Stepan Company — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Unaudited results; financial amounts below are in millions of U.S. dollars unless noted. Stepan produces intermediate chemicals through Surfactants, Polymers and Specialty Products.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $751.6 | $595.5 | $1,426.9 | $1,133.3 |
| Gross profit | $131.6 | $111.7 | $240.8 | $220.7 |
| Gross margin | 17.5% | 18.8% | 16.9% | 19.5% |
| Operating income | $77.6 | $56.7 | $141.0 | $110.6 |
| Operating margin | 10.3% | 9.5% | 9.9% | 9.8% |
| Net income attributable to Stepan | $52.1 | $43.3 | $96.9 | $83.9 |
| Diluted EPS | $2.26 | $1.85 | $4.19 | $3.59 |
Q2 sales rose 26%, primarily from higher average selling prices reflecting raw-material and logistics cost pass-through and product/customer mix; consolidated volume declined 1%. For the first half, sales also rose 26%, while volume declined 1%. Currency translation reduced sales by $25.6 million in Q2 and $37.3 million in the first half.
Q2 segment operating income was $48.2 million for Surfactants (up 5%), $33.9 million for Polymers (up 47%) and $9.9 million for Specialty Products (up 41%). First-half segment operating income was $102.0 million (up 3%), $48.0 million (up 17%) and $13.6 million (up 41%), respectively. Polymers was the largest contributor to Q2 operating-income growth.
Margins were mixed: gross margin declined year over year in both reporting periods, while operating margin improved slightly. Net margin was approximately 6.9% in Q2 versus 7.3% and 6.8% for the first half versus 7.4% in 2021.
Cash flow, liquidity and debt
- First-half operating cash flow was $38.2 million, versus $24.7 million in 2021. Receivables used $111.1 million of cash and inventories used $38.6 million; accounts payable and accrued liabilities provided $43.3 million.
- Capital expenditures were $129.5 million, compared with $74.9 million. Investing cash outflow was $126.3 million, versus $261.5 million in 2021, which included the INVISTA acquisition. Financing provided $128.1 million. Cash increased $35.4 million to $194.6 million.
- At June 30, current assets were $1,087.4 million and current liabilities $638.2 million (current ratio approximately 1.70). Receivables were $518.8 million and inventories $340.7 million.
- Total debt was $526.0 million, up from $363.6 million at December 31, 2021; net debt was $331.4 million, up from $204.4 million. Net debt to net debt plus equity rose to 22.7% from 16.0%. Current debt maturities were $142.5 million.
- The June 2022 credit agreement provides $350 million of revolving capacity and a $100 million delayed-draw term facility, both maturing in 2027. At quarter-end, $100 million was borrowed, $7.0 million of letters of credit were outstanding and $343.0 million was available. Management reported covenant compliance.
Material changes and unusual items
- Q2 operating income increased 37%; first-half operating income increased 28%. Higher pricing and segment performance contributed, alongside lower corporate expenses, notably deferred compensation income versus expense in the prior year.
- Q2 other, net changed from $2.8 million income to $5.4 million expense, including $4.3 million of investment losses and $1.5 million of foreign-exchange losses. First-half other, net was a $7.0 million expense, including investment losses.
- A $1.0 million noncash goodwill impairment was recorded for the Philippines Surfactants reporting unit, attributed mainly to lost share at a major customer and higher unit overhead costs.
- Q2 reported net income was $52.1 million; management’s non-GAAP adjusted net income was $53.0 million. For the first half, reported net income was $96.9 million and adjusted net income was $93.7 million. The filing’s reconciliations include deferred compensation, restructuring, cash-settled stock appreciation rights, environmental remediation and related tax effects.
- The Millsdale plant experienced a power outage in January, disrupting Polymer production and causing force majeure for select products; production resumed in February and force majeure was lifted in April. China COVID restrictions also weighed on Polymer volumes.
Outlook, risks and contingencies
Management expected Surfactant demand in functional-product end markets to improve versus 2021, Polymer growth to benefit from energy-conservation efforts and stricter building codes, and Specialty Products results to improve. It also expected ongoing inflation and supply-chain challenges, including raw-material availability and transportation constraints. No numerical earnings or revenue guidance is provided in the filing text.
Management estimated 2022 capital expenditures of $350–$375 million, including the Pasadena, Texas alkoxylation plant, U.S. 1,4-dioxane regulatory upgrades and growth, infrastructure and optimization projects. It stated that cash, operations and committed facilities should fund anticipated needs for the foreseeable future.
Environmental and legal loss exposure was estimated at $23.0–$42.6 million; $23.0 million was accrued at June 30 because management did not consider any amount within the range more likely than another. The filing cautions that actual costs may differ and some sites cannot be reliably estimated. Illinois filed a Millsdale environmental complaint in June seeking penalties and operational obligations; the company could not predict the outcome. On July 29, parties were notified of a possible Wilmington-site natural-resource-damages claim, also not yet quantifiable. The filing identifies risks including raw-material and energy costs and availability, supply and transport disruptions, foreign exchange, demand and competition, environmental regulation, litigation, capital-project execution, cyber risks and debt covenants; it specifically notes potential effects of the Russia-Ukraine conflict on European energy supply and prices.
Important facts for investors to verify
- Whether pricing continues to offset raw-material, logistics and other inflation, and whether volumes and gross margins recover.
- Working-capital conversion and cash generation relative to the $350–$375 million full-year capital-spending estimate.
- Debt maturities, borrowing costs, available credit and continued compliance with covenants as leverage has increased.
- Developments and potential financial exposure from the Millsdale complaint, Wilmington claims and other environmental remediation matters.
- Progress on the Pasadena plant and 1,4-dioxane upgrades, and recovery of Asian volumes after customer losses and China restrictions.