Stepan Company — Q1 2017 Form 10-Q
Business and period: This unaudited quarterly report covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016. Stepan makes intermediate chemicals through Surfactants, Polymers and Specialty Products; Surfactants represented 69% of Q1 sales, Polymers 27% and Specialty Products 4%.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $468.3 million | $445.9 million | +5% |
| Gross profit / margin | $92.1 million / 19.7% | $93.5 million / 21.0% | Profit down 1.5% |
| Operating income / margin | $46.1 million / 9.8% | $44.6 million / 10.0% | +3% |
| Net income attributable to Stepan | $31.9 million | $27.9 million | +14% |
| Diluted EPS | $1.37 | $1.22 | +$0.15 |
| Adjusted net income / diluted EPS (non-GAAP) | $31.7 million / $1.36 | $29.7 million / $1.30 | +7% / +5% |
| Operating cash flow | $3.3 million | $(1.8) million | Improved |
| Capital expenditures | $20.4 million | $19.3 million | — |
| Cash and cash equivalents, quarter-end | $197.8 million | $145.7 million | — |
| Total debt / net debt | $316.7 million / $118.9 million | $317.0 million / $91.3 million at Dec. 31, 2016 | Net debt increased |
Approximate free cash flow, calculated as operating cash flow less capital expenditures, was negative $17.1 million, versus negative $21.2 million in Q1 2016. The quarter-end current ratio was approximately 2.6, based on current assets of $699.6 million and current liabilities of $271.6 million. The dividend declared was $0.21 per share, up from $0.19.
Segments and changes versus prior year
- Surfactants: Sales increased 4% to $322.6 million, while operating income rose 3% to $38.2 million. Sales volume fell 7%; higher prices, reflecting raw material costs and product mix, offset much of the volume decline. Results varied by region: European and Asian gross profit fell, while North American gross profit improved.
- Polymers: Sales increased 11% to $126.6 million, supported by 8% volume growth and higher prices. Operating income declined 4% to $21.4 million, as higher raw material and China manufacturing costs pressured profitability.
- Specialty Products: Sales declined 14% to $19.1 million and operating income fell 45% to $1.3 million, due to lower volume and prices and a less favorable sales mix.
- Consolidated sales benefited by $43.1 million from higher selling prices, but were offset by a $16.3 million volume decline and $4.4 million of unfavorable currency translation. The price increases largely reflected higher input costs.
- Operating income included $0.8 million of restructuring expense for decommissioning the closed Longford Mills, Canada facility. Lower deferred compensation expense and investment gains also supported the year-over-year earnings comparison.
Liquidity, outlook and notable matters
- Cash decreased $27.9 million during the quarter. The company had $120.1 million available under its $125 million revolving credit facility, with no borrowings outstanding and $4.9 million of letters of credit. Management said cash, operating cash flow and credit facilities should cover anticipated needs; it reported compliance with debt covenants.
- Management estimated 2017 capital expenditures of $100–$120 million, including capacity expansions in the United States, Brazil and Germany. It remained optimistic after a record first quarter and expected full-year earnings growth, citing internal efficiencies, core polymer market growth and diversification; higher raw material costs could pressure margins. No quantified earnings guidance was provided.
- The Longford Mills shutdown is expected to generate approximately $4.5 million in total restructuring costs; $3.6 million had been recognized by March 31, 2017.
- The 2016 Tebras and PBC Brazil acquisition purchase price was finalized at approximately $29.0 million after a $4.3 million working-capital adjustment payment in Q1. The acquired businesses are in Surfactants.
- Environmental and legal loss exposure was estimated at $25.6–$46.3 million; $25.8 million was accrued. Management said some site exposures cannot be estimated and adverse determinations could materially affect cash flows or results in a period, although it did not expect the matters collectively to materially affect financial position.
- Key stated risks include manufacturing disruptions, raw-material and energy cost volatility, demand and competitive pressures, foreign exchange, acquisition integration, environmental and legal contingencies, capital project execution, debt covenant compliance and cybersecurity. The filing reported no material changes to previously disclosed risk factors or legal proceedings.
Important facts for investors to verify
- Whether surfactant volume weakness and pressure on margins from higher raw-material costs persist, particularly in Europe and Asia.
- Whether polymer volume growth translates into improved segment profitability, including at the Nanjing facility.
- Execution and returns on the planned $100–$120 million of 2017 capital expenditures, and realization of expected acquisition and efficiency benefits.
- Cash generation and working-capital needs, given negative operating cash flow after capital expenditures and the quarter’s cash decline.
- Changes in environmental and legal estimates, especially Maywood groundwater remediation and other sites with currently unquantifiable exposure.