Stepan Company (NYSE: SCL) — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter earnings report. Stepan makes specialty and intermediate chemicals across Surfactants, Polymers and Specialty Products.
Financial performance
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $1,869.8 million | $1,858.7 million | Up 1% |
| Gross profit / margin | $383.6 million / 20.5% | $339.7 million / 18.3% | Margin up 2.2 percentage points |
| Operating income / margin | $171.5 million / 9.2% | $127.3 million / 6.8% | Up 35%; margin up 2.4 points |
| Net income attributable to Stepan | $126.8 million | $103.1 million | Up 23% |
| Diluted EPS | $5.45 | $4.42 | Up 23% |
| Operating cash flow | $235.2 million | $218.4 million | Up $16.8 million |
| Capital expenditures | $125.8 million | $105.6 million | Up $20.2 million |
Adjusted net income, a non-GAAP measure, was $132.0 million, or $5.68 per diluted share, versus $119.4 million, or $5.12, in 2019. The company reported an effective tax rate of 25.4%, compared with 18.1%; the increase reflected, among other things, a one-time tax cost related to cash repatriation and the absence of a favorable 2019 tax credit benefit.
Segment results
| Segment | 2020 sales | Sales change | 2020 operating income | Operating income change |
|---|---|---|---|---|
| Surfactants | $1,351.7 million | Up 6% | $169.1 million | Up 38% |
| Polymers | $452.3 million | Down 12% | $68.2 million | Down 2% |
| Specialty Products | $65.8 million | Down 11% | $14.0 million | Down 15% |
Surfactants benefited from stronger demand for cleaning, disinfection and personal-wash products, as well as improved mix and margins. Polymers faced lower volume and selling prices, including weaker rigid-polyol demand from COVID-related construction delays and cancellations. Specialty Products’ lower results were primarily attributed to weaker margins in medium-chain triglycerides.
Liquidity, debt and capital
At year-end, cash and cash equivalents were $349.9 million, versus total debt of $198.7 million; net cash (cash less debt) was $151.2 million. Debt declined from $222.1 million in 2019. The company had no borrowings under its $350 million revolving credit facility and $343.8 million available after outstanding letters of credit. Current maturities of debt were $37.9 million. Management said cash, operating cash flow and committed credit facilities should fund foreseeable needs.
Cash dividends paid were $25.4 million in 2020. The company repurchased 173,956 shares for $15.3 million during the year. It forecast 2021 capital expenditures of $150 million to $170 million.
Material changes and unusual items
- Consolidated sales volume increased 3%, but foreign-currency translation reduced the year-over-year sales comparison by $45.7 million. Higher volume contributed $49.6 million and higher average selling prices $7.1 million.
- A January 2020 power disruption and related wastewater-treatment issues at the Millsdale, Illinois facility caused production interruptions and temporary force majeure declarations. All production lines were operating by the end of the first quarter. Stepan recognized an $18.0 million pretax insurance recovery, reducing cost of sales; $5.2 million was assigned to Surfactants and $12.8 million to Polymers.
- Polymers’ North American phthalic anhydride volume was affected by the Millsdale outage, customer share loss and soft demand. The segment also incurred higher raw-material costs related to Illinois River lock closures.
- The 2020 Clariant Mexico anionic-surfactant business acquisition cost $14.0 million, and the Logos bio-surfactant asset acquisition cost $2.0 million. Both were funded with cash on hand.
- After year-end, Stepan acquired INVISTA’s aromatic polyester polyol business for $165 million plus working capital, and acquired a Louisiana fermentation plant for $3.5 million. These transactions are subsequent events and were not part of 2020 operating results.
Outlook, risks and contingencies
Management expected heightened cleaning, disinfection and personal-wash demand to continue supporting Surfactants in 2021; agricultural and oilfield demand was expected to improve slightly. Management anticipated a modest recovery in rigid-polyol demand and slight improvement in Specialty Products. It described long-term Polymer prospects as attractive, citing energy conservation and building-code trends. The filing gives no quantified earnings or revenue guidance.
Key risks include the duration and effects of COVID-19; plant outages and hazardous chemical manufacturing; raw-material, energy and transport cost volatility; foreign exchange; competitive and customer-reformulation pressures; and environmental, product-registration and other regulatory requirements. The filing also highlights potential demand effects from regulation of 1,4-dioxane and ethylene oxide. Management said climate rules then existing or pending were not reasonably likely to have a material effect, based on information available at filing.
Environmental and legal loss estimates totaled $22.9 million to $41.1 million at year-end; Stepan accrued $22.9 million, the low end of the range because management did not consider any amount more likely than another. The company noted actual costs could differ materially, particularly at the Maywood and Wilmington sites. Deloitte identified environmental contingencies as a critical audit matter. Deloitte gave unqualified opinions on the financial statements and internal controls; management and the auditor reported effective financial reporting controls.
Most important facts for investors to verify
- Whether strong Surfactants demand and the improved segment margins persisted after 2020, and how much of the 2020 profit increase depended on the $18 million insurance recovery.
- The pace and durability of recovery in rigid polyols and other Polymer end markets, and the effects of Millsdale reliability and transport constraints.
- Integration, purchase accounting, financing and returns for the $165 million INVISTA acquisition and the bio-surfactant investments.
- Actual 2021 capital spending versus the $150 million–$170 million estimate, and the effect on cash balances, debt and shareholder distributions.
- Updates to environmental remediation estimates, including groundwater decisions at Maywood and potential exposure at Wilmington and other sites.
- Effects of COVID-19, currency movements, raw-material and energy prices, and 1,4-dioxane and ethylene oxide regulation on costs, demand and operations.