16 Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
1997 Compared with 1996. Net sales for 1997 rose eight percent to a record
$581.9 million. The increase was the result of an 11 percent growth in sales
volume. Net sales by product group were:
Percent
(Dollars in Thousands) 1997 1996 Change
- ---------------------------------------------------------------------------
Surfactants $445,946 $402,268 + 11
Polymers 105,754 103,444 + 2
Specialty Products 30,249 30,293 - 2
- ---------------------------------------------------------------------------
Total $581,949 $536,635 + 8
===========================================================================
Surfactants are a principal ingredient in consumer and industrial cleaning
products such as detergents, shampoos, lotions, toothpastes and cosmetics. Other
applications include lubricating ingredients and emulsifiers for spreading of
insecticides and herbicides. Surfactants net sales, representing 77 percent of
the company's business, were the primary source for overall sales growth in
1997. The surfactants sales increase was due mainly to a 16 percent increase in
domestic sales volume. The volume gain stemmed largely from the acquisition of
Lonza, Inc.'s West Coast surfactant business (see Note 2 of Notes to the
Consolidated Financial Statements) and from increased demand for the company's
laundry and cleaning and personal care products. The domestic market accounted
for 84 percent of total surfactant volume. Foreign net sales were flat between
years, despite a nine percent increase in sales volume. Weaker foreign currency
exchange rates, particularly for the French franc, negatively impacted results.
The polymer product group includes phthalic anhydride (PA), polyurethane
systems and polyurethane polyols. PA is used in polyester resins, alkyd resins
and plasticizers for applications in construction materials and components of
automotive, boating and other consumer products. Polyurethane systems provide
thermal insulation and are sold to the construction, industrial and appliance
markets. Polyurethane polyols are used in the manufacture of laminate board for
the construction industry. Polymers net sales, accounting for 18 percent of the
company business, increased two percent over 1996, despite volume being down
three percent. Higher average selling prices, due largely to the passing on of
raw material price increases, and increased sales volume for the more expensive
polyurethane system products caused the rise in sales. Polyurethane systems
posted significant net sales and volume improvements of 18 percent and 16
percent, respectively, compared to 1996. Offsetting these strong results,
however, were decreased sales of both PA and polyurethane polyols. PA sales
volume dropped seven percent from a year ago due to decreased customer demand
plus increased first half of year internal requirements of PA in polyurethane
polyols. Polyols sales volume fell four percent as a result of the mid-year loss
of a large customer. PA and polyurethane polyols accounted for 47 percent and 46
percent, respectively, of 1997 polymer sales volume.
Specialty products include flavors, lubricant additives, oil field chemicals
and emulsifiers and solubilizers used in the food and pharmaceutical industry.
Specialty products revenue declined two percent on an eight percent reduction in
sales volume. Improvement in the average selling price between years partially
offset the lower sales volume.
Gross profit increased eight percent to $104.2 million, or 18 percent of net
sales, in 1997 from $96.2 million, or 18 percent of net sales, in 1996.
Surfactants 1997 gross profit of $76.1 million was 17 percent higher than 1996
profit of $65.0 million. Domestic earnings, driven by strong growth in sales
volumes, increased 23 percent and accounted for the improvement in total
surfactant profit. Foreign gross profit was down six percent to $12.6 million in
1997 from $13.4 million in 1996. Despite increased sales volume, European
surfactant profit dropped $1.4 million, or 18 percent, due primarily to
continued pressure on sales margins. Stepan Mexico earnings were also down
slightly while Canadian results improved on increased sales volumes. Polymers
gross profit fell eight percent to $22.8 million in 1997 from a record $24.9
million in 1996. Decreased sales volumes and margins led to the profit decline.
Within the polymer group, PA and urethane polyol earnings declined by 21 percent
and 12 percent, respectively. In both instances, lower volumes and margins
caused the
Stepan Company 1997 Annual Report 17
decrease. Price reductions necessitated by competitive situations led to PA's
drop in margin. Higher raw material costs, which could only be partially passed
along to customers, caused polyol's margin decrease. Urethane systems profit, up
59 percent between years due to better margins and volumes, partially offset the
results of the larger two polymer product lines. A shift to a more profitable
sales mix generated urethane systems margin improvement. Specialty products
gross profit declined 16 percent to $5.3 million in 1997 from $6.3 million in
1996. Lower volumes and margins led to the decreased earnings.
Average raw material costs remained constant from year to year. Manufacturing
labor costs increased due to higher fringe benefit costs and to normal annual
pay increases. Total company headcount increased to 1,292 in 1997 from 1,270 in
1996. Most of the increase occurred in non-manufacturing areas. Depreciation
expense increased to $33.5 million in 1997 from $30.5 million in 1996 as a
result of bringing into service significant capacity expansion projects as well
as continuing capital spending for plant improvements.
Operating income was $44.4 million in 1997, a 10 percent increase over 1996.
Operating expenses, consisting of marketing, administrative and research
expenses, rose seven percent from a year ago. Administrative expenses climbed 15
percent as a result of the prior year benefiting from $4.2 million of insurance
recoveries. Lower domestic 1997 travel and computer operations expenses and
lower overall foreign expenses partially offset the impact of the 1996 insurance
recoveries. Marketing expenses and research and development expenses each grew
four percent over 1996. These increases were primarily the result of higher
salaries and fringe benefits expenses. Operating expenses are expected to
increase moderately in 1998.
Negatively impacting pre-tax earnings was $1.0 million of increased losses of
the company's equity joint ventures. Foreign exchange losses of $3.1 million for
the Philippine joint venture, due to the devaluation of the Philippine peso, led
to the increased loss. Results from operations showed a profit, and the company
expects this to continue in 1998.
The effective tax rate was 41.5 percent in 1997 compared to 40.9 percent in
1996. The higher effective tax rate for the year was precipitated by the
inability to tax benefit losses in the Philippines (see Note 6 of the Notes to
the Consolidated Financial Statements for a reconciliation of the statutory to
the effective tax rate).
Net income for 1997 rose to a record of $20.4 million, or $1.97 per share, up
seven percent from $19.1 million, or $1.80 per share reported for 1996. The
company believes that record earnings will again be achieved in 1998. The core
surfactant business will lead improvements in 1998 by growing sales volumes and
by penetrating the market with higher value-added products. Polymer earnings are
expected to improve due to increased polyurethane polyol volume. The company
also believes that the Philippine foreign exchange losses should be reduced
based on the sheer magnitude of the devaluation that has already occurred in
1997.
1996 Compared with 1995. Net sales for 1996 rose two percent to a record $536.6
million. The increase was the result of a nine percent growth in sales volume.
Net sales by product group were:
Percent
(Dollars in Thousands) 1996 1995 Change
- -----------------------------------------------------------------------
Surfactants $402,268 $380,179 + 6
Polymers 103,444 115,833 - 11
Specialty Products 30,923 32,206 - 4
- -----------------------------------------------------------------------
Total $536,635 $528,218 + 2
=======================================================================
Surfactants net sales, representing 75 percent of the company business, were
the source of sales growth in 1996. The sales increase was due mainly to a 10
percent increase in sales volume. The volume gain stemmed largely from a growing
domestic demand for high active products. The domestic market accounted for 84
percent of the total surfactant volume. Foreign operations also contributed to
the sales growth, particularly with $6.5 million of first-time sales reported by
the newly acquired German subsidiary (see Note 2 of Notes to the Consolidated
Financial Statements). Canada, France and Mexico all reported higher sales on
modest volume gains.
