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 SEPTEMBER 30, 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 October 31, 1998
- -------------------------------- -------------------------------------
Common Stock, $1 par value 9,842,768
Part I FINANCIAL INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
September 30, 1998 and December 31, 1997
Unaudited
(Dollars in Thousands) 9/30/98 12/31/97
-------- --------
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 6,970 $ 5,507
Receivables, net 89,135 81,018
Inventories (Note 2) 49,257 48,999
Deferred income taxes 6,636 6,636
Other current assets 3,405 4,322
-------- --------
Total current assets 155,403 146,482
-------- --------
PROPERTY, PLANT AND EQUIPMENT:
Cost 559,804 527,666
Less: Accumulated depreciation 348,455 321,065
-------- --------
Property, plant and equipment, net 211,349 206,601
-------- --------
OTHER ASSETS 38,023 21,853
-------- --------
Total assets $404,775 $374,936
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 8,191 $ 5,957
Accounts payable 51,796 42,894
Accrued liabilities 36,749 33,842
-------- --------
Total current liabilities 96,736 82,693
-------- --------
DEFERRED INCOME TAXES 34,570 32,258
-------- --------
LONG-TERM DEBT, less current maturities 101,010 94,898
-------- --------
OTHER NON-CURRENT LIABILITIES 22,966 27,489
-------- --------
STOCKHOLDERS' EQUITY:
5-1/2% convertible preferred stock, cumulative,
voting without par value; authorized
2,000,000 shares; issued 784,627 shares in
1998 and 788,434 shares in 1997 19,616 19,711
Common stock, $1 par value; authorized
15,000,000 shares; issued 10,446,197 shares
in 1998 and 10,341,952 shares in 1997 10,446 10,342
Additional paid-in capital 10,116 8,091
Cumulative translation adjustments (8,911) (7,337)
Retained earnings (approximately $47,503
unrestricted in 1998 and $52,623 in 1997) 133,969 120,854
-------- -------
165,236 151,661
Less: Treasury stock, at cost 15,743 14,063
-------- -------
Stockholders' equity 149,493 137,598
-------- -------
Total liabilities and stockholders' equity $404,775 $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 and Nine Months Ended September 30, 1998 and 1997
Unaudited
Three Months Ended Nine Months Ended
(In Thousands, except per share amounts) September 30 September 30
------------------------------- -----------------------------
1998 1997 1998 1997
---- ---- ---- ----
NET SALES $154,134 $146,502 $460,031 $439,822
Cost of Sales 128,307 118,197 376,721 360,188
-------- -------- -------- --------
Gross Profit 25,827 28,305 83,310 79,634
-------- -------- -------- --------
Operating Expenses:
Marketing 5,593 4,724 17,137 14,730
Administrative 5,428 4,447 15,810 14,217
Research, Development and Technical Services 4,955 4,889 15,531 14,902
-------- -------- -------- --------
15,976 14,060 48,478 43,849
-------- -------- -------- --------
Operating Income 9,851 14,245 34,832 35,785
Other Income (Expense):
Interest, Net (1,853) (1,855) (5,529) (5,625)
Income from Equity Joint Ventures 133 (1,428) 225 (1,198)
-------- -------- -------- --------
(1,720) (3,283) (5,304) (6,823)
-------- -------- -------- --------
Income Before Income Taxes 8,131 10,962 29,528 28,962
Provision for Income Taxes 3,099 4,819 11,664 12,019
-------- -------- -------- --------
NET INCOME $ 5,032 $ 6,143 $ 17,864 $ 16,943
======== ======== ======== ========
Net Income Per Common Share (Note 3)
Basic $ 0.49 $ 0.60 $ 1.74 $ 1.64
======== ======== ======== ========
Diluted $ 0.45 $ 0.56 $ 1.62 $ 1.54
======== ======== ======== ========
Dividends per Common Share $ 0.1375 $ 0.1250 $ 0.4125 $ 0.3750
======== ======== ======== ========
Average Common Shares Outstanding 9,881 9,821 9,861 9,832
======== ======== ======== ========
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1998 and 1997
Unaudited
(Dollars In Thousands) 9/30/98 9/30/97
-------- --------
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 17,864 $ 16,943
Depreciation and amortization 28,189 26,656
Deferred revenue recognition (3,244) (2,529)
Customer prepayments 800 2,292
Deferred income taxes 2,261 1,961
Non-current environmental and legal liabilities (2,226) (498)
