MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
1998 Compared with 1997
Net sales for 1998 rose five percent to a record $610.5 million. The increase
was primarily due to a seven percent growth in sales volume. Net sales by
product group were as follows (prior year data has been reclassified to conform
to 1998 presentation):
Percent
(Dollars in Thousands) 1998 1997 Change
- ---------------------------------------------------------------------------------------------
Surfactants $478,289 $457,109 +5
Polymers 112,625 105,754 +6
Specialty Products 19,537 19,086 +2
- ---------------------------------------------------------------------------------------------
Total $610,451 $581,949 +5
- ---------------------------------------------------------------------------------------------
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, accounting for 78 percent of total revenues, increased
$21.2 million, or five percent, from year to year. Most of the increase ($16.9
million) was due to foreign operations which reported a 19 percent rise in net
sales on a 25 percent increase in sales volume. All foreign subsidiaries
recorded net sales and sales volume increases. Sales for the Colombian
subsidiary, consolidated for the first time in 1998, also contributed to the
foreign results. There was no material exchange rate impact on net sales.
Domestic operations, which constitute 78 percent of total surfactant net sales,
posted a $4.3 million, or one percent, increase on volume that remained flat.
Significantly lower export sales volumes to Asia and Central America offset
modest volume gains from U.S. customers.
The polymers product group includes phthalic anhydride (PA), polyurethane
systems and polyurethane polyols. PA is used in polyester 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's business, increased six percent on sales volume that was up 22
percent. Sales volume for polyurethane polyols increased 25 percent and was the
largest contributor to the polymer sales growth. Polyols accounted for 50
percent of polymers net sales. Polyurethane systems net sales increased six
percent on sales volume that improved 13 percent. PA net sales declined nine
percent from last year despite a 21 percent sales volume increase. A decrease in
average selling prices more than offset the impact of the increase in sales
volume. Oversupply in the marketplace together with lower raw material costs led
to the decline in selling prices. PA accounted for 33 percent of polymers' 1998
net sales.
Specialty products include flavors, emulsifiers and solubilizers used in
the food and pharmaceutical industry. Net sales for the year were $0.5 million,
or two percent, greater than a year ago. Higher selling prices contributed to
the modest increase.
Gross profit increased seven percent to $111.6 million in 1998 from $104.2
million in 1997. Surfactants gross profit rose three percent from $77.1 million
in 1997 to $79.7 million in 1998. The increase was driven by a four percent
increase in sales volume. Foreign surfactants operations reported a $1.6
million, or 13 percent, increase between years. Improved sales volumes for
Mexican and German operations coupled with the consolidation of Colombian
operations for the first time in 1998 led to the increase in foreign operations.
The increase was somewhat tempered by reduced margins. Domestic surfactants
posted a $1.0 million, or two percent, rise in gross profit due to increased
margins. Lower export sales dampened the domestic result. Polymers gross profit
increased 18 percent to $26.9 million in 1998 from $22.8 million in 1997. The
major factor for the increase was a 70 percent improvement in polyurethane
polyols earnings.
14
Better volumes and margins accounted for the growth. Polyurethane systems posted
a one percent increase in gross profit due to higher sales volume partially
offset by lower margins. A shift to a less profitable sales mix was responsible
for the decline in margins. PA gross profit dropped 26 percent from that
reported in 1997. A decline in margins more than offset the increase in volume.
Price reductions due to the competitiveness brought on by oversupply in the
marketplace led to the decrease in margin. Specialty products gross profit
increased by $0.7 million, or 16 percent, rising to $5.0 million in 1998 from
$4.3 million in 1997. The improvement was primarily due to increased margins.
Average raw material costs declined approximately three percent from 1997
to 1998. Manufacturing labor costs increased mainly due to higher fringe benefit
costs and normal annual pay raises. Total number of company employees increased
to 1,372 during 1998 from 1,292 in 1997. Most of the change occurred due to non-
manufacturing employee numbers and to employees added as a result of the
Colombian acquisition. Depreciation expense increased to $34.8 million in 1998
from $33.5 million in 1997.
Operating income was $45.4 million, a two percent increase over 1997.
Operating expenses, consisting of marketing, administrative and research
expenses, rose 11 percent from a year ago. Administrative expenses increased 15
percent as a result of unusually high consulting fees and severance costs. The
acquisition of Stepan Colombia also contributed to the increase. Marketing
expenses grew 15 percent due to increased payroll costs. The acquisition of
Colombia and the start-up of operations in Brazil also added to marketing
expenses. Research costs increased three percent due mainly to the growth of
payroll cost.
Pre-tax income rose 11 percent. Contributing to the increase was a $2.7
million improvement in joint venture equity income. Most of the improvement
resulted from $3.1 million of 1997 exchange loss from the devaluation of the
Philippine peso which did not recur in the same magnitude in 1998. The 1998
exchange loss was less than $0.1 million.
The effective tax rate was 39.5 percent in 1998 compared to 41.5 percent in
1997. The lower effective tax rate was primarily attributable to the tax benefit
realized on Philippine income during 1998 compared to the inability to secure a
tax benefit from Philippine losses in the prior year (see Note 6 of the Notes to
the Consolidated Financial Statements for a reconciliation of the statutory rate
to the effective tax rate).
Net income for 1998 rose to a record of $23.5 million, or $2.29 per share
($2.12 per share diluted), up 15 percent from $20.4 million, or $1.97 per share
($1.86 per share diluted), a year ago. The company expects another strong
performance in 1999. Surfactant earnings should benefit from recent acquisitions
of higher value-added products. Polymers earnings growth will be somewhat
constrained by an increasingly competitive pricing environment. Significant
efforts in the last year by the company's purchasing personnel should also lead
to reduced raw material and supply costs.
1997 Compared with 1996
Net sales for 1997 rose eight percent to $581.9 million. The increase was the
result of an 11 percent growth in sales volume. Net sales by product group
were as follows (prior year data has been reclassified to conform to 1998
presentation):
Percent
(Dollars in Thousands) 1997 1996 Change
- ---------------------------------------------------------------------------------------------
Surfactants $457,109 $414,892 +10
Polymers 105,754 103,444 +2
Specialty Products 19,086 18,299 +4
- ---------------------------------------------------------------------------------------------
Total $581,949 $536,635 +8
- ---------------------------------------------------------------------------------------------
Surfactants net sales, representing 79 percent of the company business,
were the primary source for overall sales growth. The surfactants sales increase
was due primarily to a 16 percent increase in domestic sales volume. The volume
gain was achieved mainly from the acquisition of Lonza, Inc.'s
15
West Coast surfactant business and from increased demand for the company's
laundry and cleaning and personal care products. The domestic market accounted
for 85 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.
Polymers net sales, accounting for 18 percent of the company's 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
1996 levels due to decreased customer demand plus increased first half of year
internal requirements of PA in polyurethane polyols. Polyurethane 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 revenue increased four percent on increased 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 $77.1 million was 16 percent higher than 1996
profit of $66.4 million. Domestic earnings, driven by strong growth in sales
volumes, increased 22 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
operations 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 operations results improved on increased sales volumes.
