<PAGE>
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 JUNE 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 July 31, 1998
- ------------------------------ --------------------------------
Common Stock, $1 par value 9,867,000 Shares
<PAGE>
Part I FINANCIAL INFORMATION
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Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 1998 and December 31, 1997
Unaudited
<TABLE>
(Dollars in Thousands) 6/30/98 12/31/97
-------- ---------
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 5,523 $ 5,507
Receivables, net 90,397 81,018
Inventories (Note 2) 46,302 48,999
Deferred income taxes 6,636 6,636
Other current assets 3,961 4,322
-------- ---------
Total current assets 152,819 146,482
-------- ---------
PROPERTY, PLANT AND EQUIPMENT:
Cost 544,715 527,666
Less: accumulated depreciation 339,166 321,065
-------- ---------
Property, plant and equipment, net 205,549 206,601
-------- ---------
OTHER ASSETS 37,748 21,853
-------- ---------
Total assets $396,116 $ 374,936
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Current maturities of long-term debt $ 7,130 $ 5,957
Accounts payable 44,787 42,894
Accrued liabilities 34,062 33,842
-------- ---------
Total current liabilities 85,979 82,693
-------- ---------
DEFERRED INCOME TAXES 34,599 32,258
-------- ---------
LONG-TERM DEBT, less current maturities 108,060 94,898
-------- ---------
OTHER NON-CURRENT LIABILITIES 21,628 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 10,391,897 shares in 1998 and 10,341,952 shares in 1997 10,392 10,342
Additional paid-in capital 9,295 8,091
Cumulative translation adjustments (9,110) (7,337)
Retained earnings (approximately $44,971 unrestricted in 1998 and $52,623 in 1997) 130,524 120,854
-------- ---------
160,717 151,661
Less: Treasury stock, at cost 14,867 14,063
-------- ---------
Stockholders' equity 145,850 137,598
-------- ---------
Total liabilities and stockholders' equity $396,116 $ 374,936
======== =========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these condensed consolidated balance sheets.
<PAGE>
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF INCOME
For the Three and Six Months Ended June 30, 1998 and 1997
Unaudited
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(In Thousands, except per share amounts) June 30 June 30
--------------------- ---------------------
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
NET SALES $155,509 $153,650 $305,897 $293,320
Cost of Sales 125,855 126,366 248,414 241,991
-------- -------- -------- --------
Gross Profit 29,654 27,284 57,483 51,329
-------- -------- -------- --------
Operating Expenses:
Marketing 5,591 5,140 11,544 10,006
Administrative 5,208 5,005 10,382 9,770
Research, Development and Technical Services 5,272 5,104 10,576 10,013
-------- -------- -------- --------
16,071 15,249 32,502 29,789
-------- -------- -------- --------
Operating Income 13,583 12,035 24,981 21,540
Other Income (Expense):
Interest, Net (1,769) (1,900) (3,676) (3,770)
Income from Equity Joint Ventures 45 326 92 230
-------- -------- -------- --------
(1,724) (1,574) (3,584) (3,540)
-------- -------- -------- --------
Income Before Income Taxes 11,859 10,461 21,397 18,000
Provision for Income Taxes 4,749 4,138 8,565 7,200
-------- -------- -------- --------
NET INCOME $ 7,110 $ 6,323 $ 12,832 $ 10,800
======== ======== ======== ========
Net Income Per Common Share (Note 3)
Basic $ 0.70 $ 0.62 $ 1.26 $ 1.04
======== ======== ======== ========
Diluted $ 0.64 $ 0.58 $ 1.16 $ 0.98
======== ======== ======== ========
Dividends per Common Share $ 0.1375 $ 0.1250 $ 0.2750 $ 0.2500
======== ======== ======== ========
Average Common Shares Outstanding 9,854 9,834 9,850 9,837
======== ======== ======== ========
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
STEPAN COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1998 and 1997
Unaudited
<TABLE>
<CAPTION>
(Dollars In Thousands) 6/30/98 6/30/97
--------- ---------
<S> <C> <C>
NET CASH FLOW FROM OPERATING ACTIVITIES
Net income $ 12,832 $ 10,800
Depreciation and amortization 18,673 17,806
Deferred revenue recognition (2,163) (1,448)
Customer prepayments -- 2,292
Deferred income taxes 2,412 1,010
Non-current environmental and legal liabilities (1,797) (1,248)
Other non-cash items 156 57
