Stepan Company — Q1 2022 Form 10-Q
Business context and period: The filing covers the three months ended March 31, 2022, compared with Q1 2021. Stepan produces intermediate chemicals and reports Surfactants, Polymers and Specialty Products. All dollar amounts below are U.S. dollars.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $675.3 million | $537.7 million | Up 26% |
| Gross profit | $109.2 million | $109.0 million | Nearly flat |
| Operating income | $63.3 million | $53.9 million | Up 17% |
| Net income | $44.8 million | $40.6 million | Up 10% |
| Diluted EPS | $1.93 | $1.74 | Up 11% |
| Adjusted net income, non-GAAP | $40.7 million | $42.4 million | Down 4% |
| Adjusted diluted EPS, non-GAAP | $1.76 | $1.82 | Down 3% |
Gross margin was approximately 16.2%, versus 20.3% a year earlier; operating margin was approximately 9.4%, versus 10.0%. Sales gains were driven by higher average selling prices, principally reflecting raw-material cost pass-through and mix; consolidated volume was flat. Foreign currency translation reduced the year-over-year sales change by $11.6 million.
- Surfactants: Sales rose 26% to $468.3 million; segment operating income increased 1% to $53.8 million. Lower North American margins and higher expenses offset gains in other regions.
- Polymers: Sales rose 24% to $187.1 million, while segment operating income fell 21% to $14.1 million. A January power outage at Millsdale reduced production and increased sourcing, logistics and maintenance costs.
- Specialty Products: Sales increased 21% to $19.9 million and operating income rose 40% to $3.7 million, aided by order timing and improved MCT product margins.
Cash flow, liquidity and debt
- Operating cash flow was a use of $20.9 million, compared with a $11.7 million use in Q1 2021. Receivables used $80.3 million of cash, reflecting working-capital needs.
- Investing cash outflow was $57.1 million, including $60.3 million of capital expenditures. Financing provided $154.8 million, including $75.0 million of new private-placement notes and increased revolving-credit borrowings.
- Cash was $236.0 million at March 31, 2022, up from $159.2 million at year-end. Total debt was $537.1 million, versus $363.6 million at year-end; net debt was $301.1 million, versus $204.4 million.
- The company had $243.0 million available under its $350 million revolving credit facility, which expires January 30, 2023. It reported compliance with debt covenants. The current portion of debt was $139.4 million.
- Q1 dividends paid were $7.5 million ($0.335 per share); share repurchases totaled $9.9 million. Approximately $140.1 million remained under the repurchase authorization.
Outlook, risks and notable items
- Management expected Surfactant demand in functional markets, including agriculture and oilfield, to improve versus 2021; expected Polymer growth versus 2021; and expected Specialty Products to improve slightly. No earnings or sales guidance was provided.
- Management identified continuing supply-chain challenges, including raw-material availability, inflation and transportation constraints. Estimated 2022 capital expenditures were $350–$375 million, including the Pasadena, Texas alkoxylation plant and regulatory-related equipment upgrades.
- The Millsdale outage disrupted selected Polymer products; production resumed in February and force majeure was lifted April 15, 2022. COVID-related lockdowns also affected Asian sales volumes. Other identified risks include commodity and energy cost volatility, plant disruptions, demand shifts, foreign exchange, litigation, environmental compliance and debt covenant constraints.
- Environmental and legal loss exposure was estimated at $23.1–$41.7 million; $23.1 million was accrued. Management cautioned that actual costs could differ and some sites’ potential costs could not be estimated.
- Reported earnings included volatile deferred-compensation effects: Q1 2022 recognized $7.5 million of deferred-compensation income, compared with $2.7 million of expense in Q1 2021. Adjusted results, which exclude specified items, declined year over year. The CEO retired effective April 25, 2022; accelerated vesting of certain equity grants contributed to stock-based compensation expense.
Investor verification priorities
- Assess whether pricing pass-throughs can sustain margins as input and logistics costs evolve, particularly given flat volume and lower gross margin.
- Track Polymer recovery after the Millsdale outage and the effect of its costs and force-majeure resolution.
- Monitor operating cash conversion, receivables and the funding of the $350–$375 million capital program, alongside higher debt and the 2023 revolving-facility expiry.
- Review adjusted-to-GAAP earnings reconciliations and the impact of deferred compensation and investment valuation changes.
- Follow environmental remediation estimates and any changes to accrued contingencies, and verify progress against management’s segment outlook.