Polymers gross profit fell eight percent to $22.8 million in 1997 from $24.9
million in 1996. Decreased sales volumes and margins led to the profit decline.
Within the polymer group, PA and polyurethane polyol earnings declined by 21
percent and 12 percent, respectively. In both instances, lower volumes and
margins caused the 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 polyurethane polyols margin
decrease. Polyurethane systems profit, up 59 percent from 1996 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 polyurethane
systems margin improvement. Specialty products gross profit declined 12 percent
to $4.3 million in 1997 from $4.9 million in 1996. Lower margins more than
offset the increase in sales volume.
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 number of company employees 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 those reported in 1996. Administrative
expenses climbed 15 percent as a result of 1996 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
16
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.
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.
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 apply a tax benefit to losses in the Philippines (see Note 6 of the
Notes to the Consolidated Financial Statements for a reconciliation of the
statutory rate to the effective tax rate).
Net income for 1997 rose to $20.4 million, or $1.97 per share($1.86 per
share diluted), up seven percent from $19.1 million, or $1.80 per share ($1.71
per share diluted), reported for 1996.
Fourth Quarter 1998 Compared with 1997
For the quarter ended December 31, 1998, the company reported net income of $5.6
million, or $0.55 per share ($0.51 per share diluted), compared to $3.5 million,
or $0.33 per share ($0.32 per share diluted) in the fourth quarter of 1997. Net
sales for the quarter grew six percent to $150.4 million from $142.1 million a
year ago. Gross profit increased 15 percent to $28.3 million compared with $24.5
million for the fourth quarter of 1997. Surfactants earnings were up eight
percent due to a strong performance by domestic operations and consolidation of
the Colombian subsidiary. Polymers reported a 45 percent increase in gross
profit mainly due to strong performance of polyurethane polyols based on
increased sales volume and improved margins. Specialty products gross profit was
essentially unchanged. Operating expenses were 11 percent higher than in the
fourth quarter of 1997, primarily due to the increase of administrative
expenses, in particular, unusually high severance costs and increased payroll
expense and consulting fees in 1998.
Liquidity and Financial Condition
For the year ended December 31, 1998, net cash from operations totaled $58.8
million, a decrease of $4.0 million from year to year. However, cash flows for
1997 included $9.8 million in insurance recoveries, reflected in the $4.0
million accounts receivable decrease for that period. Net income was up by $3.0
million in 1998 compared to the prior year, while customer prepayments credited
to deferred revenue totaled $0.8 million for 1998 compared to $3.3 million in
1997. Excluding the combined effects of both insurance recoveries and customer
prepayments, net cash from operations increased by $8.3 million during 1998.
During 1998, changes in working capital produced a $1.4 million cash source
compared to $4.9 million, including $9.8 million in insurance recoveries, for
1997.
Capital spending totaled $44.1 million during 1998, up by $8.5 million from
the 1997 total. Investing activities for the current year included the
acquisition of certain product lines and related intangible assets from DuPont
and the acquisition of 100 percent ownership (up from 50 percent) of Stepan
Colombia.
During 1998, consolidated debt increased by $13.7 million, to $114.5
million. As of December 31, 1998, the ratio of long-term debt to long-term debt
plus shareholders' equity was 42.1 percent, up from 40.8 percent as of December
31, 1997.
On October 1, 1998, the company borrowed $30 million from two U.S.
insurance companies, at 6.59 percent with a term of 15 years. The proceeds of
this borrowing were used primarily to reduce short-term domestic bank debt which
had totaled $25.8 million as of September 30, 1998. The terms of these new,
unsecured loan agreements are substantially the same as those in the company's
last private placement, which was completed in 1995.
17
The company maintains contractual relationships with its domestic banks
which provide for $45 million of committed, revolving credit which may be drawn
upon as needed for general corporate purposes. The company entered into this new
agreement on January 9, 1998, and canceled the previous agreement at the same
time. The terms and conditions of the new agreement are substantially the same
as for 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 also meets short-term liquidity requirements through
uncommitted bank lines of credit. The company's foreign subsidiaries maintain
committed and uncommitted bank lines of credit in their respective countries to
meet working capital requirements as well as to fund capital expenditure
programs and acquisitions.
The company anticipates that cash from operations and from committed credit
facilities will be sufficient to fund anticipated capital expenditures,
dividends and other planned financial commitments for the foreseeable future.
Any substantial acquisitions would require additional funding.
Market Risk Analysis
FOREIGN CURRENCY EXCHANGE RISK
Forward exchange contracts are used from time to time to manage currency
exposures for financial instruments denominated in currencies other than the
entity's functional currency. The counter-parties to any such contracts are
major financial institutions, therefore the credit risk of such contracts is
considered insignificant. Corporate policy prohibits the purchase or sale of
leveraged derivative financial instruments as well as the purchase or sale of
any derivative financial instrument for trading purposes.
Any unrealized gains or losses resulting from the use of hedge instruments
are deferred and included in the measurement of the related foreign currency
transaction. Gains or losses on unhedged foreign currency transactions are
included in income. As of December 31, 1998, the company had no outstanding
forward exchange contracts.
The company's 50 percent owned Philippine joint venture has U.S. dollar
denominated debt with the potential for future translation gains or losses. A 10
percent change in this exchange rate would not have a material effect on the
company's operating results of cash flow. A substantial majority of the revenues
of the Philippine joint venture is denominated in U.S. dollars.
INTEREST RATES
The company's debt was composed of fixed-rate and variable-rate borrowings
totaling $110.6 million and $3.9 million, respectively, as of December 31, 1998.
Over the course of 1999, it is projected that interest on variable-rate
borrowings will comprise about 12 percent of the company's total interest
expense. A 10 percent increase or decrease to short-term interest rates would be
immaterial to the company's operating results or cash flow.
The fair value of the company's fixed-rate debt, including current
maturities, was estimated to be $116.0 million as of December 31, 1998, and
exceeded the carrying value by approximately $5.4 million. Market risk was
estimated as the potential increase to the fair value which would result from a
hypothetical 10 percent decrease in the company's weighted average long-term
borrowing rates at December 31, 1998, or $3.5 million. Such a rate decrease
would be immaterial to future operating results or cash flow.
COMMODITY PRICE RISK
Certain raw materials are subject to price volatility caused by weather,
petroleum prices and other unpredictable factors. The commodity price risk is
not material to the company's consolidated financial position, results of
operations or cash flow.
Environmental and Legal Matters
The company is subject to extensive federal, state and local environmental laws
and regulations. Although the company's
18
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
1998, the company's expenditures for capital projects related to the environment
were $7.1 million and should approximate $4.0 to $5.0 million for 1999. These
projects are capitalized and typically depreciated over 10 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 manufacturing locations were approximately $6.9 million for
1998 compared to $7.5 million for 1997. While difficult to project, it is not
anticipated that these recurring expenses will increase significantly in the
future.