18 Management's Discussion and Analysis of Financial Condition and Results of
Operations
Despite a seven percent increase in sales volume, polymers net sales,
accounting for 19 percent of the company business, decreased sharply due to a 35
percent drop in sales of phthalic anhydride (PA). Lower selling prices driven by
a steep decline in raw material costs led to the decrease in PA sales. A five
percent decrease in sales volume also contributed. PA business represented 48
percent of polymer volume in 1996. Partially offsetting the PA results were
higher polyurethane polyols and polyurethane systems sales on stronger sales
volume. Polyurethane polyols, representing 46 percent of polymer volume,
recorded a 13 percent volume gain primarily on the strength of the laminate
board industry.
Specialty products revenue declined moderately on a much reduced sales
volume. 1995 sales included some lower margin products which had since been
discontinued. This contributed to an improved average selling price between
years.
Gross profit in 1996 was $96.2 million, or 17.9 percent of net sales, a one
percent drop from $97.2 million, or 18.4 percent of net sales in 1995.
Surfactant business was the main contributor to the decline. Despite the sales
and volume growth, surfactants gross profit decreased 10 percent from $72.2
million to $65.0 million in 1996. Both domestic and foreign operations posted
lower gross profit. Domestic gross profit decreased primarily as a result of
competitive pressure on pricing and higher maintenance expenses. Mexican gross
profit was down 32 percent principally as a result of a larger volume of lower
margin products. Canadian gross profit was also down as a result of lower profit
margins. France posted higher gross profit on higher sales volume, while
Germany, the newly acquired subsidiary, reported start-up losses. For 1996, the
impact of the German operation was $1.6 million after-tax loss which reduced
earnings by approximately $.16 per share. Offsetting the surfactants results,
polymers gross profit increased 29 percent to a record $24.9 million in 1996
from $19.3 million reported in 1995. Higher margins and sales volumes for
polyurethane polyols and systems, partially offset by lower margins and volumes
for PA, accounted for the improvement. Specialty products gross profit improved
by $.6 million to $6.3 million as a result of the improved product mix between
years.
Average raw material costs decreased eight percent during 1996, due primarily
to lower polymer raw material costs. Manufacturing labor costs increased at a
modest rate reflecting the recent low levels of inflation. The company employed
1,270 people which was relatively unchanged from 1995. Depreciation expense
increased to $30.5 million in 1996 from $28.8 million in 1995 as a result of
bringing into service significant capacity expansion projects, as well as
continuing capital spending for plant improvements.
Operating income was $40.4 million in 1996, a 24 percent increase over 1995.
Operating expenses, consisting of marketing, administrative and research
expenses, fell 14 percent from 1995. Administrative expenses decreased 40
percent as a result of lower legal and environmental costs which in 1995
included significant charges for potential future remediation costs for the
company's Maywood, New Jersey, plant and adjacent property. Operating expense
also benefited from $4.2 million of insurance recoveries reported in 1996.
Marketing expenses rose five percent primarily due to higher payroll related
expenses as well as increased advertising and promotional expenses. Research and
development expenses increased seven percent due primarily to higher payroll
expenses.
Pre-tax income benefited from an eight percent decrease in interest expense.
An increased amount of interest capitalized for long term construction projects
accounted for most of the decline. Start-up losses reported by the Philippine
joint venture negatively affected pre-tax earnings.
The effective tax rate was 40.9 percent in 1996 compared to 35.5 percent in
1995. The higher effective tax rate for the year was precipitated by a higher
effective Mexican tax rate, as the prior year included loss carryforward
benefits. The inability to tax benefit losses in Germany and the Philippines
also contributed to a higher effective tax rate (see Note 6 of the Notes to the
Consolidated Financial Statements for a reconciliation of the statutory to the
effective tax rate).
Net income for 1996 rose to a record of $19.1 million, or $1.80 per share, up
19 percent from $16.1 million, or $1.51 per share reported for 1995.
Stepan Company 1997 Annual Report 19
Fourth Quarter 1997 Compared with 1996. For the quarter ended December 31, 1997,
the company reported net income of $3.5 million, or $.33 per share, compared to
$4.1 million, or $.38 per share in the fourth quarter of 1996. Earnings for the
quarter would have been $.11 per share higher if the exchange losses in the
Philippines had not been incurred. Net sales for the quarter grew nine percent
to $142.1 million from $130.1 million recorded in 1996. Gross profit was $24.5
million, up six percent in the fourth quarter compared to the same quarter of
1996. Surfactants earnings increased 17 percent due to a 15 percent increase in
sales volume. Polymers reported lower quarterly gross profit due to reduced
sales volume and eroded margins. Specialty products posted higher gross profit
due to increased sales volume and improved margins. Operating expenses were 11
percent greater in the fourth quarter compared to the same quarter of 1996 due
to the impact of prior year insurance settlements and higher salaries and fringe
benefits expense in 1997.
Liquidity and Financial Condition
For the year ended December 31, 1997, net cash from operations totaled $62.9
million, a decrease of $2.9 million from 1996. The current year decrease was a
product of lower insurance recoveries and customer prepayments, partially offset
by working capital improvements.
For the current year, net income was up by $1.3 million, while customer
prepayments fell by $4.1 million. Inventories decreased by $1.2 million during
1997 compared to a $4.1 million decrease in 1996. During 1997, accounts
receivable decreased by $4.0 million versus an increase of $5.2 million for
1996.
Capital expenditures totaled $35.6 million for 1997, down from the $44.9
million recorded in 1996. Looking ahead, capital spending for 1998 is expected
to be within a range of $36.0 to $44.0 million.
Since December 31, 1996, total company debt has decreased by $8.7 million to
finish the year at $100.9 million. Since December 31,1996, the ratio of long-
term debt to long-term debt plus shareholders' equity (long-term debt ratio) has
decreased from 43.8 percent to 40.8 percent.
At December 31, 1997, the company had $10.8 million outstanding under its $45
million 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.
On January 9, 1998, the company entered into a new, committed five year $45
million revolving credit agreement, replacing the old agreement. Terms and
conditions are substantially the same as the previous agreement. Interest rate
spreads and commitment fees are dependent on the company's capitalization
structure and are lower than under the old agreement.
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.
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 1997, the company's
expenditures for capital projects related to the environment were $4.1 million
and should approximate $4.0 to $5.0 million for 1998. These projects are
capitalized and typically depreciated over ten years. Capital spending on such
projects is likely to continue at these levels in future 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
20 Management's Discussion and Analysis of Financial Condition and Results of
Operations
manufacturing locations were approximately $7.5 million for 1997 compared to
$7.8 million for 1996. 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 17 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 the sites. After partial remediation payments at certain sites,
the company has estimated a range of possible environmental and legal losses
from $4.2 million to $25.8 million at December 31, 1997, compared to $4.1
million to $26.5 million at December 31, 1996. At December 31, 1997, the
company's reserve was $20.6 million for legal and environmental matters compared
to $21.0 million at December 31, 1996. During 1997, expenditures related to
legal and environmental matters approximated $3.0 million compared to $8.2
million expended in 1996. While it is difficult to forecast the timing of the
expenditures, the company believes that $3.0 million of the $20.6 million
reserve is likely to be paid out in 1998. The balance of the reserve would
probably be paid out over many years (see also Note 12 of the Notes to
Consolidated Financial Statements).