Changes in Working Capital:
Receivables, net (8,328) (2,353)
Inventories 3,354 6,417
Accounts payable and accrued liabilities (1,336) (1,919)
Other 848 (234)
-------- --------
Net Cash Provided by Operating Activities 24,651 31,180
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Expenditures for property, plant and equipment (15,603) (21,494)
Investment in acquisitions (19,695) (5,250)
Other non-current assets 1,829 284
-------- --------
Net Cash Used for Investing Activities (33,469) (26,460)
-------- --------
CASH FLOWS FROM FINANCING AND OTHER RELATED ACTIVITIES
Revolving debt and notes payable to banks, net 17,590 8,977
Other debt repayments (4,957) (8,514)
Purchase of treasury stock, net (804) (3,265)
Dividends paid (3,162) (2,998)
Other non-cash items 167 484
-------- --------
Net Cash Provided by (Used for) Financing
and Other Related Activities 8,834 (5,316)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 16 (596)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5,507 4,778
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 5,523 $ 4,182
======== ========
CASH PAID DURING THE PERIOD FOR:
Interest $ 3,851 $ 4,202
Income taxes $ 4,945 $ 7,917
</TABLE>
The accompanying Notes to Condensed Consolidated Financial Statements are an
integral part of these statements.
<PAGE>
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 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 June 30, 1998, and the consolidated
results of operations for the three and six months then ended and cash
flows for the six months then ended, have been included.
2. INVENTORIES
Inventories include the following amounts:
<TABLE>
<CAPTION>
(Dollars in Thousands) 6/30/98 12/31/97
-------- ---------
<S> <C> <C>
Inventories valued primarily on LIFO basis -
Finished products $ 30,733 $ 31,110
Raw materials 15,569 17,889
-------- ---------
Total inventories $ 46,302 $ 48,999
======== =========
</TABLE>
If the first-in, first-out (FIFO) inventory valuation method had been used
for all inventories, inventory balances would have been approximately
$11,800,000 and $11,900,000 higher than reported at June 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
<PAGE>
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 $.57 fully diluted earnings per share reported for the second
quarter of 1997 to $.58 diluted earnings per share. No other restatements
were necessary.
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 June 30, 1998. At June 30,
1998, the company's reserve was $18.8 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.
<PAGE>
The company adopted SFAS No. 130 in 1998. For the quarters and six months
ended June 30, 1998 and 1997, the company's comprehensive income included
net income and foreign currency translation losses. The foreign currency
translation losses totaled $1,174,000 and $820,000 for the quarters ended
June 30, 1998 and 1997, respectively. Therefore, total comprehensive income
was $5,936,000 for the quarter ended June 30, 1998, compared to $5,503,000
for the same quarter of 1997.
For the six months ended June 30, 1998 and 1997, the foreign currency
translation losses were $1,773,000 and $2,202,000, respectively, with the
corresponding comprehensive income amounts of $11,059,000 and $8,598,000.
6. ACQUISITIONS
On May 8, 1998, the company acquired an additional 34.5 percent of the
outstanding stock of Stepan Colombia raising its stake in the Colombia
company to 84.5 percent. 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. It is anticipated that the remaining
shares will be acquired in the third quarter making Stepan Colombia a
wholly-owned subsidiary. 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.
<PAGE>
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 six months ended June 30, 1998, net cash from operations totaled $24.7
million, a decrease of $6.5 million from the same period in 1997. Last year's
results, however, included $9.8 million in insurance recoveries. Excluding this
item, net cash from operations increased $3.3 million. Net income was up by $2.0
million for the current year period while customer prepayments credited to
deferred revenue fell to zero from $2.3 million last year. During 1998, changes
in working capital have resulted in a $5.5 million use of cash compared to a
$1.9 million source for the same period in 1997.
