Stepan Company — Q1 2021 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2021, compared with Q1 2020. Stepan manufactures intermediate chemicals through Surfactants, Polymers and Specialty Products. Amounts below are U.S. dollars; financial statement amounts are in millions unless noted.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $537.7 | $450.0 | +19.5% |
| Gross profit | $109.0 | $79.3 | +37.5% |
| Operating income | $53.9 | $40.0 | +34.8% |
| Net income attributable to Stepan | $40.6 | $27.5 | +47% |
| Diluted EPS | $1.74 | $1.18 | +47% |
| Operating cash flow | ($11.7) | ($6.5) | Greater cash use |
| Capital expenditures | $37.6 | $33.2 | +$4.4 |
Gross margin was approximately 20.3%, versus 17.6%; operating margin was approximately 10.0%, versus 8.9%. The company reported non-GAAP adjusted net income of $42.4 million, or $1.82 per diluted share, compared with $24.2 million, or $1.04, in Q1 2020.
Sales rose 20%: higher average selling prices contributed $55.0 million, increased volume $28.6 million, and currency translation $4.2 million. Management attributed price increases mainly to product/customer mix and pass-through of higher raw-material costs. Consolidated volume increased 6%.
| Segment | Sales Q1 2021 | Sales change | Operating income Q1 2021 | Operating income change |
|---|---|---|---|---|
| Surfactants | $370.9 million | +13% | $53.2 million | +47% |
| Polymers | $150.4 million | +41% | $18.0 million | +139% |
| Specialty Products | $16.4 million | Flat | $2.6 million | −34% |
Cash and cash equivalents were $150.7 million at March 31, down from $349.9 million at year-end 2020. Current assets were $797.7 million and current liabilities $464.1 million. Total debt was $248.4 million, including $87.5 million current maturities, versus $198.7 million at year-end. Net debt was $97.7 million, compared with net cash of $151.2 million at year-end. The $350 million revolving facility had $45.0 million drawn and $298.2 million available; the facility expires January 2023. The company said it was in compliance with debt covenants.
Material changes and unusual items
- Q1 cash used in investing was $223.8 million, including $184.0 million paid net of acquired cash for INVISTA’s aromatic polyester polyol business and $3.5 million for a fermentation plant. The INVISTA purchase price allocation is preliminary; recorded goodwill was $65.1 million and identifiable intangible assets $45.5 million.
- Polymers benefited from the INVISTA acquisition, recovering construction and re-roofing demand, and the non-recurrence of 2020’s Millsdale plant power outage. The outage had disrupted production and led to force majeure in certain product lines in Q1 2020.
- Surfactant sales volume was flat. North American volume fell 5%, partly because Texas severe weather disrupted supply chains; growth in other regions offset the decline.
- Corporate expenses increased, including a $10.0 million unfavorable year-over-year swing in deferred compensation, primarily reflecting the change in Stepan’s share price. Q1 2021 also included acquisition-related costs. Other, net improved versus Q1 2020 mainly because investment results were stronger.
- Specialty Products operating income declined due mainly to lower unit margins associated with raw-material shortages and manufacturing challenges in the medium-chain triglycerides product line.
Outlook, risks and contingencies
Management expected North American consumer-product surfactant volumes to recover after Texas weather disruptions, with continued demand for cleaning, disinfection and personal-wash products and improving agricultural and oilfield demand. It expected global rigid-polyol demand to continue recovering and the Polymer segment to grow year over year, supported by the INVISTA acquisition. Management expected Specialty Products results to improve slightly year over year. No numerical earnings or revenue guidance was provided.
Planned 2021 capital expenditures were estimated at $150–$170 million. Management said cash from operations, available credit and cash on hand should fund anticipated capital needs, working capital, dividends and other commitments; it also considered liquidity sufficient for potential working-capital increases.
Environmental and legal loss estimates ranged from $22.9 million to $41.3 million; $22.9 million was accrued because management considered no amount in the range more likely than another. Actual costs could differ materially, and costs for certain sites could not be estimated. Risks highlighted include COVID-19 effects, production interruptions, raw-material and energy cost/supply volatility, transportation disruptions, acquisition integration, environmental regulation, litigation, currency movements, and access to capital and compliance with debt covenants.
Important facts for investors to verify
- How much of sales and earnings growth reflects underlying pricing, volume and mix versus the INVISTA acquisition and the comparison with the 2020 Millsdale outage?
- Whether working-capital needs—particularly receivables and inventories—convert into operating cash flow as sales expand.
- The final INVISTA purchase-price allocation, acquired-business contribution and integration results, as well as the timing and returns of planned capital spending.
- Whether North American surfactant volumes recover and raw-material cost pass-through sustains margins, while monitoring Specialty Products supply and manufacturing constraints.
- Developments in environmental remediation estimates, especially the Maywood site, and any effect on cash requirements beyond the accrued amount.
- Debt maturities, revolving-facility usage, covenant headroom and the company’s ability to maintain liquidity while funding investment and dividends.