The company has been named by the government as a potentially responsible
party at 16 waste disposal sites where cleanup costs have been or may be
incurred under the federal Comprehensive Environmental Response, Compensation
and Liability Act and similar state statutes. In addition, damages are being
claimed against the company in general liability actions for alleged personal
injury or property damage in the case of some disposal and plant sites. The
company believes that it has made adequate provisions for the costs it may incur
with respect to the sites. After partial remediation payments at certain sites,
the company has estimated a range of possible environmental and legal losses
from $4.1 million to $26.4 million at December 31, 1998, compared to $4.2
million to $25.8 million at December 31, 1997. At December 31, 1998, the
company's reserve was $17.6 million for legal and environmental matters compared
to $20.6 million at December 31, 1997. During 1998, expenditures related to
legal and environmental matters approximated $3.6 million compared to $3.0
million expended in 1997. While it is difficult to forecast the timing of the
expenditures, the company believes that $3.0 million of the $17.6 million
reserve is likely to be paid out in 1999. The balance of the reserve would
probably be paid out over many years (see also Note 12 of the Notes to
Consolidated Financial Statements).
For certain sites, estimates cannot be made of the total costs of
compliance or the company's share of such costs; accordingly, the company is
unable to predict the effect thereof on future results of operations. In the
event of one or more adverse determinations in any annual or interim period, the
impact on results of operations for those periods could be material. However,
based upon the company's present belief as to its relative involvement at these
sites, other viable entities' responsibilities for cleanup and the extended
period over which any costs would be incurred, the company believes that these
matters will not have a material effect on the company's financial position.
Certain of these matters are discussed in Item 3, Legal Proceedings, in the 1998
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.
European Union
The European Council announced on December 31, 1998, irrevocably fixed
conversion rates between the National Currency Units (NCU) of the 11
participating countries and the euro. Through July 1, 2002, the official
"Transition Period", these National Currency Units will be considered to be sub-
units of the euro. During the Transition Period, cash transactions for these
11 currencies may be settled in either NCUs or euros, with no compulsion or
prohibition from either party. Stepan Company's U.S. and European banks are
euro-ready and transaction costs will not be affected.
The company expects that this conversion will result in generally higher
competition within the single-currency zone, as a result of greater cross-border
price transparency. This trend is expected to impact both the company's sales
and raw
19
material purchases with the net effect expected to be immaterial to both
operating results and cash flows. The company will experience decreased currency
risk on certain sales and raw material purchases within the single-currency
zone.
The company's internal computer systems are capable of handling currency
conversions according to the rules announced by European Council. The company is
capable of invoicing its customers and receiving payments, as well as making
payments to suppliers, within the single-currency zone in either euro or the
applicable NCU.
Year 2000 Readiness Disclosure
The Year 2000 issue is a result of computer systems that utilize two digits,
rather than four, to represent a given year. Computer systems used by the
company and its business partners that have date-sensitive processing may
recognize a date using "00" as the year 1900 rather than year 2000. This could
result in a system failure or inaccurate calculation that may interrupt normal
business operations. The company has established a steering team to oversee all
efforts and is addressing Year 2000 compliance for three major areas:
Information Technology ("IT") systems, non-"IT" systems and third-party
relationships. The project plan involves three phases: inventory and assessment,
remediation and testing and implementation.
Implementation of approximately 70 percent of "IT" systems is fully
complete and the remainder of the systems is in the process of remediation and
testing. It is expected that 95 percent of the "IT" systems will be compliant
with Year 2000 requirements in June 1999 and implementation of the remaining
systems is planned for the third quarter of 1999.
The non-"IT" systems are comprised of manufacturing process control,
telephone, security, laboratory and other embedded chip systems. Identification
and assessment of these systems are essentially complete. Implementation is
expected to be complete the third quarter of 1999.
The company has initiated formal communications with suppliers and service
providers to determine the extent of their efforts in resolving Year 2000
issues. The assessment phase, which includes evaluation of responses and
meetings with significant suppliers, is in progress and will continue through
the first quarter of 1999. Contingency plans will be developed if responses
indicate the probability of non-compliance with Year 2000 requirements.
Costs for the Year 2000 project are currently estimated to be $2.9 million
with $1.5 million expended to date. Of the total estimated cost, $1.9 million
will be capitalized and the remaining will be expensed as incurred. These costs
are not material to the overall "IT" budget and no projects have been deferred
due to year 2000 efforts. The company's actual cost to achieve Year 2000
compliance could differ significantly from amounts disclosed above due to new
issues which have not yet been identified.
Although the company is in the process of implementing its Year 2000
project plan, there can be no assurance that all phases of the plan will be
completed prior to the Year 2000 or that if completed prior to the Year 2000
that disruption will not occur. In addition, there can be no assurance that the
company's customers, suppliers and service providers will successfully resolve
their own Year 2000 issues in a manner which would not cause material impact to
the company's operations and financial results. Recognizing these uncertainties,
the company is in the process of identifying the most reasonable likely worst
case scenarios. Contingency plans for these scenarios will be developed as
warranted throughout 1999.
20
Report of Management
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.
F. Quinn Stepan
Chairman of the Board and Chief Executive Officer
Walter J. Klein
Vice President - Finance
February 11, 1999
Report of Independent Public Accountants
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, 1998 and 1997, and
the related consolidated statements of income, cash flows and stockholders'
equity, for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
Chicago, Illinois,
February 11, 1999
21
Consolidated Balance Sheets
December 31, 1998 and 1997
(Dollars in Thousands) 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 983 $ 5,507
Receivables, less allowances of $2,263 in 1998 and $2,121 in 1997 81,890 81,018
Inventories (Note 3) 52,496 48,999
Deferred income taxes (Note 6) 10,572 6,636
Other current assets 3,817 4,322
- ---------------------------------------------------------------------------------------------------------------------
Total current assets 149,758 146,482
- ---------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment:
Land 6,553 6,108
Buildings and improvements 61,838 58,670
Machinery and equipment 491,899 459,945
Construction in progress 8,311 2,943
- ---------------------------------------------------------------------------------------------------------------------
568,601 527,666
Less: Accumulated depreciation 353,505 321,065
- ---------------------------------------------------------------------------------------------------------------------
Property, plant and equipment, net 215,096 206,601
- ---------------------------------------------------------------------------------------------------------------------
Other Assets 39,507 21,853
- ---------------------------------------------------------------------------------------------------------------------
Total assets $404,361 $374,936
=====================================================================================================================
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (Note 4) $ 6,807 $ 5,957
Accounts payable 43,977 42,894
Accrued liabilities (Note 10) 37,160 33,842
- ---------------------------------------------------------------------------------------------------------------------
Total current liabilities 87,944 82,693
- ---------------------------------------------------------------------------------------------------------------------
Deferred Income Taxes (Note 6) 39,920 32,258
- ---------------------------------------------------------------------------------------------------------------------
Long-term Debt, less current maturities (Note 4) 107,708 94,898
- ---------------------------------------------------------------------------------------------------------------------
Other Non-current Liabilities (Note 11) 20,805 27,489
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' Equity (Note 7):
5 1/2 percent convertible preferred stock, cumulative, voting, without par value;
authorized 2,000,000 shares; issued 784,417 in 1998 and 788,434
shares in 1997 19,611 19,711
Common stock, $1 par value; authorized 15,000,000 shares; issued
9,997,736 shares in 1998 and 10,341,952 shares in 1997 9,998 10,342
Additional paid-in capital 10,962 8,091
Accumulated other comprehensive loss (9,050) (7,337)
Retained earnings 127,478 120,854
- ---------------------------------------------------------------------------------------------------------------------
158,999 151,661
Less: Treasury stock, at cost 11,015 14,063
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity 147,984 137,598
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $404,361 $374,936
=====================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral part
of these consolidated balance sheets.