Capital expenditures totaled $15.6 million for first half of 1998, down by $5.9
million, or 27%, from $21.5 million for the comparable period last year. Current
full-year spending is expected to exceed last year's total of $35.6 million.
Investing activities for the current year period also included the acquisition
of certain surfactant product lines and related intangible assets from DuPont.
Since last year-end, total company debt has increased by $14.3 million, to
$115.2 million. At June 30, 1998, the ratio of long-term debt to long-term debt
plus shareholders' equity was at 42.6 percent, up from 40.8 percent as of last
year-end.
The company agreed in principle to borrow $30 million in a private placement at
6.59 percent with a term of 15 years, with proceeds to be drawn on October 1,
1998. The terms of these new, unsecured loan agreements will be identical to
those of our most recent private placement completed in 1995.
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 June 30, 1998, the company had $31.0 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.
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended June 30, 1998 and 1997
Net income for the second quarter ended June 30, 1998, was a record $7.1million,
or $.70 per share ($.64 per share diluted), up 12 percent from the $6.3 million,
or $.62 per share ($.58 per share diluted) reported for the same quarter a year
earlier. Net sales rose one percent to $155.5 million from $153.7 million
reported last year. Net sales by product group were:
<TABLE>
<CAPTION>
(Dollars in Thousands) Three Months
Ended June 30
-----------------------------------
1998 1997 % Change
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
Surfactants $118,649 $116,595 2%
Polymers 28,896 29,458 -2%
Specialty Products 7,964 7,597 5%
-------- --------
Total $155,509 $153,650 1%
======== ========
</TABLE>
Surfactants net sales increased two percent between years. Domestic operations,
which accounted for about 79 percent of total surfactant revenues, reported net
sales that were $1.1 million, or one percent, greater than those of a year ago.
Sales volume decreased three percent for the period due to lower demand for high
active laundry and cleaning products and to reduced export volumes resulting
from the economic contraction in Asia. Increased sales of higher value-added
products more than offset the decline in sales volume. Foreign operations net
sales grew $.9 million, or four percent, on a seven percent increase in sales
volume. The company's Canadian and Mexican subsidiaries posted volume increases
of 25 percent and 16 percent, respectively. Foreign volumes also benefited from
the first-time consolidation of the Colombian subsidiary. Sales volume for the
European subsidiaries declined 18 percent due to a continued competitive
environment.
Surfactants gross profit increased three percent from $20.6 million for the
second quarter of 1997 to $21.3 million for the second quarter of 1998. Gross
profit for domestic operations increased $1.0 million, or six percent, and
accounted for the overall surfactants improvement. Better margins, arising from
increased sales of higher value-added products, led to the higher domestic gross
profit. Lower gross profit on export sales partially offset the improvement in
margins. Foreign operations gross profit decreased $.3 million, or eight
percent, despite an increase in sales volume. The effect of weaker European
margins more than offset the impact of the increase in foreign volumes. Canadian
margins were also down due to product mix and to a weakening of the Canadian
dollar against the U. S. dollar.
Polymers net sales decreased two percent between years. Sales volume grew 12
percent. Net sales for phthalic anhydride (PA), despite a 21 percent increase in
sales volume, decreased 12 percent due to lower average selling prices.
Competitive pressures arising from oversupply in the marketplace coupled with
lower raw material costs caused the decline in selling prices. Net
<PAGE>
sales for polyurethane systems and polyurethane polyols improved 12 percent and
two percent, respectively, on volumes that increased by 16 percent and four
percent, respectively.
Polymers gross profit increased 10 percent to $6.5 million in the second quarter
of 1998 from $5.9 million in the second quarter of 1997. Urethane polyols, with
better margins and volumes, accounted for most of the polymer gross profit
improvement. Urethane systems, as a result of higher volumes, also contributed
to the increase. PA gross profit declined from quarter to quarter due to weaker
margins.
Specialty products net sales increased five percent from quarter to quarter.
Gross profit increased to $1.8 million for the current year's second quarter
from $.8 million for the same period of a year earlier. A shift to a more
profitable product mix accounted for the increase.
