Stepan Company (NYSE: SCL) — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019. The filing also reports fourth-quarter results. Stepan manufactures specialty and intermediate chemicals through Surfactants, Polymers and Specialty Products; Surfactants contributed 68% of 2019 sales. No customer accounted for more than 10% of revenue.
Financial performance and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Net sales | $1,858.7 million | $1,993.9 million |
| Gross profit / margin | $339.7 million / 18.3% | $339.3 million / 17.0% |
| Operating income / margin | $127.3 million / 6.8% | $149.3 million / 7.5% |
| Net income attributable to Stepan | $103.1 million | $111.1 million |
| Diluted EPS | $4.42 | $4.76 |
| Operating cash flow | $218.4 million | $171.1 million |
| Capital expenditures | $105.6 million | $86.6 million |
- Fourth-quarter 2019 net sales were $445.0 million and diluted EPS was $0.95, versus $466.7 million and $1.03 in Q4 2018.
- Adjusted net income, a non-GAAP measure, rose 7% to $119.4 million, or $5.12 per diluted share, from $111.7 million, or $4.79.
- Cash and cash equivalents were $315.4 million; total debt was $222.1 million, down from $276.1 million. Management’s non-GAAP net debt measure was negative $93.3 million, indicating net cash. The current ratio was 2.4 and working capital was $479.7 million.
- The company had no borrowings on its $350 million revolving facility and $345.1 million of availability after letters of credit. Debt maturities extend from 2020 through 2027; the company reported covenant compliance.
- Dividends paid were $1.03 per common share. The 2019 effective tax rate was 18.1%, compared with 19.4%.
Changes versus prior year
- Sales fell 7%: lower average selling prices reduced revenue by $60.8 million, foreign currency translation by $37.3 million, and lower volume by $37.0 million.
- Operating income declined 15%, largely because deferred compensation expense increased $17.5 million as Stepan’s share price rose. Segment operating income decreased 8% in Surfactants, increased 5% in Polymers and increased 41% in Specialty Products.
- Surfactants sales fell 8%, with lower volume, pricing and currency effects; the German sulfonation exit contributed to the volume decline. Polymers sales fell 3% despite 4% volume growth, as lower prices and currency more than offset volume. Specialty Products sales fell 8%, while improved MCT margins and lower restructuring-related expenses lifted operating income.
- Operating cash flow increased 28%, helped by a $17.6 million working-capital source versus a $37.7 million use in 2018, including a $28.5 million inventory cash source.
Outlook, risks and unusual items
- Management expected 2020 capital expenditures of $110 million to $130 million. It anticipated a very challenging first quarter due to Millsdale, expected Specialty Products results approximately in line with 2019, and cited Surfactants margin initiatives and continued Polymers support from energy conservation and insulation demand.
- After the reporting date, a January 2020 power disruption and February wastewater-treatment-plant issues affected the Millsdale, Illinois facility. Production was interrupted, and Stepan declared force majeure for phthalic anhydride and certain surfactant products. Some production had restarted by the filing date, but the company could not quantify the financial impact and was pursuing insurance recovery.
- Management also cited potential headwinds from coronavirus effects in China and higher raw-material sourcing costs associated with planned Illinois River lock closures in the second half of 2020.
- Regulatory exposure includes restrictions on 1,4-dioxane, a by-product associated with certain surfactants, and possible ethylene oxide emissions rules affecting Millsdale and Winder. The company was modifying processes and developing lower/no-dioxane formulations.
- Environmental and legal accruals were $25.9 million, against an estimated possible-loss range of $25.9 million to $43.7 million. The filing notes that actual remediation costs could differ materially; the Maywood groundwater decision remained outstanding. A $612,718 FIFRA penalty was paid in 2019.
- Other notable items: Stepan received $9.0 million of insurance proceeds for the 2019 Ecatepec equipment failure and acquired an oilfield demulsifier product line for $9.0 million. The acquisition had no 2019 earnings impact and was not expected to be accretive in 2020.
- The company changed U.S. inventory accounting from LIFO to FIFO and retrospectively adjusted prior periods. On a hypothetical LIFO basis, 2019 net income would have been $106.1 million rather than reported $103.1 million. The filing states the change did not alter cash flows.
- Other key risks include chemical plant accidents or outages, raw-material and energy volatility, transport disruption, competition, customer reformulations, foreign-exchange exposure and debt covenant constraints.
Most important facts for investors to verify
- How long Millsdale disruptions affected production, customer shipments, force majeure obligations and insurance recoveries after the filing date.
- Whether 2020 sales volumes and margins recover, particularly in Surfactants, and whether Polymers’ volume growth can offset lower selling prices.
- The extent and timing of compliance costs or product reformulation tied to 1,4-dioxane and ethylene oxide rules.
- Whether environmental remediation estimates—especially Maywood and Wilmington—remain adequate as investigations and cleanup plans progress.
- Comparability of reported earnings after the retrospective LIFO-to-FIFO change and the effect of volatile deferred-compensation expense on GAAP results.
The filing reports unqualified audit opinions on the financial statements and internal control over financial reporting.