22
Consolidated Statements of Income
For the years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands, except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Net Sales $610,451 $581,949 $536,635
- --------------------------------------------------------------------------------------------------------------
Cost of Sales 498,856 477,778 440,420
- --------------------------------------------------------------------------------------------------------------
Gross Profit 111,595 104,171 96,215
- --------------------------------------------------------------------------------------------------------------
Operating Expenses:
Marketing 23,365 20,394 19,577
Administrative 21,825 18,964 16,549
Research, development and technical services (Note 1) 20,982 20,443 19,703
- --------------------------------------------------------------------------------------------------------------
66,172 59,801 55,829
- --------------------------------------------------------------------------------------------------------------
Operating Income 45,423 44,370 40,386
Other Income (Expenses):
Interest, net (Note 4) (7,453) (7,595) (7,243)
Income (loss) from equity joint ventures (Note 1) 796 (1,901) (882)
- ---------------------------------------------------------------------------------------------------------------
(6,657) (9,496) (8,125)
- ---------------------------------------------------------------------------------------------------------------
Income Before Provision for Income Taxes 38,766 34,874 32,261
Provision for Income Taxes (Note 6) 15,312 14,464 13,194
- --------------------------------------------------------------------------------------------------------------
Net Income $ 23,454 $ 20,410 $ 19,067
==============================================================================================================
Net Income Per Common Share:
Basic $ 2.29 $ 1.97 $ 1.80
==============================================================================================================
Diluted $ 2.12 $ 1.86 $ 1.71
==============================================================================================================
Average Common Shares Outstanding (Note 1) 9,843 9,831 10,002
==============================================================================================================
Combined Sales
(Dollars in Thousands)
Surfactants Polymers Specialty Products Consolidated Total
1994 336,224 78,778 28,946 443,948
1995 394,928 115,833 17,457 528,218
1996 414,892 103,444 18,299 536,635
1997 457,109 105,754 19,086 581,949
1998 478,289 112,625 19,537 610,451
1998 Sales Dollar Distribution
(Dollars in Thousands)
Material $367,109 60.1%
Other Expenses $ 76,984 12.6%
Payroll and Fringes $ 90,245 14.8%
Depreciation and Amortization $ 37,347 6.1%
Income Taxes $ 15,312 2.5%
Net Income $ 23,454 3.9%
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
23
Consolidated Statements of Cash Flows
For the years ended December 31, 1998, 1997 and 1996
(Dollars in Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
Net Cash Flows from Operating Activities
Net income $ 23,454 $ 20,410 $ 19,067
Depreciation and amortization 37,347 35,281 32,138
Deferred revenue recognition (4,327) (3,611) (2,896)
Customer prepayments 800 3,292 7,375
Deferred income taxes 4,244 1,114 (1,710)
Environmental and legal liabilities (3,035) (428) 12,925
Other non-cash items (998) 1,860 548
Changes in Working Capital:
Receivables, net 179 3,999 (5,203)
Inventories (2,840) 1,243 4,121
Accounts payable and accrued liabilities 2,731 1,069 (1,113)
Other 1,292 (1,364) 535
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities 58,847 62,865 65,787
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities
Expenditures for property, plant and equipment (44,056) (35,589) (44,923)
Investment in acquisitions (21,195) (4,999) (3,859)
Other non-current assets 1,587 344 268
- -----------------------------------------------------------------------------------------------------------------
Net Cash Used for Investing Activities (63,664) (40,244) (48,514)
- -----------------------------------------------------------------------------------------------------------------
Cash Flows from Financing and Other
Related Activities
Revolving debt and notes payable to banks, net (10,310) 1,210 (800)
Other debt borrowings 30,000 - 3,734
Other debt repayments (6,151) (9,660) (9,190)
Purchases of treasury stock, net (8,402) (8,863) (3,492)
Dividends paid (6,432) (6,069) (5,846)
Stock option exercises 1,728 2,252 464
Other non-cash items (140) (762) (513)
- -----------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used for) Financing and
Other Related Activities 293 (21,892) (15,643)
- ----------------------------------------------------------------------------------------------------------------
Net Increase (Decrease) in Cash and Cash Equivalents (4,524) 729 1,630
Cash and Cash Equivalents at Beginning of Year 5,507 4,778 3,148
- ----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 983 $ 5,507 $ 4,778
================================================================================================================
Supplemental Cash Flow Information
Cash payments of income taxes, net of refunds $ 9,295 $ 16,059 $ 12,417
Cash payments of interest $ 7,781 $ 8,306 $ 10,838
================================================================================================================
Capital Expenditures
(Dollars in Thousands)
1993 25,435
1994 42,884
1995 39,247
1996 44,923
1997 35,589
1998 44,056
Compound Annual Growth
Five Years +12%
Equity Per Share
(Dollars)
1993 9.65
1994 10.27
1995 11.25
1996 12.24
1997 13.01
1998 14.18
Compound Annual Growth
Five Years +8%
The accompanying Notes to Consolidated Financial Statements are an integral part
of these statements.
24
Consolidated Statements of Stockholders' Equity
For the years ended December 31, 1998, 1997 and 1996
Accumulated
Convertible Additional Other
Preferred Common Paid-in Treasury Comprehensive Retained Comprehensive
(Dollars in Thousands) Stock Stock Capital Stock Income (Loss) Earnings Income
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, January 1, 1996 $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 $19,067
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,129) -- (1,129)
-------
Comprehensive income -- -- -- -- -- -- $17,938
=======
Cash dividends paid -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (1,068) --
Common stock (47.75c per share) -- -- -- -- -- (4,778) --
- ------------------------------------------------------------------------------------------------------------------------------------
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 $20,410
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (2,517) -- (2,517)
-------
Comprehensive income -- -- -- -- -- -- $17,893
=======
Cash dividends paid -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (1,027) --
Common stock (51.25c per share) -- -- -- -- -- (5,042) --
Non-qualified stock option tax benefit -- -- 669 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 19,711 10,342 8,091 (14,063) (7,337) 120,854 --
Sale of 151,200 shares
under stock option plan -- 151 2,322 -- -- -- --
Purchase of 288,744 shares of common
treasury stock, net of sales -- -- 462 (8,402) -- -- --
Retirement of 500,000 shares of common
treasury stock -- (500) (552) 11,450 -- (10,398) --
Conversion of preferred stock
to common stock (100) 5 96 -- -- -- --
Net income -- -- -- -- -- 23,454 $23,454
Other comprehensive income:
Foreign currency translation adjustments -- -- -- -- (1,713) -- (1,713)
-------
Comprehensive income -- -- -- -- -- -- $21,741
=======
Cash dividends paid -- -- -- -- -- -- --
Preferred stock ($1.375 per share) -- -- -- -- -- (896) --
Common stock (56.25c per share) -- -- -- -- -- (5,536) --
Non-qualified stock option tax benefit -- -- 543 -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $19,611 $ 9,998 $10,962 $(11,015) $(9,050) $127,478 --
====================================================================================================================================
The accompanying Notes to Consolidated Financial Statements are an integral
part of these statements.
