| FOR RELEASE: | | IMMEDIATELY | | CONTACT: | | JAMES E. HURLBUTT |
| | | | | | | 847-446-7500 |
STEPAN REPORTS RECORD FULL YEAR EARNINGS
NORTHFIELD, Illinois, February 10, 2009 -- Stepan Company (NYSE: SCL) today reported record earnings for the full year ended December 31, 2008.
| SUMMARY | | | | | | | | | | | | |
| | | Three Months Ended | | Twelve Months Ended |
| | | | | December 31 | | | | | | December 31 | | |
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| ($ in thousands) | | | | | | % | | | | | | % |
| | | 2008 | | 2007 | | Change | | 2008 | | 2007 | | Change |
| Net Sales | | $365,333 | | $342,343 | | + 7 | | $1,600,130 | | $1,329,901 | | + 20 |
| Net Income | | 1,664 | | 1,608 | | + 3 | | 37,172 | | 15,118 | | + 146 |
| Earnings per Diluted Share | | $0.15 | | $0.15 | | — | | $3.52 | | $1.50 | | + 135 |
Net income for the year rose to a record $37.2 million, or $3.52 per diluted share, from $15.1 million, or $1.50 per diluted share, a year ago. “Our performance in 2008 was the result of our strategy to diversify our customer and product mix within our core markets combined with a disciplined approach to our cost structure,” said F. Quinn Stepan, Jr., President and Chief Executive Officer.
Gross profit grew by $28.1 million (20 percent) on improved surfactant segment profitability.
- Surfactant gross profit improved by $30.1 million, or 33 percent, due to amore favorable customer and product mix and the partial recovery of pastmargin erosion.
- Polymer gross profit declined by $1.6 million, or four percent, on a twopercent decline in volume, higher raw material costs and higher freightand maintenance costs related to a fourth quarter scheduled maintenanceshutdown.
- Specialty products gross profit reached $9.1 million, up $0.2 million, or twopercent.
Operating expenses rose by $10.2 million, or 10 percent. Over $3.7 million, or 36 percent, of the increase was due to higher provisions for performance based incentive compensation as a result of the record earnings. Higher bad debt charges, pension expense and the effect of foreign currency translation also contributed to higher level of operating expenses.
Included in the current year’s operating income were a $9.9 million pretax gain on the sale of a urethane system product line and an $8.5 million pretax gain on the sale of farmland, which was used to acquire an office building in a tax deferred like kind exchange.
The full effect of the deferred compensation plan on pretax income was $4.9 million of expense versus expense of $1.0 million in the prior year. The accounting for the Company deferred compensation plan results in expense when the price of Stepan Company stock or mutual funds held in the plan rise and income when they decline. The Company also recognizes the change in value of the mutual funds as investment income or loss. The income statement classification is summarized below:
| ($ in thousands) | | Three Months Ended | | Twelve Months Ended |
| | | December 31 | | | | December 31 |
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| | | 2008 | | | | 2007 | | | | 2008 | | | | 2007 |
| Deferred Compensation | | | | | | | | | | | | | | |
| Administrative Expense (Income) | | $ (4,174) | | $ | | 734 | | $ | | 211 | | $ | | 2,253 |
| Other, net – Mutual Fund (Gain) Loss | | 2,142 | | | | (880) | | | | 4,661 | | | | (1,243) |
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| Total | | $ (2,032) | | $ | | (146) | | $ | | 4,872 | | $ | | 1,010 |
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Year-to-date net sales increased 20 percent due to higher selling prices (21 percent increase) and foreign translation impact (one percent) offset by a two percent decline in sales volume.
Net income for the quarter was $1.7 million, or $0.15 per diluted share, compared to $1.6 million, or $0.15 per diluted share, a year ago.
Gross profit declined by $2.6 million, or eight percent, as volume declined seven percent.
- Surfactant gross profit declined by $1.2 million, or five percent, on a threepercent decline in volume. Volume declined as customers reducedinventories in anticipation of lower pricing in 2009 brought about by fallingcommodity raw material costs. The biodiesel product line reported a $2.5million negative gross profit for the quarter due to lower selling prices
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brought on by falling crude oil and diesel prices. High priced soybean oilinventory, the feedstock for biodiesel, was consumed during the quarterresulting in the loss. The remainder of the surfactant segment continuedthe year long trend of improved customer and product mix and recovery ofpast margin erosion.- Polymer gross profit declined by $2.1 million, or 22 percent, as volumedeclined. Sales of phthalic anhydride (PA) led the volume and gross profitdecline due to weakness in the end use markets of automotive, boating,housing and appliances. PA profitability declined due to the lower salesvolume and higher maintenance cost. A planned triennial maintenanceshutdown led to the higher maintenance costs.