Operating expenses for the second quarter of 1998 rose five percent from those
of the second quarter of 1997. Marketing expenses increased nine percent due
largely to higher salary payroll and benefit expenses. Administrative and
research, development and technical services expenses increased four percent and
three percent, respectively, between quarters.
Equity joint venture income declined $.3 million from quarter to quarter. Stepan
Philippines joint venture income decreased $.2 million. Included in the 1998
result was a $.4 million charge attributable to the devaluation of the peso.
Joint venture income for Stepan Colombia declined $.1 million, primarily due to
the inclusion of Colombia's results on a consolidated basis for the first time
during the second quarter of 1998.
Interest expense for the quarter decreased seven percent compared to the same
quarter last year. The decrease reflected lower average debt levels.
Six Months Ended June 30, 1998 and 1997
Net income for the first six months ended June 30, 1998, was $12.8 million, or
$1.26 per share ($1.16 per share diluted), compared to $10.8 million, or $1.04
per share ($.98 per share diluted) reported for the same period a year earlier.
Net sales increased four percent to $305.9 million from $293.3 million reported
last year. Net sales by product group were:
<TABLE>
<CAPTION>
(Dollars in Thousands) Six Months
Ended June 30
--------------------------------------
1998 1997 % Change
-------- -------- --------
<S> <C> <C> <C>
Net Sales:
Surfactants $235,352 $224,313 5%
Polymers 54,625 54,386 0%
Specialty Products 15,920 14,621 9%
-------- --------
Total $305,897 $293,320 4%
======== ========
</TABLE>
Surfactants net sales increased five percent for the first six months of 1998
over those of the first six months of 1997. Sales volume increased six percent
for the same period. Most of the net sales and volume gains were attributable to
domestic operations. Domestic revenues grew $7.4
<PAGE>
million, or four percent, on sales volume which grew four percent. Greater
demand for the company's personal care products caused most of the sales volume
improvement. Foreign operations net sales increased $3.6 million, or eight
percent, on sales volume that increased 16 percent. All foreign subsidiaries,
except Europe, posted net sales and volume increases. Foreign volumes also
benefited from the first-time consolidation of the Colombian subsidiary.
Surfactants gross profit increased 11 percent from $38.0 million in 1997 to
$42.2 million in 1998. The increase was primarily attributable to domestic
operations which reported a $3.4 million, or 11 percent, rise in gross profit.
The domestic increase was driven principally by increased sales volumes. Better
average margins resulting from a greater sales mix of higher value-added
products also contributed. Gross profit for foreign operations increased $.8
million, or 12 percent, from year to year. Increased sales volume led to the
improved foreign results. Lower margins, particularly for Europe, partially
offset the impact of the higher volume.
Polymers net sales increased $.2 million between years. Sales volume increased
13 percent. Net sales for phthalic anhydride (PA), despite an 18 percent
increase in sale volume, decreased eight percent due to lower average selling
prices. Competitive pressures arising from oversupply in the marketplace coupled
with lower raw material costs caused the decline in selling prices. Net sales
for polyurethane polyols improved 10 percent on volume that increased by 10
percent. Net sales for polyurethane systems remained flat between years on a
seven percent sales volume improvement.
Polymers gross profit remained unchanged from year to year at $11.6 million.
Gross profit for urethane polyols increased as a result of higher sales volume
and margins. Reduced margins for PA, arising from the earlier noted competitive
pressures, virtually offset the improved urethane polyol gross profit. Lower
margins , due to sales mix, also led to a decrease in gross profit for urethane
systems.
Specialty products net sales increased nine percent from quarter to quarter.
Gross profit increased to $3.7 million for the current year from $1.8 million
for last year. A shift to a more profitable product mix accounted for the
increase.
Operating expenses for the first six months increased $2.7 million, or nine
percent. Marketing expenses increased 15 percent and administrative and research
and development expenses increased six percent each. Higher salary payroll and
benefit expenses were the largest contributors to the increase in each of the
above areas.
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.
