Stepan Company — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited. Stepan produces intermediate chemicals across surfactants, polymers and specialty products. Comparisons are with Q1 2013 unless otherwise noted. Dollar amounts below are in millions except per-share data.
Financial results and position
| Metric | Q1 2014 | Q1 2013 / comparison |
|---|---|---|
| Net sales | $477.4 | $456.5; up 4.6% |
| Gross profit / margin | $63.0 / 13.2% | $72.7 / 15.9% |
| Operating income / margin | $22.5 / 4.7% | $28.3 / 6.2% |
| Net income attributable to Stepan | $13.0 | $19.0; down 32% |
| Diluted EPS | $0.57 | $0.83 |
| Dividends declared per share | $0.17 | $0.16 |
| Operating cash flow | $(9.0) | $(9.9) |
| Capital expenditures | $20.5 | $21.0 |
Cash and liquidity: Cash was $96.7 at March 31, down $36.6 from year-end 2013. Current assets were $613.5 and current liabilities $269.2. The company reported $122.0 of availability under its $125.0 revolving facility, with no borrowings and $3.0 of letters of credit outstanding.
Debt: Total debt was $269.6, including $35.1 current maturities; net debt was $172.9, up $35.6 from year-end, primarily reflecting lower cash. Debt-to-total debt plus equity was 32.3%. Management said the company was compliant with its loan covenants at quarter-end and expected to remain compliant through 2014.
Material changes and operating performance
- Sales increased mainly because higher average selling prices added $33.2; lower volume reduced sales by $10.6 and currency translation by $1.7. Overall volume declined 2%.
- Gross profit fell $9.7, primarily from lower surfactants profit amid North American winter-related disruption, higher maintenance, utilities and transportation costs, and lower sales volume. Operating expenses fell $3.9, helped by a $5.1 year-over-year decrease in deferred compensation expense.
- Surfactants: Sales declined 1% to $335.7; segment operating income fell 38% to $18.3. North American volume weakness included lower biodiesel sales and weather-related disruption.
- Polymers: Sales rose 24% to $119.1, benefiting from the 2013 Bayer polyester-resins acquisition and European growth. Segment operating income was nearly flat at $10.8.
- Specialty products: Sales increased 10% to $22.6 despite a 9% volume decline; operating income rose 42% to $4.0 on higher prices and a more profitable sales mix.
- Net interest expense increased $0.8 to $3.0, reflecting higher average debt after the 2013 private placement used partly to fund the Bayer acquisition. The effective tax rate increased to 28.1% from 24.8%, principally because certain U.S. tax credits expired.
Outlook, risks and unusual items
- Management said March and April business appeared back on track, but the weak first quarter made exceeding 2013 full-year earnings from operations a challenge. No specific earnings forecast was provided.
- Management expected surfactant earnings to improve as the year progressed, citing agricultural sales, Brazilian consumer-product growth, enhanced-oil-recovery demand and efficiency gains. It expected continued polymer growth, supported by U.S. and European conditions, new customers and the integrated Bayer business.
- 2014 capital expenditures were estimated at $100–$110, including capacity expansions in Brazil, Germany, Singapore and the United States. Management said cash, operating funds and committed credit facilities should cover planned needs for the foreseeable future.
- The company recorded $0.9 of accelerated depreciation in Q1 related to a previously approved Canadian surfactants restructuring; it expected approximately $0.9 more in Q2. The plan includes eliminating about 20 positions and was expected to be completed in Q3 2014.
- Environmental and legal losses were estimated at $10.2–$29.0, with $15.2 accrued. Management considered reserves adequate, but said adverse outcomes at certain sites could materially affect cash flows and results in a period. A multistate unclaimed-property examination was in an early stage and any liability was not determinable.
- Severe winter weather caused higher costs and some lost sales. Other disclosed exposures include raw-material price and working-capital fluctuations, foreign exchange, interest rates, customer credit risk, and competition. Management reported no material changes to the risk factors in the 2013 Form 10-K.
Key facts for investors to verify
- Whether the stated post-winter recovery and expected segment growth materialized, particularly in North American surfactants.
- Whether lower surfactants margins and elevated manufacturing costs reversed, and how the Bayer acquisition contributed to polymer earnings.
- Actual 2014 capital spending versus the $100–$110 estimate, and the timing and cost of planned capacity expansions.
- Cash conversion, working-capital needs, net-debt progression and compliance with debt covenants.
- Developments in environmental remediation estimates, including the Maywood site, and the unclaimed-property examination.