Stepan Company (NYSE: SCL) — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This filing reports annual results; it does not provide clear standalone fourth-quarter financial results in the supplied text. Amounts below are in U.S. dollars.
Business context
Stepan manufactures specialty and intermediate chemicals sold to other manufacturers. Its reportable segments are Surfactants (67% of 2021 sales), Polymers (30%) and Specialty Products (3%). Products serve consumer and industrial cleaning, construction and insulation, agriculture, oilfield, food and pharmaceutical markets.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $2,346.0 million | $1,869.8 million |
| Gross profit / margin | $395.8 million / 16.9% | $383.6 million / 20.5% |
| Operating income / margin | $170.8 million / 7.3% | $171.5 million / 9.2% |
| Net income attributable to Stepan | $137.8 million | $126.8 million |
| Diluted EPS | $5.92 | $5.45 |
| Operating cash flow | $72.1 million | $235.2 million |
| Capital expenditures | $194.5 million | $125.8 million |
| Cash and cash equivalents at year-end | $159.2 million | $349.9 million |
| Total debt at year-end | $363.6 million | $198.7 million |
Sales rose 25%, driven chiefly by higher average selling prices (+$415.2 million), alongside a 2% volume increase and favorable currency translation. Higher prices primarily reflected pass-through of raw-material costs and improved product/customer mix. Gross and operating margins declined as cost inflation, supply-chain and logistics constraints, and segment mix weighed on profitability.
Operating cash flow fell $163.1 million, largely reflecting a $140.5 million working-capital cash use, including increases in receivables and inventory. Cash used for investing activities was $376.8 million, including $194.5 million of capital spending and the INVISTA acquisition. Cash provided by financing was $117.3 million, including $200.0 million of new private-placement notes. Operating cash flow less capital expenditures was negative $122.3 million in 2021, versus positive $109.4 million in 2020.
Year-end current assets were $913.4 million and current liabilities were $500.5 million. The company had $343.3 million available under its $350.0 million revolving facility, with no borrowings and $6.7 million of letters of credit outstanding. Net debt was $204.4 million, versus net cash of $151.2 million in 2020. The company stated it was in compliance with its debt covenants.
FY2021 diluted EPS increased 9%; non-GAAP adjusted diluted EPS was $6.16, up from $5.68. The effective tax rate declined to 20.1% from 25.4%. The company paid $1.25 per share in dividends during 2021.
Material changes versus FY2020
- Surfactants: Sales increased 16% to $1,562.8 million, but operating income declined 2% to $166.0 million. Volume fell 5%, particularly in consumer products, amid customer inventory adjustments, weaker demand from pandemic peaks, and feedstock and logistics disruptions.
- Polymers: Sales rose 58% to $713.4 million and operating income rose 8% to $73.6 million. The January 2021 INVISTA aromatic polyester polyol acquisition, higher prices and recovering construction demand lifted sales. North American gross profit was pressured by higher feedstock and supply-chain costs.
- Specialty Products: Sales increased 6% to $69.7 million; operating income rose 2% to $14.2 million.
- Operating income was nearly flat despite higher sales. A $2.7 million loss on sale of a corporate headquarters building and higher corporate costs partly offset lower deferred-compensation expense and segment gains. FY2020 included an $18.0 million insurance recovery for the Millsdale outage; that recovery did not recur in 2021.
- The company acquired INVISTA’s aromatic polyester polyol business for $165.0 million plus working capital and VAT, paid with cash; net cash paid was $183.7 million. It also acquired a Louisiana fermentation plant for $3.5 million to support bio-surfactant development.
Outlook, risks and unusual items
- Management expected 2022 improvement in institutional cleaning, agriculture and oilfield demand; a slight recovery in consumer cleaning and personal-wash consumption after 2021 destocking; year-over-year Polymer growth; and modest Specialty Products improvement. Management also expected external pressures that affected 2021 to persist.
- 2022 capital expenditures were estimated at $350 million to $375 million, including the Pasadena alkoxylation plant, upgrades related to 1,4-dioxane requirements, and other growth and infrastructure projects.
- Key operating risks include volatile raw-material, natural-gas and electricity costs; supply and transportation disruptions; manufacturing outages; COVID-19 effects; foreign-exchange exposure; and the ability to pass cost increases through to customers.
- Regulatory exposure includes 1,4-dioxane restrictions affecting certain surfactants, possible tighter ethylene-oxide requirements, and other environmental and chemical-product regulations. The company was investing in process changes and lower-dioxane product options.
- Environmental and legal loss estimates were $23.1 million to $41.7 million; $23.1 million was accrued because management did not identify a more likely amount within the range. Maywood groundwater remediation requirements and other site costs could change, and actual costs may differ materially.
- In January 2022, weather-related disruption at Millsdale affected Polymer operations. In February 2022, the company announced that CEO F. Quinn Stepan, Jr. would retire April 25, 2022, with President and COO Scott Behrens designated as successor.
- Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting. The control assessment excluded the acquired INVISTA entity, which represented approximately 1.0% of 2021 sales and 1.8% of year-end assets.
Most important facts for investors to verify
- Whether pricing continues to offset raw-material, energy, freight and labor inflation, and whether margins recover from FY2021 levels.
- Whether operating cash flow rebounds as receivables and inventories normalize, given the sharp FY2021 working-capital use and planned capital spending.
- INVISTA integration, acquired capacity utilization and returns on the acquisition, alongside the execution and economics of the Pasadena and bio-surfactant investments.
- 2022 segment demand and volume trends, especially Surfactants consumer products and Polymers construction-related markets.
- Environmental remediation exposure, regulatory developments on 1,4-dioxane and ethylene oxide, and the company’s ability to maintain covenant headroom and refinance upcoming maturities.