Other non-cash items (527) 944
Changes in Working Capital:
Receivables, net (7,066) 681
Inventories 399 3,116
Accounts payable and accrued liabilities 10,409 (2,518)
Other 1,404 (486)
-------- --------
Net Cash Provided by Operating Activities 48,263 46,562
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (30,038) (29,570)
Investment in acquisitions (19,695) (5,250)
Other non-current assets 1,597 312
-------- --------
Net Cash Used for Investing Activities (48,136) (34,508)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 12,390 5,326
Other debt borrowings 35 -
Other debt repayments (5,714) (9,671)
Purchase of treasury stock, net (1,680) (6,582)
Dividends paid (4,749) (4,491)
Stock option exercises 1,579 1,966
Other non-cash items (525) (561)
-------- --------
Net Cash Provided by (Used for) Financing and Other Related Activities 1,336 (14,013)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,463 (1,959)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,507 4,778
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 6,970 $ 2,819
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 4,995 $ 5,236
Income taxes $ 8,047 $ 12,054
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 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 September 30, 1998, and the consolidated
results of operations for the three and nine months then ended and cash
flows for the nine months then ended, have been included.
2. INVENTORIES
-----------
Inventories include the following amounts:
(Dollars in Thousands) 9/30/98 12/31/97
-------- ---------
Inventories valued primarily on LIFO basis -
Finished products $ 30,580 $ 31,110
Raw materials 18,677 17,889
-------- ---------
Total inventories $ 49,257 $ 48,999
======== =========
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$11,300,000 and $11,900,000 higher than reported at September 30, 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 resulted in the
restatement of the $.55 fully diluted earnings per share reported for the
third quarter of 1997 to $.56 diluted earnings per share and $1.53 fully
diluted earnings per share reported for nine months in 1997 to $1.54
diluted earnings per share. No other restatements were necessary.
Options to purchase 233,768 shares of common stock were outstanding during
the third quarter of 1998 but were excluded from the computation of diluted
earnings per share because the options' prices were greater than the
average market price of the common stock.
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 $3.9 million to $25.9 million at September 30, 1998. At
September 30, 1998, the company's reserve was $18.4 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 and nine months
ended September 30, 1998 and 1997, the company's comprehensive income
included net income and foreign currency translation gains and losses. The
foreign currency translation gains totaled $199,000 and $169,000 for the
quarters ended September 30, 1998 and 1997, respectively. Therefore, total
comprehensive income was $5,231,000 for the quarter ended September 30,
1998, compared to $6,312,000 for the same quarter of 1997.
For the nine months ended September 30, 1998 and 1997, the foreign
currency translation losses were $1,574,000 and $2,033,000, respectively,
with the corresponding comprehensive income amounts of $16,290,000 and
$14,910,000.
6. ACQUISITIONS
------------
On May 8, 1998, the company purchased an additional 34.5 percent of the
outstanding stock of Stepan Colombia raising its stake in the Colombia
company to 84.5 percent. On August 19, 1998, the remaining shares (15.5
percent) were acquired. As a result, Stepan Colombia became a wholly-owned
subsidiary. The transaction was accounted for as a step acquisition
purchase, and Stepan Colombia's financial results have been reported on a
consolidated basis from the date that controlling interest was acquired.
Prior to the May 1998 purchase date, the investment was accounted for under
the equity method. The reported consolidated results of operations for
1997 and 1998 would not have been materially affected had this transaction
occurred at the beginning of 1997.