25
Notes to Consolidated Financial Statements
For the years ended December 31, 1998, 1997 and 1996
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. The investment in the 50
percent owned joint venture in the Philippines is accounted for on the equity
method and is included in the "Other Assets" caption on the Consolidated Balance
Sheet. The company's share of the net earnings of the investment is included in
consolidated net income. Operations in Colombia were accounted for using the
equity method until May 8, 1998, when majority interest was obtained. See Note 2
for information on acquisitions.
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, 1998 and 1997, amounted to 86 percent and 91 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 ($18,335,000, $18,775,000 and $20,509,000 in 1998, 1997 and 1996,
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 10 year life.
See Note 12 for contingency information.
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 15 years.
26
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 $12,219,000, $12,404,000 and $12,469,000 in 1998, 1997 and
1996, 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.
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. The resulting translation
adjustments are included in stockholders' equity. Revenues and expenses are
translated at average exchange rates prevailing during the year. 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. 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 for stock
option plans information.
Per Share Data
In 1997, the company adopted Statement of Financial Accounting Standards No. 128
"Earnings per Share" (SFAS No. 128), 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
SFAS No. 128 had no effect on previously reported per share data. See Note 14
for the computation of earnings per share.
Comprehensive Income
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130),
which is effective for fiscal years beginning after December 15, 1997. SFAS No.
130, which the company adopted in 1998, requires that comprehensive
27
income be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income includes net
income and all other nonowner changes in equity that are not reported in net
income. For the twelve months ended December 31, 1998, 1997 and 1996, the
company's comprehensive income included net income and foreign currency
translation gains and losses. The company has elected to disclose comprehensive
income in the Consolidated Statements of Stockholders' Equity.
Segment Reporting
In 1998, the company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" (SFAS No.
131), effective for periods beginning after December 15, 1997. The company is
required to report financial and descriptive information about its reportable
operating segments. Operating segments are components of the company that have
separate financial information that is regularly evaluated by the chief
operating decision maker to assess segment performance and allocate resources.
SFAS No. 131 requires the company to report a measure of segment profit or loss,
certain revenue and expense items and segment assets. Such data must be
reconciled to corresponding amounts in the company's general-purpose
consolidated financial statements. Enterprise-wide financial information about
the revenues derived from the company's products, about the countries in which
the company earns revenues and holds assets and about major customers must also
be disclosed. See Note 13 for segment reporting information.
Pension Plans
In 1998, the company adopted Statement of Financial Accounting Standards No.
132, "Employers' Disclosures about Pensions and Other Postretirement Benefits",
effective for fiscal years beginning after December 15, 1997. The statement
revises disclosure requirements for pension and other postretirement benefit
plans. There is no change to the measurement or recognition of such plans. See
Note 9 for pension plans disclosure.
Reclassifications
Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 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.
2. Acquisitions
- --------------------------------------------------------------------------------
On May 8, 1998, the company purchased an additional 34.5 percent of the
outstanding stock of Stepan Colombia raising its stake in the Colombia company
to 84.5 percent. On August 19, 1998, the remaining shares (15.5 percent) were
acquired. As a result, Stepan Colombia became a wholly-owned subsidiary. The
transaction was accounted for as a step acquisition purchase, and Stepan
Colombia's financial results have been reported on a consolidated basis from the
date that controlling interest was acquired. Prior to the May 1998 purchase
date, the investment was accounted for under the equity method. The reported
consolidated results of operations for 1996, 1997 and 1998 would not have been
materially affected had this transaction occurred at the beginning of 1996.
Effective June 30, 1998, the company acquired selected specialty surfactant
product lines from E.I. DuPont De Nemours Company. The acquired business
consists of phosphate esters, specialty ethoxylates and other specialty
quaternaries and polymers sold to the plastic and fiber industries. The product
lines supplement the company's existing surfactants and polymers businesses and
will be produced in current company manufacturing plants. The transaction was
recorded as a purchase of intangible assets, including patents, trademarks,
know-how and goodwill.
On November 11, 1998, the company's wholly owned subsidiary, Stepan Canada,
Inc., acquired the Canadian anionic and cationic surfactant business from Boehme
Filatex Canada, Inc.
28
The acquired product lines are sold primarily into the personal care and the
institutional cleaning product markets. No manufacturing facilities were
included in this acquisition. The transaction was recorded as a purchase of
intangible assets, including goodwill, non-compete agreement, know-how, patents
and trademarks.
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) 1998 1997
- -------------------------------------------------------------------------
Finished products $33,444 $31,110
Raw materials 19,052 17,889
- -------------------------------------------------------------------------
Total inventories $52,496 $48,999
=========================================================================
If the first-in, first-out (FIFO) inventory valuation method had been used,
inventories would have been approximately $10,000,000 and $11,900,000 higher
than reported at December 31, 1998 and 1997, respectively.
4. Debt
- --------------------------------------------------------------------------------
Debt was composed of the following:
December 31
----------------------------
(Dollars in Thousands) Maturity Dates 1998 1997
- ---------------------------------------------------------------------------------------------------
Unsecured promissory notes
6.59% 2003-2013 $ 30,000 $ 0
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% 1999-2004 6,000 8,000
9.52% 1999 1,429 3,572
9.70% 1999 667 1,667
Unsecured bank debt 2003 3,100 10,800
Debt of foreign subsidiaries
payable in foreign currency 1999-2006 3,319 6,816
- ---------------------------------------------------------------------------------------------------
Total debt 114,515 100,855
Less current maturities 6,807 5,957
- ---------------------------------------------------------------------------------------------------
Long-term debt $107,708 $ 94,898
===================================================================================================
Unsecured bank debt at December 31, 1998, consisted of borrowings under a
committed $45,000,000 revolving credit agreement with interest at varying rates
averaging 6.31 percent during the year. The agreement requires a commitment fee
to be paid on the unused portion of the commitment which averaged 0.14 percent
during the year. Periodically, the company also had other borrowings under notes
payable to banks under which there were no outstanding balances at December 31,
1998 and 1997.
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
$44,346,000 and $52,623,000 at December 31, 1998 and 1997, respectively. The
company is in compliance with all loan agreements.
29
Debt at December 31, 1998, matures as follows: $6,807,000 in 1999; $7,434,000
in 2000; $9,099,000 in 2001; $9,069,000 in 2002; $14,893,000 in 2003 and
$67,213,000 after 2003.