<PAGE>
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 six months of
1998, company expenditures for capital projects related to the environment were
$2.1 million and should approximate $5.5 million to $7.5 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 $3.6
million for the first six 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 June 30,
1998. At June 30, 1998, the company's reserve was $18.8 million for legal and
environmental matters compared to $20.6 million at December 31, 1997. During the
first six months of 1998, expenditures related to legal and environmental
matters approximated $2.1 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).
<PAGE>
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.
<PAGE>
Part II OTHER INFORMATION
- --------------------------------------------------------------------------------
Item 1 - Legal Proceedings
Reference is made to the company's Report 10-Q for the quarter ending March 31,
1998, with regard to an action entitled Gilberg, et al. v. Stepan and Accurso,
et al. v. Stepan. The company attempted to remove all the cases which had been
filed in Middlesex County in New Jersey to the Federal District Court, Newark,
New Jersey. The Federal District Court remanded all but 15 cases to Middlesex
County. The company sought to appeal this decision to the Third Circuit Court of
Appeals by filing a Writ of Mandamus. On July 23, 1998, the Third Circuit Court
denied the company's petition. Consequently, at this time, there appear to be
256 cases pending in Middlesex County, New Jersey, and 15 cases pending in the
Federal District Court, Newark, New Jersey.
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
<PAGE>
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: August 12, 1998
<PAGE>
Exhibit (11)
STEPAN COMPANY
STATEMENT RE COMPUTATION OF PER SHARE EARNINGS
For the Three and Six Months Ended June 30, 1998 and 1997
Unaudited
<TABLE>
<CAPTION>
(In Thousands, except per share amounts) Three Months Ended Six Months Ended
June 30 June 30
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Computation of Basic Earnings per Share
- ---------------------------------------
Net income $ 7,110 $ 6,323 $12,832 $10,800
Deduct dividends on preferred stock 224 267 449 534
------- ------- ------- -------
Income applicable to common stock $ 6,886 $ 6,056 $12,383 $10,266
======= ======= ======= =======
Weighted average number of shares outstanding 9,854 9,834 9,850 9,837
Per share earnings* $ 0.699 $ 0.616 $ 1.257 $ 1.044
======= ======= ======= =======
Computation of Diluted Earnings per Share
- -----------------------------------------
Net Income $ 7,110 $ 6,323 $12,832 $10,800
------- ------- ------- -------
Weighted-average number of shares outstanding 9,854 9,834 9,850 9,837
Add net shares issuable from assumed exercise
of options (under treasury stock method) 485 246 438 261
Add Weighted-average shares issuable from assumed
conversion of convertible preferred stock 744 887 745 887
------- ------- ------- -------
Shares applicable to diluted earnings 11,083 10,967 11,033 10,985
======= ======= ======= =======
Per share diluted earnings* $ 0.642 $ 0.577 $ 1.163 $ 0.983
======= ======= ======= =======
</TABLE>
__________
* Rounded
This calculation is submitted in accordance with Regulation S-K, item
601(b)(11).
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONDENSED CONSOLIDATED BALANCE SHEET AS OF JUNE 30, 1998 AND CONSOLIDATED
STATEMENT OF INCOME FOR THE SIX MONTHS THEN ENDED AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 5,523
<SECURITIES> 0
<RECEIVABLES> 90,397
<ALLOWANCES> 0
<INVENTORY> 46,302
<CURRENT-ASSETS> 152,819
<PP&E> 544,715
<DEPRECIATION> 339,166
<TOTAL-ASSETS> 396,116
<CURRENT-LIABILITIES> 85,979
<BONDS> 0
0
19,616
<COMMON> 10,392
<OTHER-SE> 115,842
<TOTAL-LIABILITY-AND-EQUITY> 396,116
<SALES> 305,897
<TOTAL-REVENUES> 305,897
<CGS> 248,414
<TOTAL-COSTS> 280,916
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,676
<INCOME-PRETAX> 21,397
<INCOME-TAX> 8,565
<INCOME-CONTINUING> 12,832
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,832
<EPS-PRIMARY> 1.26
<EPS-DILUTED> 1.16
</TABLE>