Effective June 30, 1998, the company acquired selected surfactant product
lines from DuPont's Specialty Chemicals unit. The acquired business
consists of phosphate esters, specialty ethoxylates and other specialty
quaternaries and polymers sold to the plastic and fiber industries. The
product lines supplement the company's existing surfactants and polymers
businesses and will be produced in current company manufacturing plants.
The transaction was recorded as a purchase of intangible assets, including
patents, trademarks, know-how and goodwill. The company believes that the
acquisition will have little impact on 1998 results, but should benefit
1999 earnings.
7. RECLASSIFICATIONS
-----------------
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation.
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 nine months ended September 30, 1998, net cash from operations totaled
$48.3 million, an increase of $1.7 million from the same period in 1997. Last
year's results had included $9.8 million in insurance recoveries. Excluding
this item, net cash from operations increased $11.5 million. Net income was up
by $1.0 million for the current year period while customer prepayments credited
to deferred revenue fell to $0.8 million from $2.3 million last year. During
1998, changes in working capital have resulted in a $5.1 million source of cash
compared to a $0.8 million source for the same period in 1997.
Capital expenditures totaled $30.0 million for three quarters of 1998, up by
$0.5 million from the comparable period last year. For the full year, capital
spending is expected to exceed last year's total of $35.6 million. Investing
activities for the current year period included the acquisition of certain
product lines and related intangible assets from DuPont and the acquisition of
100 percent ownership (up from 50 percent) of Stepan Colombia.
Since last year-end, total company debt has increased by $8.3 million, to $109.2
million. At September 30, 1998, the ratio of long-term debt to long-term debt
plus shareholders' equity was at 40.3 percent, down from 40.8 percent as of last
year-end.
On October 1, 1998, the company borrowed $30 million from two U.S. insurance
companies, at 6.59 percent with a term of 15 years. The terms of these new,
unsecured loan agreements are substantially the same as those in our last
private placement completed in 1995. The proceeds of this borrowing were
primarily used to repay domestic bank debt which had totaled $25.8 million as of
September 30, 1998.
The company maintains contractual relationships with its domestic banks which
provide for $45 million of committed, revolving credit which may be drawn upon
as needed for general corporate purposes. The company also meets short-term
liquidity requirements through uncommitted bank lines of credit. The company's
foreign subsidiaries maintain committed and uncommitted bank lines of credit in
their respective countries to meet working capital requirements as well as to
fund capital expenditure programs and acquisitions.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
RESULTS OF OPERATIONS
- ---------------------
Three Months Ended September 30, 1998 and 1997
- ----------------------------------------------
Net income for the third quarter declined 18 percent to $5.0 million, or $.49
per share ($.45 per share diluted) from $6.1 million or $.60 per share ($.56 per
share diluted) for the third quarter of 1997. Net sales increased five percent
to $154.1 million from $146.5 million reported a year ago. Net sales by product
group were:
(Dollars in Thousands) Three Months
Ended September 30
--------------------------------
1998 1997 % Change
-------- -------- --------
Net Sales:
Surfactants $113,477 $110,397 3%
Polymers 32,083 28,449 13%
Specialty Products 8,574 7,656 12%
-------- --------
Total $154,134 $146,502 5%
======== ========
Surfactants net sales increased $3.1 million, or three percent, between years.
The increase was due to a $5.7 million (28 percent) increase in foreign
operations net sales. A 34 percent improvement in sales volume led to the
increase. The company's Germany and Mexico subsidiaries posted the strongest
increases in net sales of 89 percent and 71 percent, respectively. Sales for the
Colombian subsidiary, which was not consolidated in 1997, also contributed to
the foreign result. There was no material exchange rate fluctuation impact on
net sales. Domestic operations, which constitute 77 percent of total surfactant
revenues, reported a three percent decline in net sales due to a four percent
decrease in sales volume. Weaker demand for the company's laundry and cleaning
products accounted for most of the domestic decline.
