Stepan Company — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. This is an annual report; it does not provide a standalone Q4 summary. Stepan makes specialty and intermediate chemicals across Surfactants, Polymers and Specialty Products. Surfactants represented 68% of 2022 sales, Polymers 28% and Specialty Products 4%.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $2,773.3 million | $2,346.0 million | +18% |
| Gross profit | $427.1 million | $395.8 million | +8% |
| Operating income | $207.3 million | $170.8 million | +21% |
| Net income attributable to Stepan | $147.2 million | $137.8 million | +7% |
| Diluted EPS | $6.38 | $5.92 | +8% |
| Adjusted net income (non-GAAP) | $153.5 million | $143.5 million | +7% |
| Adjusted diluted EPS (non-GAAP) | $6.65 | $6.16 | +8% |
Gross margin was approximately 15.4%, operating margin 7.5% and net margin 5.3%, calculated from reported figures. Higher average selling prices added $676.2 million to the sales comparison, largely reflecting pass-through of higher input and logistics costs and improved mix. Lower volume reduced sales by $153.5 million; foreign currency translation reduced them by $95.4 million. Consolidated sales volume fell 7%.
Segments and material year-over-year changes
- Surfactants: Sales rose 20% to $1,882.7 million, while operating income declined 2% to $162.7 million. Six-percent lower volume, input and transportation costs not fully recovered, and foreign exchange pressured results.
- Polymers: Sales rose 11% to $789.1 million and operating income rose 13% to $82.9 million. Higher margins and price recovery were partly offset by 7% lower volume, weaker construction demand, destocking, currency effects and a January 2022 Millsdale power outage.
- Specialty Products: Sales rose 45% to $101.4 million and operating income increased to $29.9 million from $14.2 million, mainly on improved margins and mix in medium-chain triglycerides.
- Higher corporate earnings were partly aided by a swing in deferred compensation accounting: the company recognized $9.4 million of income in 2022 versus $6.9 million of expense in 2021. Conversely, net interest expense rose to $9.8 million from $5.8 million, and the effective tax rate increased to 22.0% from 20.1%.
Cash flow, liquidity and debt
- Cash from operating activities was $160.8 million, up from $72.1 million. Working capital used $75.7 million of cash, including a $99.4 million inventory use.
- Capital expenditures were $301.6 million, versus $194.5 million in 2021. Investing activities used $308.1 million; financing activities provided $166.2 million.
- Cash and cash equivalents were $173.8 million at year-end, including $97.1 million held by non-U.S. subsidiaries.
- Total debt was $587.1 million, up from $363.6 million; net debt was approximately $413.3 million, versus $204.4 million. Debt-to-total-capitalization rose to 33.5% from 25.3%. The company reported $249.8 million available under its $350 million revolving facility and $100 million delayed-draw term facility, after outstanding borrowings and letters of credit.
- Debt included $397.9 million of senior unsecured notes and $189.2 million of credit-agreement borrowings, including a $98.8 million delayed-draw term loan. The company said it was in compliance with material debt covenants at year-end.
- Dividends paid were $30.6 million; open-market share repurchases totaled $24.9 million. The annual dividend was $1.37 per share.
Outlook, risks and unusual items
- Management expects 2023 conditions to remain challenging due to elevated inflation and high interest rates, which may weigh on consumer demand and construction. Higher costs, depreciation and pre-startup expenses for Pasadena may make earnings growth difficult. Management expects to pursue productivity, pricing where possible, and improved product and customer mix; no quantified earnings guidance is provided.
- 2023 capital expenditures were estimated at $240–$270 million, including Pasadena construction, 1,4-dioxane-related upgrades, growth initiatives and infrastructure work. Pasadena startup was delayed from Q4 2023 to the first half of 2024, with cost inflation also raising project cost expectations.
- Environmental and legal loss estimates were $32.6–$56.4 million; $32.6 million was accrued, up from $23.1 million. The increase primarily reflected revised Maywood, New Jersey remediation estimates. Management anticipates higher remediation cash spending in 2023; ultimate costs may differ materially. The Maywood groundwater remedy remains unresolved, and a possible Wilmington, Massachusetts natural-resource-damages claim has an uncertain outcome.
- Other key risks include hazardous chemical manufacturing and potential outages, raw-material and energy volatility, transportation constraints, regulation of chemicals including 1,4-dioxane and ethylene oxide, customer reformulation, cyclicality in construction and consumer markets, foreign exchange, cybersecurity and debt/covenant exposure.
- A $1.0 million goodwill impairment was recorded for the Philippines Surfactants reporting unit, attributed to lost share at a major customer and higher unit overhead. The 2022 Millsdale outage temporarily disrupted Polymer production; force majeure was declared for select products and lifted in April.
- Independent auditors issued unqualified opinions on the financial statements and internal controls. Environmental contingencies were identified as a critical audit matter.
Important facts for investors to verify
- Whether higher selling prices and improved mix can offset continued volume weakness, input-cost pressure and customer destocking.
- Pasadena project cost, schedule, startup expenses and expected contribution once operational.
- Maywood remediation developments, changes in the recorded environmental reserve and the potential Wilmington claim.
- Debt maturities, borrowing costs, covenant headroom and the effect of higher rates on floating-rate debt.
- Cash conversion and inventory levels, including whether working-capital demands normalize in 2023.
- Underlying earnings excluding non-GAAP adjustments, especially market-sensitive deferred compensation and remediation expenses.