At certain of the 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 company has begun evaluating the nature and extent of the effort required to
make its systems and infrastructure Year 2000 compliant. Some systems will be
replaced while others will be modified using both external and internal
resources. Costs for new systems and software will be capitalized and
depreciated over the assets' useful lives. Modifications will be expensed
against income as incurred. Although the total cost of making the necessary
systems modifications is not yet known, the company believes, based on available
information, that it will be able to manage a complete and timely Year 2000
transition without any material adverse effect on its operating results or
financial condition.
In addition, reference should be made to the Five Year Summary on page 34.
Report of Management Report of Independent Public Accountants 21
Management Report on Financial Statements
The financial statements of Stepan Company and subsidiaries were prepared by and
are the responsibility of management. The statements have been prepared in
conformity with generally accepted accounting principles appropriate in the
circumstances and include some amounts that are based on management's best
estimates and judgments. The Board of Directors, through its Audit Committee,
assumes an oversight role with respect to the preparation of the financial
statements.
In meeting its responsibility for the reliability of the financial
statements, the company depends on its system of internal accounting control.
The system is designed to provide reasonable assurance that assets are
safeguarded and that transactions are executed as authorized and are properly
recorded. The system is augmented by written policies and procedures and an
internal audit department.
The Audit Committee of the Board of Directors, composed solely of directors
who are not officers or employees of the company, meets regularly with
management, with the company's internal auditors and with its independent
certified public accountants to discuss its evaluation of internal accounting
controls and the quality of financial reporting. The independent auditors and
the internal auditors have free access to the Audit Committee, without
management's presence.
/S/ F. Quinn Stepan
- -------------------
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
/S/ Walter J. Klein
- -------------------
Walter J. Klein
Vice President--Finance
February 11, 1998
To the Stockholders of Stepan Company:
We have audited the accompanying consolidated balance sheets of Stepan Company
(a Delaware corporation) and subsidiaries as of December 31, 1997 and 1996, and
the related consolidated statements of income, cash flows and stockholders'
equity, for each of the three years in the period ended December 31, 1997. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stepan
Company and subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Chicago, Illinois,
February 11, 1998
Stepan Company 1997 Annual Report
Consolidated Balance Sheets
December 31, 1997 and 1996
(Dollars in Thousands) 1997 1996
- -------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 5,507 $ 4,778
Receivables, less allowances of $2,121 in 1997 and $2,074 in 1996 81,018 85,017
Inventories (Note 3) 48,999 50,242
Deferred income taxes (Note 6) 6,636 10,703
Other current assets 4,322 2,958
- -------------------------------------------------------------------------------------------------------------------
Total current assets 146,482 153,698
- -------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 6,108 6,416
Buildings and improvements 58,670 55,795
Machinery and equipment 459,945 427,141
Construction in progress 2,943 8,530
- -------------------------------------------------------------------------------------------------------------------
527,666 497,882
Less: Accumulated depreciation 321,065 290,723
- -------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 206,601 207,159
- -------------------------------------------------------------------------------------------------------------------
Other Assets 21,853 20,155
- -------------------------------------------------------------------------------------------------------------------
Total assets $374,936 $381,012
===================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 5,957 $ 6,973
Accounts payable 42,894 43,417
Accrued liabilities (Note 10) 33,842 32,986
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 82,693 83,376
- -------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes (Note 6) 32,258 35,954
- -------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 4) 94,898 102,567
- -------------------------------------------------------------------------------------------------------------------
Other Non-current Liabilities (Note 11) 27,489 27,500
- -------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 7):
5 1/2 percent convertible preferred stock, cumulative, voting,
without par value; authorized 2,000,000 shares; issued 788,434
in 1997 and 796,972 shares in 1996 19,711 19,924
Common stock, $1 par value; authorized 15,000,000 shares; issued
10,341,952 shares in 1997 and 10,131,706 shares in 1996 10,342 10,132
Additional paid-in capital 8,091 5,066
Cumulative translation adjustments (7,337) (4,820)
Retained earnings 120,854 106,513
- ------------------------------------------------------------------------------------------------------------------
151,661 136,815
Less: Treasury stock, at cost 14,063 5,200
- ------------------------------------------------------------------------------------------------------------------
Stockholders' equity 137,598 131,615
- ------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $374,936 $381,012
==================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
Stepan Company 1997 Annual Report 23
Consoldiated Statements of Income
For the years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------
Net Sales $581,949 $536,635 $528,218
- --------------------------------------------------------------------------------------------
Cost of Sales 477,778 440,420 431,051
- --------------------------------------------------------------------------------------------
Gross profit 104,171 96,215 97,167
- --------------------------------------------------------------------------------------------
Operating Expenses:
Marketing 20,394 19,577 18,673
Administrative 18,964 16,549 27,412
Research, development and technical services (Note 1) 20,443 19,703 18,462
- --------------------------------------------------------------------------------------------
59,801 55,829 64,547
- --------------------------------------------------------------------------------------------
Operating Income 44,370 40,386 32,620
Other Income (Expenses):
Interest, net (Note 4) (7,595) (7,243) (7,865)
Income (loss) from equity joint ventures (Note 1) (1,901) (882) 236
- --------------------------------------------------------------------------------------------
(9,496) (8,125) (7,629)
- --------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 34,874 32,261 24,991
Provision for Income Taxes (Note 6) 14,464 13,194 8,872
- --------------------------------------------------------------------------------------------
Net Income $ 20,410 $ 19,067 $ 16,119
- --------------------------------------------------------------------------------------------
Net Income Per Common Share:
Basic $ 1.97 $ 1.80 $ 1.51
- --------------------------------------------------------------------------------------------
Diluted $ 1.86 $ 1.71 $ 1.46
- --------------------------------------------------------------------------------------------
Average Common Shares Outstanding (Note 1) 9,831 10,002 9,984
- --------------------------------------------------------------------------------------------
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
1997 Sales Dollar Distribution
(Dollars in Thousands)
- ------------------------------
[PIE CHART APPEARS HERE] [_] Material [_] Depreciation and
$352,590 Amortization
60.6% $35,281
6.0%
[_] Other Expenses [_] Income Taxes
$74,428 $14,464
12.8% 2.5%
[_] Payroll and [_] Net Income
Fringes $20,410
$84,776 3.5%
14.6%
Combined Sales
(Thousands of Dollars)
- ----------------------
[Bar Graph Appears Here]
93 324,809 79,071 34,945 438,825
94 329,186 78,778 35,984 443,948
95 380,179 115,833 32,206 528,218
96 402,268 103,444 30,923 536,635
97 445,946 105,754 30,249 581,949
[_] Surfactants
[_] Polymers
[_] Specialty Products
(Consolidated Totals in bold)
24 Stepan Company 1997 Annual Report
Capital Expenditures
(Thousands of Dollars)
[INSERT BAR CHART HERE]
