental policies and practices
are designed to ensure compliance with these laws and regulations, future
developments and increasingly stringent environmental regulation could require
the company to make additional unforeseen environmental expenditures. The
company will continue to invest in the equipment and facilities necessary to
comply with existing and future regulations. During the first quarter of 1998,
company expenditures for capital projects related to the environment were $.8
million and should approximate $5.0 million to $7.0 million for the full year
1998. These projects are capitalized and typically depreciated over 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 $2.0 million for the first three
months of 1998. While difficult to project, it is not anticipated that these
recurring expenses will increase significantly in the future.
The company has been named by the government as a potentially responsible party
at 16 waste disposal sites where cleanup costs have been or may be incurred
under the federal Comprehensive Environmental Response, Compensation and
Liability Act and similar state statutes. In addition, damages are being
claimed against the company in general liability actions for alleged personal
injury or property damage in the case of some disposal and plant sites. The
company believes that it has made adequate provisions for the costs it may incur
with respect to these sites. The company has estimated a range of possible
environmental and legal losses from $4.1 million to $25.7 million at March 31,
1998. At March 31, 1998, the company's reserve was $20.1 million for legal and
environmental matters compared to $20.6 million at December 31, 1997. During
the first three months of 1998, expenditures related to legal and environmental
matters approximated $.7 million. For certain sites, estimates cannot be made
of the total costs of compliance or the company's share of such costs;
accordingly, the company is unable to predict the effect thereof on future
results of operations. In the event of one or more adverse
determinations in any annual or interim period, the impact on results of
operations for those periods could be material. However, based upon the
company's present belief as to its relative involvement at these sites, other
viable entities' responsibilities for cleanup and the extended period over which
any costs would be incurred, the company believes that these matters will not
have a material effect on the company's financial position. Certain of these
matters are discussed in Item 3, Legal Proceedings, in the 1997 Form 10-K Annual
Report and in other filings of the company with the Securities and Exchange
Commission, which are available upon request from the company.
ACCOUNTING STANDARD
The company adopted Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130), in 1998. The adoption of SFAS No. 130 has
no effect on reported Net Income or Net Income per Common Share (see note 5 of
the Notes to Condensed Consolidated Financial Statements for further
information).
OTHER
Except for the historical information contained herein, the matters discussed in
this document are forward looking statements that involve risks and
uncertainties. The results achieved this quarter are not necessarily an
indication of future prospects for the company. Actual results in future
quarters may differ materially. Potential risks and uncertainties include,
among others, fluctuations in the volume and timing of product orders, changes
in demand for the company's products, changes in technology, continued
competitive pressures in the marketplace, outcome of environmental
contingencies, availability of raw materials, foreign currency fluctuations and
the general economic conditions.
Part II OTHER INFORMATION
- -------------------------------------------------------------------------------
Item 1 - Legal Proceedings
Stepan Company is aware of the fact that three plaintiffs' law firms located in
New Jersey have filed a complaint in the Superior Court of New Jersey, Middlesex
County, annexing approximately 270 separate case captions, collectively referred
to as Gilberg, et al. V. Stepan, et al. and Accurso, et al. v. Stepan, et al.,
Civil Action No. 98-139 (KSH), alleging personal and property injury as well as
wrongful death, on behalf of certain citizens of Maywood, Rochelle Park and
Lodi, New Jersey. Stepan Company has accepted service in Gilberg, et al.
pursuant to a court request. The injuries and deaths are alleged to have been
the result of radiological and chemical contamination from the company's
Maywood, New Jersey site. The company has asserted in legal papers filed by it
that plaintiffs did not follow proper procedure under State Court rules and that
the multiple suits therefore were not properly filed. The complaint and annexed
captions, consistent with applicable federal law, have been removed to the
Federal District Court in Newark where the issue of jurisdiction will be
determined. The company believes it did not cause the alleged contamination. In
addition, the company believes it has other valid defenses. Moreover, as it is
uncertain as of this date how many, if any, lawsuits have been properly filed or
when the company will be served in any or all of the lawsuits, the company
cannot estimate what its liability, if any, will be.
Item 4 - Submission of Matters to a Vote of Security Holders
(A) The company's 1997 Annual Meeting of Stockholders was held on May 5,
1998.
(B) Proxies were solicited by management pursuant to Regulation 14 under
the Securities Exchange Act of 1934, there was no solicitation in
opposition to management's nominees as listed in the proxy statement,
and all such nominees were elected.
(C) A majority of the outstanding shares voted to ratify the appointment
of Arthur Andersen LLP as independent auditors for the company for
1998.
9,224,658 For
65,793 Against
16,279 Abstentions
402 Broker Non-Vote
Item 6 - Exhibits and Reports on Form 8-K
(A) Exhibits
(11) Statement re computation of Per Share Earnings
(27) Financial Data Schedule
(B) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEPAN COMPANY
/s/ Walter J. Klein
Walter J. Klein
Vice President - Finance
Principal Financial and Accounting Officer
Date: May 13, 1998
Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three Months Ended March 31, 1998 and 1997
Unaudited
(In Thousands, except per share amounts) Three Months
Ended March 31
1998 1997
---- ----
Computation of Basic Earnings per Share
- ----------------------------------------
Net income $ 5,722 $ 4,477
Deduct dividends on preferred stock 224 267
------- -------
Income applicable to common stock $ 5,498 $ 4,210
======= =======
Weighted-average number of shares outstanding 9,846 9,839
Per share earnings* $ 0.558 $ 0.428
======= =======
Computation of Diluted Earnings per Share
- -----------------------------------------
Net income $ 5,722 $ 4,477
======= =======
Weighted-average number of shares outstanding 9,846 9,839
Add net shares issuable from assumed exercise of options
(under treasury stock method) 391 276
Add weighted-average shares issuable from assumed conversion of
convertible preferred stock 746 887
------- -------
Shares applicable to diluted earnings 10,983 11,002
======= =======
Per share diluted earnings* $ 0.521 $ 0.407
======= =======
____________
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
5
1,000
3-MOS
DEC-31-1998
JAN-01-1998
MAR-31-1998
5,245
0
86,553
0
46,598
148,558
533,345
329,627
373,660
83,411
0
0
19,671
10,354
111,249
373,660
150,388
150,388
122,559
138,990
0
0
1,907
9,538
3,816
5,722
0
0
0
5,722
0.56
0.52
