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Stepan Company Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: October 28, 2011 03:46PM
Stepan Company (SCL) filed Quarterly Report for the period ended 2011-09-30.
Highlight of Business Operations:Corporate expenses, which comprise operating expenses that are not allocated to the reportable segments, increased $0.6 million (12 percent) to $5.5 million for the third quarter of 2011 from $4.9 million for the third quarter of 2010. Legal and environmental expenses increased $1.0 million and income related to the Companys deferred compensation plans increased $0.6 million. The increase in legal and environmental expenses reflected favorable remediation liability adjustments made in 2010 for two sites that did not recur in 2011. With respect to deferred compensation, the Company recorded $2.0 million of income in the third quarter of 2011 compared to $1.4 million of income in the same quarter of 2010. Declines in the values of the mutual fund assets to which a portion of the deferred compensation obligations are tied led to the higher quarter-over-quarter deferred compensation income. The impact of the mutual fund performance was partially offset by the effect of Company common stock prices that declined less in the third quarter of 2011 than in 2010. The value of Company common stock declined $3.72 per share from $70.90 per share at June 30, 2011, to $67.18 per share at September 30, 2011. For last years third quarter, the Companys common stock price decreased $9.32 per share from $68.43 per share at June 30, 2010, to $59.11 per share at September 30, 2010. The accounting treatment for the Companys deferred compensation plans results in income when the value of Company common stock or mutual funds held in the plans falls and expense when the value of Company common stock or mutual funds increases.
Corporate expenses of $22.6 million for the first three quarters of 2011 were unchanged from corporate expenses reported for the same period of 2011. Deferred compensation income increased $2.2 million year-over-year, but was completely offset by increases in other expenses, most notably a $1.2 million increase in legal and environmental expenses and $0.5 million of higher expense related to derivative income reported in 2010 arising from recording certain electric contracts at fair value (the Company held no such contracts during 2011). With respect to deferred compensation, the Company recorded $2.7 million of deferred compensation income for the first three quarters of 2011 compared to $0.5 million of income for the first three quarters of 2010. Declines in the values of Company stock and the mutual fund assets to which the deferred compensation obligations are tied led to the higher year-over-year deferred compensation income. The value of Company common stock declined $9.09 per share from $76.27 per share at December 31, 2010, to $67.18 per share at September 30, 2011. For the first three quarters of last year, the Companys common stock price declined $5.70 per share from $64.81 per share at December 31, 2009, to $59.11 per share at September 30, 2010. The increase in legal and environmental expenses reflected favorable remediation liability adjustments made in 2010 for two sites that did not recur in 2011.
For the nine months ended September 30, 2011, the Company used $78.8 million of available cash plus $5.0 million of net borrowings and operating cash sources of $12.6 million to fund net investing cash outflows of $76.4 million and non-debt financing cash outflows of $18.8 million, with exchange rates decreasing cash by $1.1 million. For the current year to date, net income was up by $2.1 million and working capital consumed $41.0 million more than for the comparable period last year. Investing cash outflows increased by $0.4 million year over year. Cash flows used in financing activities were $13.8 million for the current year to date versus a $42.3 million cash source for the comparable period in 2010.
Total Company debt decreased by $5.0 million for the current year to date, from $191.6 million to $186.6 million, with U.S. debt decreasing $9.9 million and foreign debt increasing $4.9 million. Higher foreign debt was driven primarily by capital spending in Europe. The decrease in U.S. debt reflected the liquidation of the previously noted build-to-suit lease obligation and an increase in revolving bank debt. Net debt (which is defined as total debt minus cash) increased by $73.8 million for the first nine months of 2011, from $80.4 million to $154.2 million. As of September 30, 2011, the ratio of total debt to total debt plus shareholders equity was 31.8 percent versus 35.2 percent at December 31, 2010. The ratio of net debt to net debt plus shareholders equity was 27.8 percent at September 30, 2011, compared to 18.5 percent at December 31, 2010.
Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA 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. It is the Companys accounting policy to record liabilities 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, 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. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $9.4 million to $29.2 million at September 30, 2011, compared to $10.0 million to $29.7 million at December 31, 2010. At September 30, 2011 and December 31, 2010, the Companys accrued liability for such losses, which represented the Companys best estimate within the estimated range of possible environmental and legal losses, was $15.2 million and $15.9 million, respectively. Actual costs could differ from the estimated reported liability. During the first nine months of 2011, cash outlays related to legal and environmental matters approximated $3.3 million compared to $2.1 million for the first nine months of 2010. Remediation of the soil at the Poland subsidiary accounted for most of the year-over-year change (see the Poland Manufacturing Site discussion in Note 8 to the condensed consolidated financial statements).
Stocks Discussed: SCL,