Surfactants gross profit decreased 15 percent from $20.2 million in the third
quarter of 1997 to $17.1 million in the third quarter of 1998. Gross profit for
domestic operations decreased $3.7 million, or 21 percent, and accounted for the
overall decline. Weaker volumes and margins led to the domestic result. The 34
percent increase in sales volume for foreign surfactants resulted in a $.6
million, or 23 percent, increase in total foreign surfactants earnings. The
strong sales were somewhat offset by weaker margins.
Polymers net sales increased 13 percent between years. Sales volume grew
26 percent. Polyurethane polyols net sales rose 41 percent on sales volume that
increased 46 percent. Net sales of phthalic anhydride (PA) fell 16 percent
despite a 12 percent increase in sales volume. The drop in net sales was due
primarily to a decrease in average selling prices. Oversupply in the marketplace
together with lower raw material costs led to the average selling price decline.
Net sales of polyurethane systems increased 12 percent with sales volume up 10
percent.
Polymers gross profit increased 29 percent to $7.7 million in the third quarter
of 1998 from $6.0 million in the third quarter of 1997. Polyurethane polyols,
reporting higher sales volume and margins, accounted for most of the polymer
gross profit improvement. Polyurethane systems, as
a result of higher sales volume, also contributed to the increase. PA gross
profit declined from quarter to quarter due to weaker margins.
Specialty products net sales increased $.9 million, or 12 percent, from the same
quarter a year earlier. The June 30, 1998, acquisition of certain product lines
from DuPont contributed to the net sales increase. Gross profit was down $1.1
million or 53% from last year's third quarter due to product mix.
Operating expenses increased 14 percent from those of the third quarter of 1997.
Administrative expenses rose 22 percent as a result of high hiring and
relocation expenses. Marketing expenses increased 18 percent primarily due to
foreign expenditures and higher domestic payroll.
Income from equity in joint ventures improved by $1.6 million from the $1.4
million loss reported in the third quarter of 1997. Included in 1997 results
was $2.1 million in exchange losses attributable to the devaluation of the peso
compared with $.3 million exchange loss included in the third quarter of 1998.
The equity income without the effect of exchange loss decreased by $.2 million
from quarter to quarter.
Nine Months Ended September 30, 1998 and 1997
- ---------------------------------------------
Net income for the nine months ended September 30, 1998, rose five percent to
$17.9 million or $1.74 per share ($1.62 per share diluted) from $16.9 million or
$1.64 per share ($1.54 per share diluted) in 1997. Net sales increased five
percent to $460.0 million from $439.8 million reported last year. Net sales by
product group were:
(Dollars in Thousands) Nine Months
Ended September 30
--------------------------------
1998 1997 % Change
-------- -------- --------
Net Sales:
Surfactants $348,829 $334,710 4%
Polymers 86,708 82,835 5%
Specialty Products 24,494 22,277 10%
-------- --------
Total $460,031 $439,822 5%
======== ========
Surfactants net sales increased $14.1 million, or four percent, for the first
nine months of 1998 over those of the first nine months of 1997. Foreign
surfactants reported a $9.3 million, or 14 percent, net sales increase mainly
due to a 22 percent rise in sales volume. All foreign subsidiaries, except
France, reported net sales increases. Foreign net sales and sales volumes also
benefited from the consolidation of the Colombian subsidiary which occurred in
the second quarter of 1998. There was no material exchange rate fluctuation
impact on net sales. Domestic surfactants, which accounted for 79 percent of
1998 surfactant revenues, posted a net sales increase of $4.8 million, or two
percent, on a one percent increase in sales volume. Lower export sales, notably
to Asia, reduced the domestic gain.
Surfactants gross profit increased two percent between years from $58.2 million
in 1997 to $59.3 million in 1998. Foreign surfactants, which posted a $1.4
million, or 15 percent, increase in earnings on increased sales volume,
accounted for the overall improvement. Colombia, which
was first consolidated in the second quarter of 1998, contributed to the foreign
increase. Margin declines for most foreign locations partially offset the sales
volume gains. Domestic surfactants gross profit declined one percent due
primarily to reduced margins on export sales.