Net interest expense for the years ended December 31 was composed of the
following:
(Dollars in Thousands) 1998 1997 1996
- -----------------------------------------------------------------------------------------------
Interest expense $8,235 $8,205 $ 9,165
Interest income (364) (173) (671)
- -----------------------------------------------------------------------------------------------
7,871 8,032 8,494
Capitalized interest (418) (437) (1,251)
- -----------------------------------------------------------------------------------------------
Interest, net $7,453 $7,595 $ 7,243
===============================================================================================
5. Leased Properties
- --------------------------------------------------------------------------------
The company leases certain property and equipment (primarily transportation
equipment, buildings and computer equipment) under operating leases. Total
rental expense was $3,918,000, $3,884,000 and $3,474,000 in 1998, 1997 and 1996,
respectively.
Minimum future rental payments under operating leases with terms in excess
of one year as of December 31, 1998, are:
(Dollars in Thousands) Year Amount
- ----------------------------------------------------------------------
1999 $ 3,005
2000 2,355
2001 1,797
2002 1,031
2003 987
Subsequent to 2003 5,813
- ----------------------------------------------------------------------
Total minimum future rental payments $14,988
- ----------------------------------------------------------------------
6. Income Taxes
- -------------------------------------------------------------------------------
The provision for taxes on income and the related income before taxes are as
follows:
Taxes on Income
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------
Federal
Current $ 8,544 $11,321 $ 9,785
Deferred 3,285 (321) 54
State
Current 1,704 1,953 1,863
Deferred 718 502 (345)
Foreign
Current 1,047 1,451 2,700
Deferred 14 (442) (863)
- -------------------------------------------------------------------------------------------
Total $15,312 $14,464 $13,194
===========================================================================================
Income before Taxes
(Dollars in Thousands) 1998 1997 1996
- -------------------------------------------------------------------------------------------
Domestic $35,766 $31,758 $28,420
Foreign 3,000 3,116 3,841
- -------------------------------------------------------------------------------------------
Total $38,766 $34,874 $32,261
===========================================================================================
No federal income taxes have been provided on $26,483,000 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:
1998 1997 1996
(Dollars in Thousands) Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
Income tax provision at statutory tax rate $13,568 35.0 $12,206 35.0 $11,292 35.0
State taxes on income
less applicable federal tax benefit 1,574 4.1 1,215 3.5 987 3.1
Effect of equity in foreign joint ventures (278) -0.7 665 1.9 308 1.0
Other items 448 1.1 378 1.1 607 1.8
- ------------------------------------------------------------------------------------------------------------------------
Total income tax provision $15,312 39.5 $14,464 41.5 $13,194 40.9
========================================================================================================================
30
The net deferred tax liability at December 31 is comprised of the
following:
(Dollars in Thousands) 1998 1997
- ------------------------------------------------------------------------------------------
Current deferred income taxes
Gross assets $ 11,203 $ 7,469
Gross liabilities (631) (833)
- ------------------------------------------------------------------------------------------
Total current deferred tax assets 10,572 6,636
Non-current deferred income taxes
Gross assets 7,073 12,558
Gross liabilities (46,993) (44,816)
- ------------------------------------------------------------------------------------------
Total non-current deferred tax liabilities (39,920) (32,258)
- ------------------------------------------------------------------------------------------
Net deferred tax liability $(29,348) $(25,622)
==========================================================================================
At December 31, the tax effect of significant temporary differences
representing deferred tax assets and liabilities is as follows:
(Dollars in Thousands) 1998 1997
- ------------------------------------------------------------------------------------------
Tax over book depreciation $(43,884) $(40,705)
Safe Harbor leases (2,795) (2,971)
SFAS No. 87 pension accounting (3,043) (2,894)
State income tax accrual 2,062 1,444
Deferred revenue 4,505 5,942
Book reserves deductible in other periods 13,966 14,277
Other, net (159) (715)
- ------------------------------------------------------------------------------------------
Net deferred tax liability $(29,348) $(25,622)
==========================================================================================
7. Stockholders' Equity
- --------------------------------------------------------------------------------
The company's 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), 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 $0.14 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.
On December 8, 1998, 500,000 shares of common stock held in treasury were
retired in accordance with the Board of Directors' authorization. At December
31, 1998, treasury stock consists of 133,874 shares of preferred stock and
305,048 shares of common stock. At December 31, 1997, treasury stock consisted
of 133,874 shares of preferred stock and 516,304 shares of common stock.
8. Stock Option Plans
- --------------------------------------------------------------------------------
The company has two fixed stock option plans: the 1982 Plan and the 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 10 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 1998, 1997 and 1996 consistent with the provisions of SFAS No.
123, the company's net income and earnings
31
per share would have been reduced to the following pro forma amounts:
(In Thousands, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------
Net Earnings - as reported $23,454 $20,410 $19,067
Net Earnings - pro forma 22,575 19,716 18,556
Basic Earnings per share - as reported 2.29 1.97 1.80
Basic Earnings per share - pro forma 2.20 1.90 1.75
Diluted Earnings per share - as reported 2.12 1.86 1.71
Diluted Earnings per share - pro forma 2.05 1.80 1.66
- ------------------------------------------------------------------------------------------
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 1998, 1997 and 1996: expected dividend yield of
2.5 percent in 1998, 2.7 percent in 1997 and 3.0 percent in 1996. Expected
volatility of 27 percent in 1998 and 28 percent in 1997 and 1996; expected lives
of 7.5 years; and risk-free interest rate of 5.75 percent in 1998, 6.24 percent
in 1997 and 6.89 percent in 1996.
A summary of the status of the company's stock option plans at December 31,
1998, 1997 and 1996, and changes during the years then ended is presented as
follows:
Weighted-
Average
1998 Exercise 1997 1996
Shares Price Shares Shares
- ---------------------------------------------------------------------------------------------------------------
Options outstanding, beginning of year 1,168,252 $16.06 1,266,252 1,044,810
Options exercised (151,200) 16.36 (200,500) (44,826)
Options canceled (3,229) 30.97 (4,000) (5,112)
Options granted 233,768 30.86 106,500 271,380
- ---------------------------------------------------------------------------------------------------------------
Options outstanding, end of year 1,247,591 18.76 1,168,252 1,266,252
- ---------------------------------------------------------------------------------------------------------------
Option price range at end of year $ 9.438- $ 9.438- $ 9.438-
30.969 19.750 19.750
Option price range for exercised shares 9.438- 9.438- 8.125-
19.750 18.219 18.219
- ---------------------------------------------------------------------------------------------------------------
Options available for grant at end of year 315,583 546,122 647,122
- ---------------------------------------------------------------------------------------------------------------
Weighted-average fair value of options,
granted during the year $ 9.64 $ 6.18 $ 6.35
===============================================================================================================
Summary of stock options outstanding at December 31, 1998, is as follows:
Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Price at 12/31/98 Life Price at 12/31/98 Price
- -------------------------------------------------------------------------------------------------------------
$9.438 89,800 1.33 $ 9.44 89,800 $ 9.44
$12.563 - $14.000 436,500 5.06 13.84 436,500 13.84
$18.219 - $30.969 721,291 7.23 22.90 385,752 19.13
- -------------------------------------------------------------------------------------------------------------
1,247,591 6.04 $18.76 912,052 $15.64
=============================================================================================================
32
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, 1998, 1997 and 1996, included $11,183,000,
$12,443,000 and $8,558,000, respectively, of the company's common stock.