92 34,440
93 25,435
94 42,884
95 39,247
96 44,923
97 35,589
Compound Annual Growth
Five Years + 1%
Equity Per Share
(Dollars)
[INSERT BAR CHART HERE]
92 9.22
93 9.65
94 10.27
95 11.25
96 12.24
97 13.01
Compound Annual Growth
Five Years + 7%
Consolidated Statements of Cash Flows
For the years ended December 31, 1997, 1996 and 1995
(Dollars in Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------
Net Cash Flows from Operating Activities
Net income $ 20,410 $ 19,067 $ 16,119
Depreciation and amortization 35,281 32,138 30,384
Deferred revenue recognition (3,611) (2,896) (2,760)
Customer prepayments 3,292 7,375 --
Deferred income taxes 1,114 (1,710) 2,359
Non-current environmental and legal liabilities (428) 12,925 3,601
Other non-cash items 1,860 548 (605)
Changes in Working Capital:
Receivables, net 3,999 (5,203) (9,429)
Inventories 1,243 4,121 (8,899)
Accounts payable and accrued liabilities 1,069 (1,113) 4,310
Other (1,364) 535 (74)
- -----------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 62,865 65,787 35,006
- -----------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (35,589) (44,923) (39,247)
Investment in acquisitions (4,999) (3,859) (7,500)
Other non-current assets 344 268 (14)
- -----------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (40,244) (48,514) (46,761)
- -----------------------------------------------------------------------------------------
Cash Flows from Financing and Other
Related Activities
Revolving debt and notes payable to banks, net 1,210 (800) (9,711)
Other debt borrowings -- 3,734 40,000
Other debt repayments (9,660) (9,190) (12,053)
Purchases of treasury stock, net (8,863) (3,492) (64)
Dividends paid (6,069) (5,846) (5,540)
Stock option exercises 2,252 464 540
Other non-cash items (762) (513) (721)
- -----------------------------------------------------------------------------------------
Net Cash Provided by (Used for) Financing
and Other Related Activities (21,892) (15,643) 12,451
- -----------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents 729 1,630 696
Cash and Cash Equivalents at Beginning of Year 4,778 3,148 2,452
- -----------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 5,507 $ 4,778 $ 3,148
=========================================================================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 16,059 $ 12,417 $ 9,804
Cash payments of interest $ 8,306 $ 10,838 $ 7,761
=========================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
Stepan Company 1997 Annual Report 25
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1997, 1996 and 1995
Convertible Additional Cumulative
Preferred Common Paid-in Treasury Translation Retained
(Dollars in Thousands) Stock Stock Capital Stock Adjustments Earnings
- -----------------------------------------------------------------------------------------------------------
Balance, January 1, 1995 $19,980 $10,029 $ 3,983 $(1,644) $(3,491) $ 82,445
Sale of 55,800 shares under stock
option plan -- 56 484 -- -- --
Purchase of 536 shares of common
treasury stock, net of sales -- -- 52 (64) -- --
Conversion of preferred stock to
common stock (51) 2 49 -- -- --
Net income -- -- -- -- -- 16,119
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- (801)
Common stock (44.75c per share) -- -- -- -- -- (4,471)
Translation adjustments -- -- -- -- (200) --
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1995 19,929 10,087 4,568 (1,708) (3,691) 93,292
Sale of 44,826 shares under stock
option plan -- 45 419 -- -- --
Purchase of 184,587 shares of common
treasury stock, net of sales -- -- 74 (3,492) -- --
Conversion of preferred
stock to common stock (5) -- 5 -- -- --
Net income -- -- -- -- -- 19,067
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- (1,068)
Common stock (47.75c per share) -- -- -- -- -- (4,778)
Translation adjustments -- -- -- -- (1,129) --
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 19,924 10,132 5,066 (5,200) (4,820) 106,513
Sale of 200,500 shares under stock
option plan -- 200 2,052 -- -- --
Purchase of 246,901 shares of common
and 113,666 shares of preferred
treasury stock, net of sales -- -- 101 (8,863) -- --
Conversion of preferred
stock to common stock (213) 10 203 -- -- --
Net income -- -- -- -- -- 20,410
Cash dividends paid
Preferred stock ($1.375 per share) -- -- -- -- -- (1,027)
Common stock (51.25c per share) -- -- -- -- -- (5,042)
Translation ajustments -- -- -- -- (2,517) --
Non-qualified stock option tax benefit -- -- 669 -- -- --
- -----------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 $19,711 $10,342 $ 8,091 $(14,063) $(7,337) $120,854
===========================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
26 Notes to Consolidated Financial Statements for the years ended December 31,
1997, 1996 and 1995
1. Summary of Significant Accounting Policies
- --------------------------------------------------------------------------------
Nature of Operations. The company's operations consist predominantly of the
production and sale of specialty and intermediate chemicals which are sold to
other manufacturers for use in a variety of end products. Principal markets for
all products are manufacturers of cleaning and washing compounds (including
detergents, shampoos, toothpastes and household cleaners), paints, cosmetics,
food and beverages, agricultural insecticides and herbicides, plastics,
furniture, automotive equipment, insulation and refrigeration.
The company grants credit to its customers who are widely distributed across
the Americas, Europe, Asia and the Pacific. There is no material concentration
of credit risk.
Principles of Consolidation. The consolidated financial statements include the
accounts of Stepan Company and its wholly-owned foreign subsidiaries. All
significant intercompany balances and transactions have been eliminated in
consolidation. Investments in 50 percent owned joint ventures in the Philippines
and Colombia are accounted for on the equity method and are included in the
"Other Assets" caption on the Consolidated Balance Sheet. The company's share of
the net earnings of the investments is included in consolidated net income.
Differences between the cost of equity investments and the amount of underlying
equity in net assets of the investees are amortized systematically to income.
Cash and Cash Equivalents. The company considers all highly liquid investments
with original maturities of six months or less from the date of purchase to be
cash equivalents.
Inventories. Inventories are valued at cost, which is not in excess of market
value, and include material, labor and plant overhead costs. The last-in, first-
out (LIFO) method is used to determine the cost of most company inventories. The
first-in, first-out (FIFO) method is used for all other inventories. Inventories
priced at LIFO as of December 31, 1997 and 1996, amounted to 91 percent and 89
percent of total inventories, respectively.
Property, Plant and Equipment. Depreciation of physical properties is provided
on a straight-line basis over the estimated useful lives of various assets.
Lives used for calculating depreciation are 30 years for buildings, 15 years for
building improvements and from three to 15 years for machinery and equipment.
Major renewals and betterments are capitalized in the property accounts, while
maintenance and repairs ($18,775,000, $20,509,000 and $16,791,000 in 1997, 1996
and 1995, respectively), which do not renew or extend the life of the respective
assets, are charged to operations currently. The cost of property retired or
sold and the related accumulated depreciation are removed from the accounts and
any resulting gain or loss is reflected in income.
Interest charges on borrowings applicable to major construction projects are
capitalized and subsequently amortized over the lives of the related assets.
Environmental Expenditures. Environmental expenditures that relate to current
operations are expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are recorded
when environmental assessments and/or remedial efforts are probable and the cost
or range of possible costs can be reasonably estimated. When no amount within
the range is a better estimate than any other amount, at least the minimum is
accrued. Some of the factors on which the company bases its estimates include
information provided by feasibility studies, potentially responsible party
negotiations and the development of remedial action plans. Expenditures that
mitigate or prevent environmental contamination and that benefit future
operations are capitalized. Capitalized expenditures are depreciated generally
utilizing a ten-year life.
