Stepan Company — Q3 2020 Form 10-Q
Business context and period. The filing covers the quarter and nine months ended September 30, 2020. Stepan makes intermediate chemicals across Surfactants, Polymers and Specialty Products. Amounts below are U.S. dollars; financial-statement amounts are unaudited.
Key financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $464.5M | $451.6M | $1,375.0M | $1,413.8M |
| Gross profit | $97.1M | $77.4M | $274.8M | $255.0M |
| Operating income | $42.4M | $28.0M | $127.0M | $98.8M |
| Net income attributable to Stepan | $33.2M | $25.9M | $96.4M | $81.1M |
| Diluted EPS | $1.43 | $1.11 | $4.15 | $3.48 |
- Q3 sales rose 3%; gross margin increased to 20.9% from 17.1%, and operating margin to 9.1% from 6.2%. Nine-month sales fell 3%, while gross margin rose to 20.0% from 18.0% and operating margin to 9.2% from 7.0%.
- Q3 consolidated volume increased 5%; higher volume and pricing added to sales, partly offset by $9.7M of unfavorable currency translation. Nine-month volume increased 2%, but lower selling prices and currency translation reduced sales by $27.8M and $38.2M, respectively.
- Surfactants drove the improvement: Q3 sales increased 11% and operating income 109%, to $333.8M and $41.2M. Polymers sales fell 14% and operating income 4%; Specialty Products sales fell 17% and operating income 30%.
- For the first nine months, Surfactants sales rose 3% and operating income 41%. Polymers sales declined 15% and operating income 22%; Specialty Products sales declined 16% and operating income 23%.
- Management-reported adjusted diluted EPS, a non-GAAP measure, was $1.56 in Q3 versus $1.20; nine-month adjusted diluted EPS was $4.25 versus $4.02. Adjustments include items such as deferred compensation, restructuring and, in 2019, environmental remediation and early debt repayment.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $141.7M, versus $132.6M in 2019. Capital expenditures were $84.9M, versus $70.8M; investing cash outflow was $98.1M. Financing cash outflow was $44.6M, including $18.5M of dividends and $13.8M of share repurchases.
- Cash and equivalents were $310.4M at September 30, down from $315.4M at year-end 2019. Receivables used $28.4M of operating cash; working capital was a net cash use of $23.2M.
- Total debt was $207.9M, down from $222.1M at year-end. Cash exceeded debt by approximately $102.4M. The $350M revolving facility had no borrowings, $344.7M available and $5.3M of letters of credit outstanding. The company reported compliance with debt covenants.
- Capital expenditures were forecast at $100M–$120M for 2020. Management said cash, operating cash flow and committed facilities should fund anticipated needs, dividends and planned commitments.
Outlook, commentary and material items
- Management expected Surfactants to continue benefiting from demand for cleaning, disinfection and personal-wash products; agricultural demand was expected to approximate the prior year, while oilfield demand was expected to remain weak through year-end.
- Management expected Polymers to remain challenged by COVID-related construction delays and cancellations, while describing its longer-term prospects as attractive. Full-year Specialty Products results were expected to approximate 2019. No quantified earnings or sales guidance was provided.
- A January power disruption and subsequent wastewater-treatment issue at the Millsdale, Illinois facility caused production interruptions and force majeure declarations; all production lines were operational before the end of Q1. In Q3, Stepan recognized a $5.0M partial insurance recovery, benefiting Surfactants by $2.2M and Polymers by $2.8M. The remaining claim was still being pursued.
- Polymers also benefited from a $1.2M Q3 government reimbursement related to a 2012 China joint-venture shutdown; nine-month reimbursement was $2.3M. The timing and recurrence of these recoveries are uncertain.
- COVID-19 supported consumer-cleaning demand but also created operating, supply-chain and customer-demand risks. The company disclosed temporary pandemic-related facility interruptions and said the pandemic’s overall impact could not be reasonably estimated.
- In 2020, Stepan acquired Logos Technologies’ bio-surfactant assets for $2.0M and Clariant’s Mexican anionic surfactant business and selected equipment for a $14.0M purchase price. Both were assigned to Surfactants. The filing said the prior oilfield demulsifier acquisition was not expected to be accretive to 2020 earnings.
- Environmental and legal loss estimates were $22.4M–$41.1M; $22.4M was accrued at the low end of the range. Management said additional reserves may be needed, and actual costs could differ materially. Certain sites’ costs could not be estimated.
- The Q3 effective tax rate was 23.2%, versus 5.7%, principally because a 2019 research-credit benefit did not recur and the geographic mix of income was less favorable. Nine-month rates were 23.7% versus 17.3%.
Important facts for investors to verify
- Progress and eventual recoveries on the Millsdale insurance claim, and how much of Q3 earnings benefited from insurance and the China reimbursement.
- Whether elevated cleaning-related Surfactants demand and margins persist, and the pace of recovery in Polymers as construction markets and phthalic anhydride volumes evolve.
- Cash conversion, receivables and inventory needs, particularly alongside planned capital spending of $100M–$120M.
- Integration and performance of the 2020 acquisitions, including preliminary purchase accounting for Clariant Mexico.
- Environmental remediation exposure: the recorded $22.4M accrual is below the disclosed possible-loss ceiling of $41.1M, and some site exposures remain unquantified.