Net 1998, 1997 and 1996 periodic pension cost for the plans consists of the
following:
(Dollars in Thousands) 1998 1997 1996
- ----------------------------------------------------------------------------------------------
Service cost $ 1,969 $ 1,754 $ 1,664
Interest cost on projected benefit obligation 3,262 3,029 2,700
Expected return on plan assets (4,658) (4,158) (3,851)
Amortization of unrecognized net transition
assets (567) (567) (567)
Amortization of unrecognized prior service cost 269 268 168
Amortization of unrecognized net gain (5) (4) (4)
- ----------------------------------------------------------------------------------------------
Net pension expense $ 270 $ 322 $ 110
==============================================================================================
Changes in benefit obligations for the years ending December 31, 1998 and 1997
were as follows:
(Dollars in Thousands) 1998 1997
- ------------------------------------------------------------------
Benefit obligation at beginning of year $44,391 $37,696
Service cost 1,969 1,754
Interest cost 3,262 3,029
Plan amendments 23 --
Actuarial loss 5,064 3,198
Benefits paid (1,540) (1,286)
- ------------------------------------------------------------------
Benefit obligation at end of year $53,169 $44,391
==================================================================
Changes in the fair value of plan assets during fiscal years 1998 and 1997 were
as follows:
(Dollars in Thousands) 1998 1997
- --------------------------------------------------------------------------------
Fair value of plan assets at beginning of year $64,786 $52,304
Actual return on plan assets 3,350 13,130
Employer contributions 587 638
Benefits paid (1,540) (1,286)
- --------------------------------------------------------------------------------
Fair value of plan assets at end of the year $67,183 $64,786
================================================================================
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) 1998 1997
- -----------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligations $14,014 $ 20,395
Unrecognized net transition assets (1,134) (1,701)
Unrecognized prior service cost 1,748 1,994
Unrecognized net gain (7,386) (13,763)
- -----------------------------------------------------------------------------------------
Prepaid benefit cost $ 7,242 $ 6,925
=========================================================================================
The prepaid pension asset is included in the "Other Assets" caption on the
Consolidated Balance Sheets. The weighted-average assumptions as of December 31,
1998, 1997 and 1996, were as follows:
1998 1997 1996
- ------------------------------------------------------------------------------------------
Discount rate 6.75% 7.25% 7.75%
Expected return on plan assets 8.50% 8.50% 8.50%
Rate of compensation increase 4.25%-6.25% 4.50%-6.50% 5.00%-7.00%
==========================================================================================
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.
33
10. Accrued Liabilities
- --------------------------------------------------------------------------------
Accrued liabilities consisted of:
December 31
----------------------------------------------
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------------
Accrued payroll and benefits $14,236 $13,824
Accrued customer discounts 6,760 6,307
Deferred revenue - current 4,451 4,328
Other accrued liabilities 11,713 9,383
- -------------------------------------------------------------------------------------
Total accrued liabilities $37,160 $33,842
=====================================================================================
11. Other Non-current Liabilities
- --------------------------------------------------------------------------------
Other non-current liabilities were comprised of the following:
December 31
-------------------------
(Dollars in Thousands) 1998 1997
- ----------------------------------------------------------------------
Deferred revenue $ 6,242 $ 9,892
Environmental and legal matters (Note 12) 14,563 17,597
- ----------------------------------------------------------------------
Total other non-current liabilities $20,805 $27,489
======================================================================
During 1998 and 1997, 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, 1998 and 1997 is $10,693,000
and $14,219,000, 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 $4.1 million
to $26.4 million at December 31, 1998, compared to $4.2 million to $25.8 million
at December 31, 1997. At December 31, 1998, the company's reserve was $17.6
million for legal and environmental matters compared to $20.6 million at
December 31, 1997. The company made payments of $3.6 million in 1998 and $3.0
million in 1997 related to legal costs, settlements and costs related to
remedial design studies at various sites.
For certain sites, estimates cannot be made of the total costs of
compliance, or the company's share of such costs; accordingly, the company is
unable to predict the effect thereof on future results of operations. In the
event of one or more adverse determinations in any annual or interim period, the
impact on results of operations for those periods could be material. However,
based upon the company's present belief as to its relative involvement at these
sites, other viable entities' responsibilities for cleanup, and the extended
period over which any costs would be incurred, the company believes that these
matters will not have a material effect on the company's financial position.
Certain of these matters are discussed in Item 3, Legal Proceedings, in the 1998
Form 10-K Annual Report and in other filings of the company with the Securities
and Exchange Commission, which filings are available upon request from the
company.
34
13. Segment Reporting
- --------------------------------------------------------------------------------
Stepan Company has three reportable segments: surfactants, polymers and
specialty products. Each segment provides distinct products and requires
separate management due to unique markets, technologies and production
processes. Surfactants are used in a variety of consumer and industrial cleaning
compounds as well as in agricultural products, lubricating ingredients and other
specialized applications. Polymers derives its revenues from the sale of
phthalic anhydride, polyurethane polyols and polyurethane systems used in
plastics, building materials and refrigeration systems. Specialty products sells
chemicals used in food, flavoring and pharmaceutical applications.
The company evaluates the performance of its segments and allocates
resources based on operating income before interest income/expense, other
income/expense items and income tax provisions. The accounting policies of the
reportable segments are the same as those described in the summary of
significant accounting policies. There is no intersegment revenue and all
intercompany transactions are eliminated from segments' revenue.
Segment data for the three years ended December 31, 1998, 1997 and 1996, is as
follows:
Specialty Segment
(Dollars in Thousands) Surfactants Polymers Products Totals
1998 ----------- -------- -------- -------
----
Net sales $478,289 $112,625 $19,537 $610,451
Operating income 42,757 21,051 3,511 67,319
Assets 315,549 48,795 17,478 381,822
Capital expenditures 37,091 3,632 1,652 42,375
Depreciation and amortization expenses 29,265 5,847 1,249 36,361
1997
----
Net sales $457,109 $105,754 $19,086 $581,949
Operating income 43,989 16,296 2,959 63,244
Assets 278,559 57,295 18,020 353,874
Capital expenditures 23,873 6,494 3,850 34,217
Depreciation and amortization expenses 27,507 5,819 983 34,309
1996
----
Net sales $414,892 $103,444 $18,299 $536,635
Operating income 37,672 19,765 3,494 60,931
Assets 280,854 52,012 15,743 348,609
Capital expenditures 35,967 6,376 1,757 44,100
Depreciation and amortization expenses 24,781 5,624 738 31,143
35
Below are reconciliations of segment data to the accompanying consolidated
financial statements:
(Dollars in Thousands) 1998 1997 1996
---- ----- ----
Operating income - segment totals $ 67,319 $ 63,244 $ 60,931
Unallocated corporate expenses(a) (21,896) (18,874) (20,545)
Interest expenses (7,453) (7,595) (7,243)
Income/(Loss) from equity in joint ventures 796 (1,901) (882)
-------- -------- --------
Consolidated income before income taxes $ 38,766 $ 34,874 $ 32,261
======== ======== ========
Assets - segment totals $381,822 $353,874 $348,609
Unallocated corporate assets(b) 22,539 21,062 32,403
-------- -------- --------
Consolidated assets $404,361 $374,936 $381,012
======== ======== ========
Capital expenditures - segment totals $ 42,375 $ 34,217 $ 44,100
Unallocated corporate expenditures 1,681 1,372 823
-------- -------- --------
Consolidated capital expenditures $ 44,056 $ 35,589 $ 44,923
======== ======== ========
Depreciation and amortization expenses - segment totals $ 36,361 $ 34,309 $ 31,143
Unallocated corporate depreciation expenses 986 972 995
-------- -------- --------
Consolidated depreciation and
amortization expenses $ 37,347 $ 35,281 $ 32,138
======== ======== ========
(a) Includes corporate administrative and corporate manufacturing expenses
which are not included in segment operating income and not used to evaluate
segment performance.