Intangible Assets. Included in other assets are intangible assets consisting of
patents, agreements not to compete, trademarks, customer lists and goodwill, all
of which were acquired as part of business acquisitions. These assets are
presented net of amortization provided on a straight-line basis over their
estimated useful lives generally ranging from five to ten years.
Research and Development Costs. The company's research and development costs are
expensed as incurred. These expenses are aimed at discovery and
commercialization of new knowledge with the intent that such effort will be
useful in developing a new product or in bringing about a significant
improvement to an existing product or process. Total expenses were $12,404,000,
$12,469,000 and $12,425,000 in 1997, 1996 and 1995, respectively. The balance of
expenses reflected on the Consolidated Statements of Income relates to technical
services which include routine product testing, quality control and sales
support service.
Stepan Company 1997 Annual Report 27
Income Taxes. The provision for income taxes includes federal, foreign, state
and local income taxes currently payable and those deferred because of temporary
differences between the financial statement and tax bases of assets and
liabilities. Deferred tax assets or liabilities are computed based on the
difference between the financial statement and income tax bases of assets and
liabilities using the enacted marginal tax rate. Deferred income tax expenses or
credits are based on the changes in the asset or liability from period to
period.
Translation of Foreign Currencies. Assets and liabilities of consolidated
foreign subsidiaries are translated into U.S. dollars at exchange rates in
effect at year end, while revenues and expenses are translated at average
exchange rates prevailing during the year. The resulting translation adjustments
are included in stockholders' equity. Gains or losses on foreign currency
transactions and the related tax effects are reflected in net income.
Derivative Financial Instruments. The company's utilization of derivative
financial instruments consists of the use of forward exchange contracts to hedge
firm foreign currency commitments. The unrealized gains and losses are deferred
and included in the measurement of the related foreign currency transaction.
Gains and losses on unhedged foreign currency transactions are included in
income.
Long-Lived Assets. Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," requires that operating assets and associated goodwill be
written down to fair value whenever an impairment review indicates that the
carrying value cannot be recovered on an undiscounted cash flow basis. After any
such noncash write-down, results of operations would be favorably affected by
reduced depreciation, depletion and amortization charges. During 1996, the
company adopted this statement. The company has determined that no impairment
loss has needed to be recognized for applicable assets of continuing operations.
Stock-Based Compensation. Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The company has chosen to continue to account for stock-
based compensation using the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
related interpretations. Accordingly, compensation cost for stock options is
measured as the excess, if any, of the quoted market price of the company's
stock at the date of the grant over the amount an employee must pay to acquire
the stock. See Note 8.
Per Share Data. In 1997, the company adopted Statement of Financial Accounting
Standards No. 128, "Earnings per Share," effective December 15, 1997.
Accordingly, basic earnings per share amounts are computed based on the
weighted-average number of common shares outstanding. Net income used in
computing basic earnings per share has been reduced by dividends paid to
preferred stockholders. Diluted earnings per share amounts are based on the
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 earnings per share. The adoption of Statement of Financial Accounting
Standards No. 128 had no effect on previously reported per share data. See Note
14 for the computation of earnings per share.
Reclassifications. Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform to the 1997 presentation.
Use of Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
28 Notes to Consolidated Financial Statements for the years ended December 31,
1997, 1996 and 1995
2. Acquisitions
- --------------------------------------------------------------------------------
In April 1997, the company acquired the West Coast anionic surfactant business
from Lonza, Inc. The acquisition consisted of intangible assets, including
customer lists, goodwill, know-how and a non-compete covenant. No manufacturing
facilities were included in the agreement. The acquisition enables the company
to significantly strengthen its market share in the personal care market on the
West Coast.
In April 1996, the company acquired a sulfonation plant from Shell Group in
Cologne, Germany. This plant, organized as a German subsidiary, allows the
company to serve Northern European customers with a wide range of sulfate and
sulfonate products used in household, personal care, individual, institutional
and agricultural markets. The purchase consisted of land, sulfonation equipment,
and intangible assets. The acquisition was accounted for as a purchase, and the
results of the subsidiary have been included in the accompanying consolidated
financial statements since the date of acquisition. Had the results of this
subsidiary been included commencing with operations in 1996, the reported
results would not have been materially affected.
3. Inventories
- --------------------------------------------------------------------------------
The composition of inventories was as follows:
December 31
------------------
(Dollars in Thousands) 1997 1996
- ------------------------------------------------------
Finished products $31,110 $30,689
Raw materials 17,889 19,553
- ------------------------------------------------------
Total inventories $48,999 $50,242
======================================================
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $11,900,000 and $12,800,000 higher
than reported at December 31, 1997 and 1996, respectively.
4. Debt
- --------------------------------------------------------------------------------
Debt was composed of the following:
December 31
--------------------
(Dollars in Thousands) Maturity Dates 1997 1996
- -----------------------------------------------------------------
Unsecured promissory notes
7.22% 1999-2008 $ 30,000 $ 30,000
7.77% 2000-2010 30,000 30,000
7.69% 2001-2005 10,000 10,000
9.70% 1998-2005 8,000 10,000
9.52% 1998-1999 3,572 6,429
9.70% 1998-1999 1,667 2,667
10.54% -- -- 2,379
Unsecured bank debt 2003 10,800 12,200
Debt of foreign subsidiaries
payable in foreign currency 1998-2006 6,816 5,865
- -----------------------------------------------------------------
Total debt 100,855 109,540
Less current maturities 5,957 6,973
- -----------------------------------------------------------------
Long-term debt $ 94,898 $102,567
=================================================================
Unsecured bank debt at December 31, 1997, consisted of borrowings under a
committed $45,000,000 revolving credit agreement with interest at varying rates
averaging 6.22 percent during the year. This agreement required a commitment fee
of .25 percent per annum on the unused portion of the commitment. Periodically,
the company also had other borrowings under notes payable to banks of which
there were no outstanding balances at December 31, 1997 and 1996.
On January 9, 1998, the company entered into a new committed five year
$45,000,000 revolving credit agreement, replacing the old agreement. Terms and
conditions are substantially the same as the previous agreement. Interest rate
spreads and commitment fees are dependent on the company's capitalization
structure, and are lower than under the old agreement.
The various loan agreements contain provisions which, among others, require
maintenance of certain financial ratios and place limitations on additional
debt, investments and payment of dividends. Unrestricted retained earnings were
$52,623,000 and $46,689,000 at December 31, 1997 and 1996, respectively. The
company is in compliance with all loan agreements.
Debt at December 31, 1997, matures as follows: $5,957,000 in 1998;
$6,423,000 in 1999; $7,052,000 in 2000; $9,048,000 in 2001; $9,044,000 in 2002
and $63,331,000 after 2002.
Net interest expense for the years ended December 31 was composed of the
following:
(Dollars in Thousands) 1997 1996 1995
- ---------------------------------------------------------
Interest expense $8,205 $9,165 $9,043
Interest income (173) (671) (629)
- ---------------------------------------------------------
8,032 8,494 8,414
Capitalized interest (437) (1,251) (549)
- ---------------------------------------------------------
Interest, net $7,595 $7,243 $7,865
=========================================================
Stepan Company 1997 Annual Report 29
5. Leased Properties
- --------------------------------------------------------------------------------
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $3,884,000, $3,474,000 and $3,398,000 in 1997, 1996 and 1995,
respectively.