- Administrative expense declined by $4.5 million, or 44 percent. Deferredcompensation plan income of $4.2 million was recorded in administrativeexpense, while related mutual fund losses of $2.1 million were recorded inother income.
| SEGMENT RESULTS | | | | | | | | | | | | |
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| | | Three Months Ended | | Twelve Months Ended |
| | | | | December 31 | | | | | | December 31 | | |
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| ($ in thousands) | | | | | | % | | | | | | % |
| | | 2008 | | 2007 | | Change | | 2008 | | 2007 | | Change |
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| Net Sales | | | | | | | | | | | | |
| Surfactants | | $282,714 | | $253,289 | | + 12 | | $1,199,438 | | $975,726 | | + 23 |
| Polymers | | 71,572 | | 81,353 | | - 12 | | 359,014 | | 321,228 | | + 12 |
| Specialty Products | | 11,047 | | 7,701 | | + 43 | | 41,678 | | 32,947 | | + 27 |
| Total Net Sales | | $365,333 | | $342,343 | | + 7 | | $1,600,130 | | $1,329,901 | | + 20 |
Surfactant gross profit increased $30.1 million, or 33 percent, for the full year, but declined by $1.2 million, or five percent, for the quarter. The full year improvement was driven by improved customer and product mix, coupled with recovery of higher raw material costs in selling prices. Full year gross profit on sales of higher value added surfactants in the laundry, personal care, agricultural and oilfield markets more than offset weakness in biodiesel and building product applications.
Sales volume declined one percent for the year and three percent during the fourth quarter. The decline was largely attributable to lower biodiesel sales volume. Excluding biodiesel, sales volume was relatively flat for the year. Improved laundry and cleaning volume in North America was partially offset by lower European volume.
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Polymer gross profit declined $1.6 million, or four percent, for the year and $2.1 million, or 22 percent, for the quarter. The decline was due to lower PA sales volume, which fell 22 percent for the year and 46 percent for the fourth quarter, which included the previously discussed maintenance turnaround. Demand for PA in the automotive, boating and housing industries remains extremely weak. PA sales represent less than five percent of total Company sales. Polyol gross profit grew by three percent on volume growth of 10 percent for the full year. The majority of the polyol is sold into the commercial flat roof insulation market for replacement roofs versus new construction. Demand for greater energy efficiency is continuing to drive growth in this market. During the fourth quarter, polyol sales volume declined by eight percent as the global recession worsened and customers delayed purchases in anticipation of lower announced pricing for January of 2009, as raw material feedstock prices declined rapidly.
| OPERATING EXPENSES | | | | | | | | | | | | |
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| | | Three Months Ended | | Twelve Months Ended |
| | | | | December 31 | | | | | | December 31 | | |
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| ($ in thousands) | | | | | | % | | | | | | % |
| | | 2008 | | 2007 | | Change | | 2008 | | 2007 | | Change |
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| Marketing | | $9,748 | | $9,225 | | + 6 | | $41,218 | | $36,165 | | + 14 |
| Administrative - General | | 10,058 | | 9,689 | | + 5 | | 41,389 | | 37,149 | | + 12 |
| Administrative – Deferred | | | | | | | | | | | | |
| Compensation Obligations | | (4,174) | | 734 | | NM | | 211 | | 2,253 | | NM |
| Research, development | | | | | | | | | | | | |
| and technical service | | 7,870 | | 7,891 | | — | | 34,437 | | 31,457 | | + 9 |
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| Total | | $23,502 | | $27,539 | | - 15 | | $117,255 | | $107,024 | | + 10 |
Excluding deferred compensation expense, the remaining operating expense increases were attributable to higher performance based incentive compensation, bad debt provisions and the effect of foreign currency translation.
Interest expense declined 15 percent and two percent for quarter and year-to-date periods, respectively. Lower interest rates offset the effect of higher average debt levels during the year. Higher working capital requirements, due to rising raw material costs during the year, have started to decline during the fourth quarter.
The loss from our equity in the Philippine joint venture was $2.3 million versus $0.4 million in the prior year. The increase was attributable to higher foreign exchange losses and bad debt provisions.
Included in other, net expense on the income statement is a $2.1 million loss for the quarter and $4.7 million loss for the year in mutual fund investments held for our deferred compensation plans. Partially offsetting this expense is foreign exchange
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gains of $0.5 million for the quarter and $1.1 million for the year attributable to the strengthening U.S. dollar.
PROVISION FOR INCOME TAXES
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The effective tax rate declined to 32.1 percent for the year compared to 36.6 percent a year ago. The prior year rate was unusually high due to the recording in 2007 of UK goodwill impairment for which no tax benefit was realized.
Our record performance in 2008 was the result of our strategy to diversify our customer and product mix within our core markets combined with a disciplined approach to our cost structure. The depth of the recession in 2009 will affect our sales volume, particularly in the polymer end-markets. Our surfactant business, particularly the volumes associated with consumer laundry and personal care applications, has historically been relatively resistant to a recession. Our business should fair better than most in these difficult times. In 2009, we will continue to stay close to our customers within our core markets while we focus on innovation and cost reduction opportunities.
Stepan Company will host a conference call to discuss the fourth quarter and year end results at 2 p.m. Eastern Time on February 11, 2009. To listen to a live webcast of this call, please go to our Internet website at: www.stepan.com, click on investor relations, next click on conference calls and follow the directions on the screen.
