Stepan Company — FY 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. Stepan manufactures specialty and intermediate chemicals through three segments: surfactants, polymers and specialty products.
Financial results and liquidity
| Metric | 2013 | 2012 |
|---|---|---|
| Net sales | $1,880.8 million | $1,803.7 million |
| Gross profit / margin | $281.7 million / 15.0% | $291.6 million / 16.2% |
| Operating income / margin | $109.2 million / 5.8% | $128.7 million / 7.1% |
| Net income attributable to Stepan | $72.8 million | $79.4 million |
| Diluted earnings per share | $3.18 | $3.49 |
| Cash from operating activities | $150.3 million | $109.0 million |
| Capital expenditures | $92.9 million | $83.2 million |
| Cash and cash equivalents at year-end | $133.3 million | $76.9 million |
| Total debt at year-end | $270.6 million | $182.4 million |
| Working capital / current ratio | $339.6 million / 2.3 | $275.9 million / 2.1 |
Operating cash flow increased, while investing outflows rose to $167.6 million, including $68.2 million for the BMS polyester resins acquisition. Net debt rose to $137.3 million from $105.5 million. The company reported $122.3 million available under its $125 million revolving credit facility, with no year-end borrowings on it. The $100 million private-placement notes issued in 2013 bear fixed interest of 3.86% and mature in 2025.
Changes and segment performance
- Sales rose 4% as volume increased 7%; lower average selling prices reduced the increase by $43.9 million. Net income attributable to Stepan fell 8%, and operating income declined 15%.
- Surfactants: Sales increased 1% to $1,317.2 million, but operating income fell 16% to $100.2 million. Lower margins, including about $9 million of costs tied to Singapore start-up inventory, pricing timing and strategic raw-material sourcing, weighed on results.
- Polymers: Sales rose 14% to $483.4 million and operating income rose 13% to $54.5 million. Results included $31.9 million of acquired BMS business sales and higher insurance recovery income.
- Specialty products: Sales increased 8% to $80.3 million, while operating income declined to $10.9 million from $12.2 million, reflecting higher costs and competitive pricing, particularly for medium-chain triglyceride products.
- Fourth-quarter 2013 gross profit was $60.9 million versus $70.1 million a year earlier; operating income was $13.9 million versus $24.6 million, and diluted EPS was $0.46 versus $0.68.
Outlook, unusual items and risks
- Management expected 2014 earnings to rebound from 2013, while noting a slow start due to severe North American weather. Surfactant earnings were expected to be down in the first quarter, then improve with agricultural sales, Brazil consumer-product growth, enhanced-oil-recovery demand and efficiencies. Management anticipated no repeat of the approximately $9 million of surfactant costs incurred in 2013.
- Management expected continued polymer growth, including benefits from the integrated BMS business, but warned that China supply costs would pressure margins. Planned 2014 capital spending was $115–$125 million, including U.S. and Brazil capacity expansions.
- A fourth-quarter restructuring will close certain sulfonation operations in Canada, eliminate about 20 positions and transfer affected production to U.S. plants. The company recorded $1.0 million severance expense and expects completion in the third quarter of 2014; shorter asset lives add about $1.8 million depreciation in the first half of 2014.
- The effective tax rate fell to 24.4% from 31.1%, principally due to a favorable IRS ruling on biodiesel excise tax credits, tax-credit extensions and a greater share of earnings generated in lower-tax jurisdictions.
- Environmental and legal losses were estimated at $9.7–$28.9 million, with $14.7 million accrued. The Maywood, New Jersey remediation plan remained unresolved; the final remedy could change estimated costs. Management said other identified environmental matters were adequately reserved, but outcomes remain uncertain.
- Principal risks include production interruptions, volatile raw-material and energy costs, transportation disruptions, competition and customer reformulations, foreign currency and overseas operating risks, environmental/product regulation, litigation, cyber/IT disruption, and debt covenant or refinancing constraints.
Most important facts for investors to verify
- Whether surfactant margins recover after the 2013 cost and pricing pressures, and whether management’s 2014 rebound expectations materialize.
- The acquired BMS business’s contribution to polymer revenue, earnings and cash returns, alongside planned expansion spending.
- Execution and savings from the Canadian restructuring, including remaining 2014 severance and depreciation impacts.
- Debt maturities, covenant headroom and liquidity as capital expenditures rise; management reported covenant compliance at year-end.
- Developments in the Maywood and other environmental matters, and any changes to the $14.7 million recorded liability.