Minimum future rental payments under operating leases with terms in excess
of one year as of December 31, 1997, are:
(Dollars in Thousands) Year Amount
- ----------------------------------------------------------
1998 $ 3,288
1999 2,283
2000 1,743
2001 1,293
2002 671
Subsequent to 2002 2,091
- ----------------------------------------------------------
Total minimum future rental payments $11,369
==========================================================
6. Income Taxes
- --------------------------------------------------------------------------------
The provision for taxes on income and the related income before taxes are as
follows:
Taxes on Income
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
Federal
Current $11,321 $ 9,785 $ 3,698
Deferred (321) 54 2,003
State
Current 1,953 1,863 899
Deferred 502 (345) 278
Foreign
Current 1,451 2,700 1,973
Deferred (442) (863) 21
- -------------------------------------------------------------------------------------
Total $14,464 $13,194 $ 8,872
=====================================================================================
Income before Taxes
(Dollars in Thousands) 1997 1996 1995
- -------------------------------------------------------------------------------------
Domestic $31,758 $28,420 $18,044
Foreign 3,116 3,841 6,947
- -------------------------------------------------------------------------------------
Total $34,874 $32,261 $24,991
=====================================================================================
No federal income taxes have been provided on $24,534,000 of undistributed
earnings of the company's foreign subsidiaries. In general, the company
reinvests earnings of foreign subsidiaries in their operations indefinitely.
However, the company will repatriate earnings from a subsidiary where excess
cash has accumulated and it is advantageous for tax or foreign exchange reasons.
Because of the probable availability of foreign tax credits, it is not
practicable to estimate the amount, if any, of the deferred tax liability on
earnings reinvested indefinitely.
The variations between the effective and statutory federal income tax rates
are summarized as follows:
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
(Dollars in Thousands) Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------------------------
Income tax provision at statutory tax rate $12,206 35.0 $11,292 35.0 $8,747 35.0
State taxes on income less applicable federal tax benefit 1,215 3.5 987 3.1 765 3.1
Effect of equity in foreign joint ventures 665 1.9 308 1.0 -- --
Other items 378 1.1 607 1.8 (640) (2.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Total income tax provision $14,464 41.5 $13,194 40.9 $8,872 35.5
===================================================================================================================================
The net deferred tax liability at December 31 is comprised of the
following:
(Dollars in Thousands) 1997 1996
- ----------------------------------------------------------------------
Current deferred income taxes
Gross assets $ 7,469 $ 14,970
Gross liabilities (833) (4,267)
- ----------------------------------------------------------------------
Total current deferred tax assets 6,636 10,703
Non-current deferred income taxes
Gross assets 12,558 6,135
Gross liabilities (44,816) (42,089)
- ----------------------------------------------------------------------
Total non-current deferred tax liabilities (32,258) (35,954)
- ----------------------------------------------------------------------
Net deferred tax liability $(25,622) $(25,251)
======================================================================
At December 31, the tax effect of significant temporary differences
representing deferred tax assets and liabilities is as follows:
(Dollars in Thousands) 1997 1996
- ---------------------------------------------------------------------
Tax over book depreciation $(40,705) $(36,691)
Safe Harbor leases (2,971) (3,452)
SFAS No. 87 pension accounting (2,894) (2,716)
State income tax accrual 1,444 1,377
Deferred revenue 5,942 5,813
Book reserves deductible in other periods 14,277 10,652
Other, net (715) (234)
- ---------------------------------------------------------------------
Net deferred tax liability $(25,622) $(25,251)
=====================================================================
30 Notes to Consolidated Financial Statements for the years ended December 31,
1997, 1996 and 1995
7. Stockholders' Equity
- --------------------------------------------------------------------------------
On November 11, 1994, the Board of Directors declared a two-for-one stock split
on the company's common stock in the form of a 100 percent stock dividend,
payable December 15, 1994, to shareholders of record on December 1, 1994. As a
result of the split, 5,014,272 additional shares were issued, and retained
earnings were reduced by $5,014,272. All share and per share data appearing in
the consolidated financial statements and notes thereto have been retroactively
adjusted for the stock split.
On April 28, 1993, the shareholders approved an increase in the authorized
shares of the 5 1/2% convertible preferred stock ("preferred stock") from
200,000 to 2,000,000 and approved an eight-for-one stock split to shareholders
of record on April 30, 1993. All share and per share data appearing in the
consolidated financial statements and notes thereto have been retroactively
adjusted for the stock split and the increased authorized shares.
The preferred stock is convertible at the option of the holder at any time
(unless previously redeemed) into shares of common stock at a conversion of
1.14175 shares of common stock for each share of preferred stock. Dividends on
preferred stock accrue at a rate of $1.375 per share per annum which are
cumulative from the date of original issue. The company may not declare and pay
any dividend or make any distribution of assets (other than dividends or other
distribution payable in shares of common stock) on, or redeem, purchase or
otherwise acquire, shares of common stock, unless all accumulated and unpaid
preferred dividends have been paid or are contemporaneously declared and paid.
The preferred stock is subject to optional redemption by the company, in whole
or in part, at any time on or after September 1, 1997, at a redemption price of
$25.69 per share reduced annually by $.14 per share to a minimum of $25 per
share on or after September 1, 2002, plus accrued and unpaid dividends thereon
to the date fixed for redemption. Preferred stock is entitled to 1.14175 votes
per share on all matters submitted to stockholders for action, and votes
together with the common stock as a single class, except as otherwise provided
by law or the Certificate of Incorporation of the company. There is no mandatory
redemption or sinking fund obligation with respect to the preferred stock.
At December 31, 1997, treasury stock consists of 133,874 shares of
preferred stock and 516,304 shares of common stock. At December 31, 1996,
treasury stock consisted of 20,208 shares of preferred stock and 269,403 shares
of common stock.
8. Stock Option Plans
- --------------------------------------------------------------------------------
The company has two fixed stock option plans--1982 Plan and 1992 Plan. The 1992
Plan extends participation to directors who are not employees of the company. No
further grants may be made under the 1982 Plan. The 1992 Plan authorizes the
award of up to 1,600,000 shares of the company's common stock for stock options
("options") and stock appreciation rights ("SAR"). SARs entitle the employee to
receive an amount equal to the difference between the fair market value of a
share of stock at the time the SAR is exercised and the exercise price specified
at the time the SAR is granted. Options are granted at the market price on the
date of grant. An option may not be exercised within two years from the date of
grant and no option will be exercisable after ten years from the date granted.
The company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for the 1992
Plan been determined based on the fair value at the grant date for awards in
1997 and 1996 consistent with the provisions of SFAS No. 123, the company's net
income and earnings per share would have been reduced to the following pro forma
amounts:
(In Thousands, except per share data) 1997 1996 1995
- ----------------------------------------------------------------------
Net Earnings--as reported $20,410 $19,067 $16,119
Net Earnings--pro forma 19,716 18,556 16,117
Basic Earnings per share--
as reported $ 1.97 $ 1.80 $ 1.51
Basic Earnings per share--
pro forma 1.90 1.75 1.51
Diluted Earnings per share--
as reported 1.86 1.71 1.46
Diluted Earnings per share--
pro forma 1.80 1.66 1.46
- ----------------------------------------------------------------------
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1997, 1996 and 1995: expected dividend yield of
2.7% in 1997 and 3.0% in 1996 and 1995; expected volatility of 28%; expected
lives of 7.5 years; and risk-free interest rate of 6.24% in 1997, 6.89% in 1996
and 7.06% in 1995.