Polymers net sales increased five percent, or $3.9 million, between years.
Sales volume rose 18 percent. Polyurethane polyols reported a $7.4 million, or
21 percent, net sales increase on sales volume that rose 22 percent. Net sales
for polyurethane systems increased four percent on an eight percent rise in
sales volume. PA net sales fell $3.5 million, or 11 percent, despite a 16
percent increase in volume. Lower average selling prices between years more
than offset the sales volume increase. Competitive pressures arising as a
result of oversupply in the marketplace coupled with lower raw material costs
caused the decline.
Polymers gross profit increased $1.7 million to $19.3 million in 1998 from $17.6
million in 1997. Gross profit for polyurethane polyols increased due to higher
sales volume and margins. Polyurethane systems gross profit rose slightly due
to improved sales volume. Reduced margins for PA, arising from the earlier
noted competitive pressures, partially offset the increased polyurethane polyols
and polyurethane systems profits.
Specialty products net sales for the nine months of 1998 increased $2.2 million,
or 10 percent, over those for the same period of 1997. Sales from the business
acquired from DuPont contributed to the increase. Gross profit increased to
$4.7 million from $3.8 million a year ago. A shift to a more profitable product
mix accounted for the increase.
Operating expenses increased $4.6 million, or 11 percent, from 1997 to 1998.
Marketing expenses increased 16 percent mainly due to higher domestic payroll.
Administrative expenses rose 11 percent. Salaries, fringe benefits and
relocation expenses were the main contributors to this increase. Research and
development expenses increased four percent between years.
Income from equity in joint ventures improved by $1.4 million from the $1.2
million loss recorded in 1997. Results in 1997 included $2.1 million of
exchange losses for the Philippines joint venture compared with $.7 million
exchange loss reported during the first nine months of 1998.
1998 OUTLOOK
- ------------
The company remains optimistic about achieving record sales and earnings in
1998. Earnings growth for polymers is expected to continue as a result of strong
polyurethane polyols performance. Weakening global economic conditions and a
major operating problem at one of the company's key raw material suppliers may
negatively affect fourth quarter surfactant earnings. The impact of the
supplier's operating problem on the company's future financial results, if any,
is uncertain at this time.
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 nine months of
1998, company expenditures for capital projects related to the environment were
$4.3 million and should approximate $5.5 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 $5.3
million for the first nine months of 1998.
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 $3.9 million to $25.9 million at September
30, 1998. At September 30, 1998, the company's reserve was $18.4 million for
legal and environmental matters compared to $20.6 million at December 31, 1997.
During the first nine months of 1998, expenditures related to legal and
environmental matters approximated $2.7 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.
YEAR 2000 READINESS
- -------------------
The Year 2000 issue is a result of computer systems that utilize two digits,
rather than four, to represent a given year. Computer systems used by the
company and its business partners that have date-sensitive processing may
recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a system failure or inaccurate calculation that may interrupt
normal business operations. The company is addressing Year 2000 compliance for
three major areas: Information Technology ("IT") systems, non-"IT" systems and
third-party relationships.
The project plan involves three phases: inventory and assessment, remediation
and testing and implementation.
Implementation of approximately 55 percent of "IT" systems is fully complete and
the remainder of the systems is in the process of remediation and testing. It is
expected that all "IT" systems will be compliant with Year 2000 requirements in
June 1999.
The non-"IT" systems are comprised of manufacturing process control, telephone,
security, laboratory and other embedded chip systems. Inventory and assessment
of Year 2000 issues are approximately 40 percent complete with completion of
this phase planned for December 31, 1998. Implementation which includes
necessary upgrades and replacement of non-compliant items is expected to be
complete in the third quarter of 1999.