(b) Includes items such as deferred tax asset, prepaid pension asset, joint
venture investments and LIFO inventory reserve which are not allocated to
segments.
Company-wide geographic data for the years ended December 31, 1998, 1997 and
1996, is as follows (net sales attributed to countries based on selling
location):
(Dollars in Thousands) 1998 1997 1996
----- ----- -----
Net sales
United States $506,075 $494,496 $449,544
All foreign countries 104,376 87,453 87,091
-------- -------- --------
Total $610,451 $581,949 $536,635
======== ======== ========
Long-lived assets
United States $200,587 $192,821 $189,671
All foreign countries 14,509 13,780 17,488
-------- -------- --------
Total $215,096 $206,601 $207,159
======== ======== ========
14. Earnings Per Share
- --------------------------------------------------------------------------------
Below is the computation of basic and diluted earnings per share for the years
ended December 31, 1998, 1997 and 1996:
(In Thousands, except per share amounts) 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Computation of Basic Earnings per Share
Net income $23,454 $20,410 $19,067
Deduct dividends on preferred stock 896 1,027 1,068
- -----------------------------------------------------------------------------------------------------------------------------
Income applicable to common stock $22,558 $19,383 $17,999
Weighted-average number of shares outstanding 9,843 9,831 10,002
Basic earnings per share $ 2.29 $ 1.97 $ 1.80
=============================================================================================================================
Computation of Diluted Earnings per Share
Net income $23,454 $20,410 $19,067
Weighted-average number of shares outstanding 9,843 9,831 10,002
Add net shares from assumed exercise of options
(under treasury stock method) 456 275 242
Add weighted-average shares from assumed
conversion of convertible preferred stock 744 853 887
- -----------------------------------------------------------------------------------------------------------------------------
Shares applicable to diluted earnings 11,043 10,959 11,131
Diluted earnings per share $ 2.12 $ 1.86 $ 1.71
=============================================================================================================================
36
Five Year Summary
(In Thousands, except per share and employee data)
For the Year 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
Net Sales $610,451 $581,949 $536,635 $528,218 $443,948
Operating Income 45,423 44,370 40,386 32,620 29,853
Percent of net sales 7.4% 7.6% 7.5% 6.2% 6.7%
- -------------------------------------------------------------------------------------------------------------------------
Pre-tax Income 38,766 34,874 32,261 24,991 22,512
Percent of net sales 6.4% 6.0% 6.0% 4.7% 5.1%
- -------------------------------------------------------------------------------------------------------------------------
Provision for Income Taxes 15,312 14,464 13,194 8,872 8,667
- -------------------------------------------------------------------------------------------------------------------------
Net Income 23,454 20,410 19,067 16,119 13,845
Per share (Diluted)/(a)(b)/ 2.12 1.86 1.71 1.46 1.26
Percent of net sales 3.8% 3.5% 3.6% 3.1% 3.1%
Percent to stockholders' equity/(c)/ 17.0% 15.5% 15.6% 14.5% 13.3%
- -------------------------------------------------------------------------------------------------------------------------
Cash Dividends Paid 6,432 6,069 5,846 5,540 5,294
Per common share/(a)/ .5625 .5125 .4775 .4475 .4250
- -------------------------------------------------------------------------------------------------------------------------
Depreciation and Amortization 37,347 35,281 32,138 30,384 28,935
Capital Expenditures 44,056 35,589 44,923 39,247 42,884
Weighted-Average Common
Shares Outstanding/(a)/ 9,843 9,831 10,002 9,984 9,924
- -------------------------------------------------------------------------------------------------------------------------
As of Year End
- -------------------------------------------------------------------------------------------------------------------------
Working Capital $ 61,814 $ 63,789 $ 70,322 $ 66,856 $ 48,915
Current Ratio 1.7 1.8 1.8 1.8 1.6
- -------------------------------------------------------------------------------------------------------------------------
Property, Plant and Equipment, net 215,096 206,601 207,159 192,470 183,657
Total Assets 404,361 374,936 381,012 362,527 324,948
Long-term Debt, less current maturities 107,708 94,898 102,567 109,023 89,795
- -------------------------------------------------------------------------------------------------------------------------
Stockholders' Equity 147,984 137,598 131,615 122,477 111,302
Per share/(a)(d)/ 14.18 13.01 12.24 11.25 10.27
Number of Employees 1,372 1,292 1,270 1,267 1,265
- -------------------------------------------------------------------------------------------------------------------------
/(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.
Quarterly Stock Data (Unaudited)
Dividends Paid
Stock Price Range Per Common Share
--------------------------------------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------------------------------------
Quarter High Low High Low
- --------------------------------------------------------------------
First $30 1/2 $26 1/8 $20 3/8 $18 1/4 13.75c 12.50c
Second 32 1/4 29 5/8 24 5/8 18 13.75c 12.50c
Third 31 1/4 23 1/8 26 3/4 22 1/16 13.75c 12.50c
Fourth 29 24 5/8 32 3/8 26 15.00c 13.75c
------------------------
Year 32 1/4 23 1/8 32 3/8 18 56.25c 51.25c
======================================================================================================
Quarterly Financial Data (Unaudited)
(Dollars in Thousands, except per share data)
1998
--------------------------------------------------
Quarter First Second Third Fourth Year
- ---------------------------------------------------------------------------------------
Net Sales $150,388 $155,509 $154,134 $150,420 $610,451
- ---------------------------------------------------------------------------------------
Gross Profit 27,829 29,654 25,827 28,285 111,595
- ---------------------------------------------------------------------------------------
Interest, net (1,907) (1,769) (1,853) (1,924) (7,453)
- ---------------------------------------------------------------------------------------
Pre-tax Income 9,538 11,859 8,131 9,238 38,766
- ---------------------------------------------------------------------------------------
Net Income 5,722 7,110 5,032 5,590 23,454
- ---------------------------------------------------------------------------------------
Net Income per Share (Diluted) .52 .64 .45 .51 2.12
=======================================================================================
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 (Diluted) .41 .58 .56 .32 1.86
=======================================================================================
37