Stepan Company 1997 Annual Report 31
A summary of the status of the company's stock option plans at December 31,
1997, 1996 and 1995 and changes during the years then ended is presented as
follows:
Weighted-
Average
1997 Exercise 1996 1995
Shares Price Shares Shares
- ----------------------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 1,266,252 $ 15.04 1,044,810 1,126,704
Options exercised (200,500) 11.23 (44,826) (55,800)
Options cancelled (4,000) 19.75 (5,112) (27,088)
Options granted 105,000 19.25 271,380 994
- ----------------------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,166,752 16.05 1,266,252 1,044,810
- ----------------------------------------------------------------------------------------------------------------------------
Option price range at end of year $ 9.43750- $ 9.43750- $ 8.12500-
$ 19.75000 $ 19.75000 $ 19.62500
Option price range for exercised shares $ 19.43750- $ 8.12500- $ 8.12500-
$ 18.21875 $ 18.21875 $ 14.68750
- ----------------------------------------------------------------------------------------------------------------------------
Options available for grant at end of year 546,122 647,122 913,390
- ----------------------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options, granted during the year $ 6.18 $ 6.35 $ 6.38
- ----------------------------------------------------------------------------------------------------------------------------
A summary of stock options outstanding at December 31, 1997, is as follows:
Options Outstanding Options Exercisable
-------------------------------------------------------------
Weighted- Weighted- Weighted-
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable Exercise
Exercise Price at 12/31/97 Contractual Life Price at 12/31/97 Price
- ------------------------------------------------------------------------------------------------------------------
$ 9.43750 101,800 2.33 $ 9.44 101,800 $ 9.44
$ 12.09375 - $14.00000 489,300 5.99 13.82 489,300 13.82
$ 18.21875 - $19.75000 575,652 7.08 19.12 203,272 18.23
- ------------------------------------------------------------------------------------------------------------------
1,166,752 6.21 $ 16.05 794,372 $ 14.39
- ------------------------------------------------------------------------------------------------------------------
9. Pension Plans
- -------------------------------------------------------------------------------
The company has non-contributory defined benefit plans covering substantially
all employees. The benefits under these plans are based primarily on years of
service and compensation levels. The company funds the annual provision
deductible for income tax purposes. The plans' assets consist principally of
marketable equity securities and government and corporate debt securities. The
plans' assets at December 31, 1997, include $12,443,000 of the company's common
stock.
Net 1997, 1996 and 1995 periodic pension cost for the plans consists of the
following:
(Dollars in Thousands) 1997 1996 1995
- --------------------------------------------------------------------------------
Service cost $ 1,754 $ 1,664 $ 1,244
Interest cost on projected
benefit obligation 3,029 2,700 2,383
Actual return on plan assets (13,130) (6,732) (8,653)
Net amortization and deferral 8,669 2,478 4,611
- --------------------------------------------------------------------------------
Net pension expense (income) $ 322 $ 110 $ (415)
================================================================================
The reconciliation of the funded status of the plans to the amount reported
in the company's consolidated balance sheet is as follows:
(Dollars in Thousands) 1997 1996
- --------------------------------------------------------------------------------
Vested benefit obligation $ (32,098) $ (27,013)
- --------------------------------------------------------------------------------
Accumulated benefit obligation (35,955) (30,306)
- --------------------------------------------------------------------------------
Projected benefit obligation (44,391) (37,696)
Plan assets at fair value 64,786 52,304
- --------------------------------------------------------------------------------
Plan assets in excess of projected
benefit obligation 20,395 14,608
Unrecognized net gain (13,763) (6,871)
Unamortized net transitional assets (1,701) (2,268)
Unamortized prior service cost 1,994 1,140
- --------------------------------------------------------------------------------
Prepaid pension asset $ 6,925 $ 6,609
================================================================================
The prepaid pension asset is included in the "Other Assets" caption on the
Consolidated Balance Sheets.
The projected benefit obligations were determined using a discount rate of
7.25 and 7.75 percent for 1997 and 1996, respectively. The projected benefit
obligations were determined under assumed compensation increases ranging from
4.50 percent to 6.50 percent for different employee groups for 1997 and 5.00
percent to 7.00 percent for 1996. The assumed long-term rate of return on plan
assets was 8.50 percent for 1997 and 1996. The plans' net transitional assets
are being amortized over a period of 15 years. The prior service costs are being
amortized over an average of 12 years.
32 Notes to Consolidated Financial Statements for the years ended December
31, 1997, 1996 and 1995
10. Accrued Liabilities
- --------------------------------------------------------------------------------
Accrued liabilities consisted of:
December 31
----------------------
(Dollars in Thousands) 1997 1996
- ------------------------------------------------------------
Accrued payroll and benefits $ 13,824 $ 11,236
Accrued customer discounts 6,307 3,806
Deferred revenue--current 4,328 3,564
Accrued environmental and
legal matters (Note 12) 3,000 4,500
Other accrued liabilities 6,383 9,880
- ------------------------------------------------------------
Total accrued liabilities $ 33,842 $ 32,986
============================================================
11. Other Non-current Liabilities
- --------------------------------------------------------------------------------
Other non-current liabilities were comprised of the following:
December 31
----------------------
(Dollars in Thousands) 1997 1996
- ---------------------------------------------------------------------
Deferred revenue $ 9,892 $ 10,974
Environmental and legal matters (Note 12) 17,597 16,526
- ---------------------------------------------------------------------
Total other non-current liabilities $ 27,489 $ 27,500
=====================================================================
During 1997 and 1996, the company received prepayments on certain multi-year
commitments for future shipments of products. As the commitments are fulfilled,
a proportionate share of the deferred revenue is recognized into income. Related
deferred revenue at December 31, 1997 and 1996 is $14,219,000 and $14,538,000,
respectively, of which the amount recognizable within one year is included in
the "Accrued Liabilities" caption of the Consolidated Balance Sheets.
12. 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, the company believes that it
has made adequate provisions for the costs it may incur with respect to these
sites.
After partial remediation payments at certain sites, the company has
estimated a range of possible environmental and legal losses from $4.2 million
to $25.8 million at December 31, 1997, compared to $4.1 million to $26.5 million
at December 31, 1996. At December 31, 1997, the company's reserve was $20.6
million for legal and environmental matters compared to $21.0 million at
December 31, 1996. The company made payments of $3.0 million in 1997 and $8.2
million in 1996 related to legal costs, settlements and costs related to
remedial design studies at various sites.
At certain of the 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.