Stepan Company, headquartered in Northfield, Illinois, is a leading producer of specialty and intermediate chemicals used in household, industrial, personal care, agricultural, food and insulation related products. The common and the convertible preferred stocks are traded on the New York and Chicago Stock Exchanges under the symbols SCL and SCLPR.
Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. The most significant of these uncertainties are described in Stepan Company’s Form 10-K, Form 8-K and Form 10-Q reports and exhibits to those reports, and include (but are not limited to), prospects for our foreign operations, foreign currency fluctuations, certain global and regional economic conditions, the probability of future acquisitions and the uncertainties related to the integration of acquired businesses, the probability of new products, the loss of one or more key customer or supplier relationships, the costs and other effects of governmental regulation and legal and administrative proceedings, including the expenditures necessary to address and resolve environmental claims and proceedings, and general economic conditions. These forward-looking statements are made only as of the date hereof, and Stepan Company undertakes no obligation to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
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| STEPAN COMPANY |
| Statements of Income |
| For the Three and Twelve Months Ended December 31, 2008 and 2007 |
| (Unaudited – 000’s Omitted) |
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| | | Three Months Ended | | | | | | | | Twelve Months Ended | | |
| | | | | December 31 | | | | | | | | | | December 31 | | | | |
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| | | 2008 | | 2007 | | Change | | | | 2008 | | | | 2007 | | Change |
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| Net Sales | | $ 365,333 | | $ 342,343 | | + | | 7 | | $ 1,600,130 | | $ 1,329,901 | | + | | 20 |
| Cost of Sales | | 334,440 | | 308,898 | | + | | 8 | | | | 1,430,593 | | | | 1,188,505 | | + | | 20 |
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| Gross Profit | | 30,893 | | 33,445 | | - | | 8 | | | | 169,537 | | | | 141,396 | | + | | 20 |
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| Operating Expenses: | | | | | | | | | | | | | | | | | | | | |
| Marketing | | 9,748 | | 9,225 | | + | | 6 | | | | 41,218 | | | | 36,165 | | + | | 14 |
| Administrative | | 5,884 | | 10,423 | | - | | 44 | | | | 41,600 | | | | 39,402 | | + | | 6 |
| Research, Development | | | | | | | | | | | | | | | | | | | | |
| and Technical Services | | 7,870 | | 7,891 | | - | | - | | | | 34,437 | | | | 31,457 | | + | | 9 |
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| | | 23,502 | | 27,539 | | - | | 15 | | | | 117,255 | | | | 107,024 | | + | | 10 |
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| Sale of Product Line | | — | | 65 | | | | NM | | | | (9,929) | | | | (4,190) | | | | NM |
| Sale of Land | | — | | — | | | | — | | | | (8,469) | | | | — | | | | NM |
| Goodwill Impairment Charge | | — | | — | | | | — | | | | — | | | | 3,467 | | | | NM |
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| Operating Income | | 7,391 | | 5,841 | | + | | 27 | | | | 70,680 | | | | 35,095 | | + | | 101 |
| Other Income (Expense): | | | | | | | | | | | | | | | | | | | | |
| Interest, Net | | (2,147) | | (2,512) | | - | | 15 | | | | (9,514) | | | | (9,730) | | - | | 2 |
| Loss from equity in joint venture | | (452) | | (214) | | + | | 111 | | | | (2,697) | | | | (416) | | | | NM |
| Investment income (loss) | | (2,143) | | 880 | | | | NM | | | | (4,661) | | | | 1,243 | | | | NM |
| Foreign Exchange gain (loss) | | 512 | | (374) | | | | NM | | | | 1,070 | | | | (2,477) | | | | NM |
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| | | (4,230) | | (2,220) | | + | | 91 | | | | (15,802) | | | | (11,380) | | + | | 39 |
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| Income Before Income | | | | | | | | | | | | | | | | | | | | |
| Taxes and Minority Interest | | 3,161 | | 3,621 | | - | | 13 | | | | 54,878 | | | | 23,715 | | + | | 131 |
| Provision for Income Taxes | | 1,410 | | 2,031 | | - | | 31 | | | | 17,615 | | | | 8,687 | | + | | 103 |
| Minority Interest | | 87 | | (18) | | | | NM | | | | 91 | | | | (90) | | | | NM |
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| Net Income | | $ 1,664 | | $ 1,608 | | + | | 3 | | $ | | 37,172 | | $ | | 15,118 | | + | | 146 |
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| Net Income Per Common Share | | | | | | | | | | | | | | | | | | | | |
| Basic | | $ 0.15 | | $ 0.15 | | | | — | | $ | | 3.81 | | $ | | 1.54 | | + | | 147 |
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| Diluted | | $ 0.15 | | $ 0.15 | | | | — | | $ | | 3.52 | | $ | | 1.50 | | + | | 135 |
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| Shares used to Compute Net Income | | | | | | | | | | | | | | | | | | | | |
| Per Common Share: | | | | | | | | | | | | | | | | | | | | |
| Basic | | 9,699 | | 9,345 | | + | | 4 | | | | 9,566 | | | | 9,316 | | + | | 3 |
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| Diluted | | 10,166 | | 9,192 | | + | | 11 | | | | 10,549 | | | | 10,113 | | + | | 4 |
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