Stepan Company — Q3 2015 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Stepan makes intermediate chemicals across Surfactants, Polymers and Specialty Products. Surfactants represented 68% of nine-month sales, Polymers 28% and Specialty Products 4%.
Key financial metrics
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $444.0m | $491.4m | $1,356.9m | $1,473.0m |
| Gross profit | $77.6m | $65.1m | $233.6m | $199.7m |
| Operating income | $38.8m | $22.3m | $102.6m | $81.7m |
| Net income attributable to Stepan | $24.9m | $13.5m | $63.1m | $50.9m |
| Diluted EPS | $1.09 | $0.59 | $2.76 | $2.22 |
| Gross / operating / net margin | 17.5% / 8.7% / 5.6% | 13.2% / 4.5% / 2.7% | 17.2% / 7.6% / 4.7% | 13.6% / 5.5% / 3.5% |
For the first nine months, operating cash flow was $123.5m, versus $44.9m in 2014; capital expenditures were $90.3m versus $62.4m. Cash and equivalents were $160.5m at September 30, compared with $85.2m at year-end 2014. Total debt was $341.5m, up from $273.9m; net debt was $181.0m, down from $188.7m. The company reported $120.0m available on its $125.0m revolving facility and no borrowings on that facility. Current assets were $645.4m and current liabilities $250.0m.
Material changes versus prior period
- Q3 sales fell 10%, but volume rose 7%; lower selling prices, mainly reflecting lower raw-material costs, and unfavorable currency translation more than offset volume growth. Foreign currency translation reduced Q3 sales by $38.7m and operating income by $4.1m.
- Q3 operating income increased 74% and diluted EPS rose to $1.09 from $0.59. Surfactants operating income rose 96% and Polymers rose 35%; Specialty Products moved to a $0.3m operating loss from $3.0m income.
- Nine-month sales declined 8%, while operating income rose 26%. Foreign currency translation reduced nine-month sales by $101.9m and operating income by $10.2m. Higher volume and improved Surfactants and Polymers results helped offset currency and price declines.
- Q3 and nine-month comparisons benefited from lower prior-year bad-debt and Maywood environmental charges. Nine-month 2015 results included a $2.9m gain on sale of a product line. Nine-month corporate expenses rose $18.4m, principally due to a year-over-year swing in deferred compensation expense/income and higher benefits and consulting costs.
Outlook, commentary, risks and unusual items
- Management said the company was positioned for full-year earnings growth and expected further earnings growth in 2016. It expected Surfactants to benefit from new laundry volumes, diversification and efficiency improvements; Polymer growth was expected from rigid-insulation and metal-panel polyol volumes.
- Management forecast 2015 capital expenditures of $110m–$120m, including U.S., China and Brazil capacity expansions. It said operating cash, committed facilities and cash on hand should fund foreseeable needs.
- Management cautioned that planned Q4 maintenance at the North American phthalic anhydride plant would hurt Polymer earnings, China plant commissioning costs would begin in Q4, and 2016 volumes would be below earlier expectations because of weaker construction demand in China.
- After quarter-end, Stepan and Nalco decided to dissolve their equally owned TIORCO enhanced-oil-recovery joint venture. Stepan expected a Q4 2015 pretax charge of $3m–$4m to wind down the venture and restructure its EOR activities; management expected the net earnings impact to be positive. TIORCO losses had averaged about $5m annually over the prior three years.
- Environmental and legal loss exposure was estimated at $20.6m–$41.1m, with $20.6m accrued. Certain sites remain difficult to estimate; adverse determinations could materially affect cash flows and results for a period. The Maywood remediation estimate may change as plans develop.
- Other notable items: a $100m fixed-rate 3.95% private placement loan closed in July, with principal payments beginning in 2021; the company acquired a Brazilian surfactants facility for $5.1m and purchased Sun Products manufacturing assets and land for $13.0m. A related Sun supply agreement began in Q3 and management expected it to improve North American capacity utilization.
Important facts for investors to verify
- Whether volume and operating-profit improvements persist after separating price, raw-material, foreign-exchange and prior-year comparison effects.
- Delivery and economics of the Sun supply agreement, acquired assets, and planned capacity projects, including China demand and commissioning costs.
- Actual TIORCO wind-down costs, timing and earnings impact relative to the $3m–$4m estimate.
- Environmental and legal exposures against the $20.6m accrual and the wider estimated loss range, including Maywood remediation developments.
- Debt covenant compliance, capital spending, liquidity and cash conversion as debt increased and investment spending rose.