Stepan Company 1997 Annual Report 33
13. Geographic Data
- --------------------------------------------------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -----------------------------------------------------------------------
United States
Net Sales--Unaffiliated $ 494,496 $ 449,544 $ 452,013
Interarea Transfers 16,897 15,338 13,052
--------------------------------------
Total $ 511,393 $ 464,882 $ 465,065
Operating Income 40,992 37,034 25,938
Identifiable Assets 330,671 333,598 315,393
=======================================================================
Other
Net Sales--Unaffiliated $ 87,453 $ 87,091 $ 76,205
Interarea Transfers 22,961 20,025 19,971
--------------------------------------
Total $ 110,414 $ 107,116 $ 96,176
Operating Income 3,378 3,352 6,682
Identifiable Assets 44,265 47,414 47,134
=======================================================================
Eliminations
Net Sales $ (39,858) $ (35,363) $ (33,023)
=======================================================================
Consolidated
Net Sales $ 581,949 $ 536,635 $ 528,218
Operating Income 44,370 40,386 32,620
Identifiable Assets 374,936 381,012 362,527
=======================================================================
Interarea transfers consist principally of surfactant intermediates and finished
products. They are generally transferred at cost plus an appropriate mark-up for
profit. Marketing and services in the United States, Canada and Mexico are
managed as a single enterprise. However, in compliance with Statement of
Financial Accounting Standards No. 14, "Financial Reporting for Segments of a
Business Enterprise," the United States is reported as a separate geographic
area. Other includes subsidiaries in Canada, Mexico and Europe.
14. Earnings Per Share
- --------------------------------------------------------------------------------
Below is the computation of basic and diluted earnings per share for the years
ended December 31, 1997, 1996 and 1995:
(In Thousands, except per share amounts) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
Computation of Basic Earnings per Share
Net income $ 20,410 $ 19,067 $ 16,119
Deduct dividends on preferred stock 1,027 1,068 1,069
- --------------------------------------------------------------------------------------------------------------------------
Income applicable to common stock $ 19,383 $ 17,999 $ 15,050
Weighted-average number of shares outstanding 9,831 10,002 9,984
Basic earnings per share $ 1.97 $ 1.80 $ 1.51
==========================================================================================================================
Computation of Diluted Earnings per Share
Net income $ 20,410 $ 19,067 $ 16,119
Weighted-average number of shares outstanding 9,831 10,002 9,984
Add net shares from assumed exercise of options (under treasury stock method) 275 242 166
Add weighted-average shares from assumed conversion of convertible preferred stock 853 887 888
- --------------------------------------------------------------------------------------------------------------------------
Shares applicable to diluted earnings 10,959 11,131 11,038
Diluted earnings per share $ 1.86 $ 1.71 $ 1.46
==========================================================================================================================
34 Stepan Company 1997 Annual Report
Five Year Summary
(In Thousands, except per share and employee data)
For the Year 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------
Net Sales $581,949 $536,635 $528,218 $443,948 $438,825
Operating Income 44,370 40,386 32,620 29,853 27,335
Percent of net sales 7.6% 7.5% 6.2% 6.7% 6.2%
- ---------------------------------------------------------------------------------------------
Pre-tax Income 34,874 32,261 24,991 22,512 19,624
Percent of net sales 6.0% 6.0% 4.7% 5.1% 4.5%
- ---------------------------------------------------------------------------------------------
Provision for Income Taxes 14,464 13,194 8,872 8,667 8,848
- ---------------------------------------------------------------------------------------------
Net Income 20,410 19,067 16,119 13,845 10,776
Per share (basic)/(a)(b)/ 1.97 1.80 1.51 1.29 .98
Percent of net sales 3.5% 3.6% 3.1% 3.1% 2.5%
Percent to stockholders' equity/(c)/ 15.5% 15.6% 14.5% 13.3% 10.8%
- ---------------------------------------------------------------------------------------------
Cash Dividends Paid 6,069 5,846 5,540 5,294 5,105
Per common share/(a)/ .5125 .4775 .4475 .4250 .4050
- ---------------------------------------------------------------------------------------------
Depreciation and Amortization 35,281 32,138 30,384 28,935 27,679
Capital Expenditures 35,589 44,923 39,247 42,884 25,435
Weighted-Average Common Shares
Outstanding/(a)/ 9,831 10,002 9,984 9,924 9,894
- ---------------------------------------------------------------------------------------------
As of Year End
- ---------------------------------------------------------------------------------------------
Working Capital $ 63,789 $ 70,322 $ 66,856 $ 48,915 $ 48,569
Current Ratio 1.8 1.8 1.8 1.6 1.7
- ---------------------------------------------------------------------------------------------
Property, Plant and
Equipment, net 206,601 207,159 192,470 183,657 170,270
Total Assets 374,936 381,012 362,527 324,948 300,488
Long-term Debt, less
current maturities 94,898 102,567 109,023 89,795 89,660
- ---------------------------------------------------------------------------------------------
Stockholders' Equity 137,598 131,615 122,477 111,302 104,217
Per share/(a)(d)/ 13.01 12.24 11.25 10.27 9.65
Number of Employees 1,292 1,270 1,267 1,265 1,302
=============================================================================================
/(a)/ Adjusted for two-for-one common stock split in 1994.
/(b)/ Based on weighted-average number of common shares outstanding during the
year.
/(c)/ Based on equity at beginning of year.
/(d)/ Based on common shares and the assumed conversion of the convertible
preferred shares outstanding at year end.
Stepan Company 1997 Annual Report 35
Quarterly Stock Data (Unaudited)
Dividends Paid
Stock Price Range Per Common Share
-----------------------------------------------------------------
1997 1996 1997 1996
-----------------------------------------------------------------
Quarter High Low High Low
- ----------------------------------------------------------------------------------------------------------
First $20 3/8 $18 1/4 $19 3/4 $15 3/4 12.50c 11.75c
Second 24 5/8 18 20 1/2 18 12.50c 11.75c
Third 26 3/4 22 1/16 19 17 12.50c 11.75c
Fourth 32 3/8 26 20 1/2 16 7/8 13.75c 12.50c
---------------------
Year 32 3/8 18 20 1/2 15 3/4 51.25c 47.75c
====================================================================================================================================
Quarterly Financial Data (Unaudited)
(Dollars in Thousands, except per share data)
1997
----------------------------------------------------------
Quarter First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $139,670 $153,650 $146,502 $142,127 $581,949
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit 24,045 27,284 28,305 24,537 104,171
- ------------------------------------------------------------------------------------------------------------------------------------
Interest, net (1,870) (1,900) (1,855) (1,970) (7,595)
- ------------------------------------------------------------------------------------------------------------------------------------
Pre-tax Income 7,539 10,461 10,962 5,912 34,874
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income 4,477 6,323 6,143 3,467 20,410
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income per Share .43 .62 .60 .33 1.97
====================================================================================================================================
1996
----------------------------------------------------------
Quarter First Second Third Fourth Year
- ------------------------------------------------------------------------------------------------------------------------------------
Net Sales $130,643 $137,926 $137,922 $130,144 $536,635
- ------------------------------------------------------------------------------------------------------------------------------------
Gross Profit 25,875 25,030 22,242 23,068 96,215
- ------------------------------------------------------------------------------------------------------------------------------------
Interest, net (1,987) (1,732) (1,643) (1,881) (7,243)
- ------------------------------------------------------------------------------------------------------------------------------------
Pre-tax Income 9,143 8,722 7,540 6,856 32,261
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income 5,635 5,173 4,202 4,057 19,067
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income per Share .54 .49 .39 .38 1.80
====================================================================================================================================