The company has initiated formal communications through questionnaires with
suppliers and service providers to determine the extent of their efforts in
resolving Year 2000 issues. The assessment phase, which includes evaluation of
responses and meetings with significant suppliers, will continue through the
first quarter of 1999. Contingency plans will be developed if responses indicate
the probability of non-compliant with Year 2000 requirements.
Costs for the Year 2000 project are currently estimated to be $2.9 million with
$1.4 million expended to date. Of the total cost, the $1.8 million will be
capitalized and the remaining will be expensed as incurred. These costs are not
material to the overall "IT" budget and no major projects have been deferred due
to Year 2000 efforts. The company's actual cost to achieve Year 2000 compliance
could differ significantly from amounts disclosed above due to new issues which
have not yet been identified.
Although the company is in the process of implementing its Year 2000 project
plan, there can be no assurance that all phases of the plan will be completed
prior to the Year 2000 or that if completed prior to the Year 2000 that
disruption will not occur. In addition, there can be no assurance that the
company's customers, suppliers and service providers will successfully resolve
their own Year 2000 issues in a manner which would not cause material impact to
the company's operations and financial results. Recognizing these uncertainties,
the company is in the process of identifying most reasonably likely worst case
scenarios. Contingency plans for these scenarios will be developed as warranted
throughout 1999.
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
Reference is made to the company's Report Form 10-Q dated March 31, 1995 and
Report Form 10-K for the year ended December 31, 1993, with reference to a site
entitled Chemical Control Site in Elizabeth, New Jersey. While the company does
not believe it has liability at this site, in the interest of resolving any
outstanding claims with the State of New Jersey, the company has agreed to pay a
portion of the settlement in full and final satisfaction of this claim. The
company's payment will be non-material and de minimis in amount.
On October 19, 1998, the company received from the United States Environmental
Protection Agency (Region IX) a letter indicating the company may be responsible
for response costs at a site known as Casmalia Disposal Site in Santa Barbara
County in California. The company believes that its involvement, if any,
relates to the shipment of xylene sulphones to this site. Xylene sulphones are
a delisted substance and in the company's opinion, are not considered hazardous.
As of this point, the company cannot determine what its liability, if any, will
be at this site due to lack of adequate information.
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: November 12, 1998
Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three and Nine Months Ended September 30, 1998 and 1997
Unaudited
(In Thousands, except per share amounts) Three Months Ended Nine Months Ended
September 30 September 30
1998 1997 1998 1997
------- ------- ------- -------
Computation of Basic Earnings per Share
- ---------------------------------------
Net income $ 5,032 $ 6,143 $17,864 $16,943
Deduct dividends on preferred stock 224 267 673 801
------- ------- ------- -------
Income applicable to common stock $ 4,808 $ 5,876 $17,191 $16,142
======= ======= ======= =======
Weighted average number of shares outstanding 9,881 9,821 9,861 9,832
Per share earnings* $ 0.487 $ 0.598 $ 1.743 $ 1.642
======= ======= ======= =======
Computation of Diluted Earnings per Share
- -----------------------------------------
Net Income $ 5,032 $ 6,143 $17,864 $16,943
------- ------- ------- -------
Weighted-average number of shares outstanding 9,881 9,821 9,861 9,832
Add net shares issuable from assumed exercise
of options (under treasury stock method) 491 274 456 266
Add Weighted-average shares issuable from assumed
conversion of convertible preferred stock 743 885 744 886
------- ------- ------- -------
Shares applicable to diluted earnings 11,115 10,980 11,061 10,984
======= ======= ======= =======
Per share diluted earnings* $ 0.453 $ 0.560 $ 1.615 $ 1.543
======= ======= ======= =======
- -----------
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
5
1,000
9-MOS
DEC-31-1998
SEP-30-1998
6,970
0
89,135
0
49,257
155,403
559,804
348,455
404,775
96,736
0
0
19,616
10,446
119,431
404,775
460,031
460,031
376,721
425,199
0
0
5,529
29,528
11,664
17,864
0
0
0
17,864
1.74
1.62
