Stepan Company (NYSE: SCL) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Comparative periods are the corresponding 2020 periods. Amounts below are in U.S. dollars; financial amounts are in millions unless noted.
Business context
Stepan makes intermediate chemicals across Surfactants, Polymers and Specialty Products. Surfactants represented 66% and Polymers 31% of nine-month 2021 sales. The company completed its acquisition of INVISTA’s aromatic polyester polyol business in January 2021, adding manufacturing sites in North Carolina and the Netherlands to the Polymers segment.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $602.7 | $464.5 | $1,735.9 | $1,375.0 |
| Gross profit | $91.9 | $97.1 | $312.6 | $274.8 |
| Operating income | $40.2 | $42.4 | $150.8 | $127.0 |
| Net income attributable to Stepan | $36.9 | $33.2 | $120.8 | $96.4 |
| Diluted EPS | $1.59 | $1.43 | $5.19 | $4.15 |
| Operating cash flow | Not separately provided | Not separately provided | $21.4 | $141.7 |
Margins: Gross margin was 15.2% in Q3 2021 versus 20.9% in Q3 2020; operating margin was 6.7% versus 9.1%. For the first nine months, gross margin was 18.0% versus 20.0%, and operating margin was 8.7% versus 9.2%. Q3 net margin was 6.1% versus 7.1%; nine-month net margin was 7.0% versus 7.0%.
Q3 segment results: Sales rose 30%, largely from higher average selling prices reflecting raw-material cost pass-through and favorable mix, plus the INVISTA acquisition’s contribution to Polymers. Sales volume increased 1% overall; Surfactants volume fell 6%, while Polymers and Specialty Products volume rose 27% and 9%. Segment operating income declined 13% to $56.6 million: Surfactants fell 16% to $34.5 million, Polymers fell 12% to $19.8 million, and Specialty Products rose 53% to $2.4 million.
Nine-month segment results: Sales increased 26%. Surfactants sales increased 15%, Polymers 61% and Specialty Products 16%. Segment operating income increased 15% to $206.3 million, led by Polymers (+34%), with Surfactants up 6% and Specialty Products up 37%.
Cash, debt and liquidity
- Cash and cash equivalents were $105.3 million at September 30, 2021, down from $349.9 million at December 31, 2020.
- Nine-month operating cash flow was $21.4 million, primarily pressured by working-capital investment: receivables used $96.8 million and inventories used $63.8 million. Capital expenditures were $119.5 million.
- Investing activities used $306.0 million, including $184.5 million for business acquisitions, net of cash acquired. Financing activities provided $43.0 million, including $100 million from new private-placement notes.
- Total debt was $279.8 million, compared with $198.7 million at year-end 2020; net debt was $174.6 million versus net cash of $151.2 million. Debt-to-debt-plus-equity was 20.9%.
- The $350 million revolving credit facility had $6.0 million drawn and $336.9 million available, after outstanding letters of credit. It expires January 30, 2023. Management said the company was in compliance with debt covenants and expects cash, operations and committed credit facilities to fund foreseeable needs.
Material changes and unusual items
- Q3 operating income declined 5% despite 30% sales growth. Higher selling prices did not fully offset supply-chain disruption, higher feedstock and transportation costs, and lower Surfactants consumer-product volumes.
- Q3 reported net income benefited from a 6.1% effective tax rate versus 23.2% a year earlier, reflecting non-recurring Brazilian entity-merger and U.S. tax benefits. Management reported adjusted net income of $36.4 million in both quarters; adjusted diluted EPS was $1.57 versus $1.56.
- Prior-year Q3 segment results included partial insurance recoveries of $2.2 million in Surfactants and $2.8 million in Polymers related to the 2020 Millsdale power outage, plus a $1.2 million China government settlement in Polymers.
- Environmental and legal loss estimates were $22.9 million to $41.3 million; the company accrued $22.9 million, the low end of the range. Management cautioned that actual costs could differ materially.
- On October 19, 2021, the board authorized a new share repurchase program of up to $150 million, replacing the prior authorization.
Outlook and principal risks
Management expected institutional cleaning, agricultural and oilfield Surfactants demand to improve versus 2020, but not enough to offset lower consumer cleaning, disinfection and personal-wash demand compared with the pandemic peak. It expected continued recovery in rigid polyols, supported by the INVISTA acquisition, and slight year-over-year improvement in Specialty Products. Despite continuing supply-chain disruptions, management remained optimistic about full-year earnings growth. No specific earnings target was provided.
Management estimated 2021 capital expenditures of $200–$220 million, including a planned alkoxylation plant at the Pasadena, Texas site. Key disclosed risks include COVID-19 effects, feedstock and energy cost or supply volatility, transportation disruption, plant outages, customer demand changes, acquisition integration, environmental regulation and remediation, litigation, foreign exchange, and debt covenant or capital-market constraints.
Important facts for investors to verify
- Whether pricing actions and customer/product mix can preserve margins as raw-material, logistics and other supply-chain costs change.
- Whether Surfactants consumer volumes stabilize, and whether Polymers growth persists after separating organic performance from the INVISTA acquisition.
- Whether working-capital needs and planned capital spending convert into stronger operating cash flow and manageable net debt.
- The realization of expected benefits from the INVISTA acquisition and the execution, cost and timing of the Pasadena expansion.
- Potential outcomes and reserve adequacy for environmental and legal matters, particularly sites where remediation costs remain uncertain.
- The durability of earnings excluding the quarter’s non-recurring tax benefits and other adjustments used in management’s non-GAAP measures.