Stepan Company — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. The consolidated financial statements are unaudited. Stepan produces intermediate chemicals across Surfactants, Polymers and Specialty Products.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $651.4 million | $675.3 million | Down 4% |
| Gross profit / margin | $73.6 million / 11.3% | $109.2 million / 16.2% | Down 33% in profit |
| Operating income / margin | $21.1 million / 3.2% | $63.3 million / 9.4% | Down 67% |
| Net income | $16.1 million | $44.8 million | Down 64% |
| Diluted EPS | $0.70 | $1.93 | Down 64% |
| Adjusted net income and diluted EPS (non-GAAP) | $16.4 million / $0.71 | $40.7 million / $1.76 | Down 60% in adjusted income |
Sales volume fell 14%, primarily because of weaker demand and customer and channel inventory destocking. Higher average selling prices added $86.3 million to the year-over-year sales comparison, largely reflecting raw-material and input-cost pass-through and mix; volume declines and foreign currency translation offset much of that benefit. Surfactants sales were nearly flat, Polymers sales fell 14%, and Specialty Products sales rose 13%.
Segment operating income declined across all three businesses: Surfactants $27.1 million (down 50%), Polymers $10.0 million (down 29%), and Specialty Products $2.5 million (down 32%). Surfactants faced lower volume, weaker unit margins, inflation and start-up/pre-commissioning costs. Polymers was affected by lower volume, destocking and weaker construction activity. Specialty Products was pressured by lower volume and margins in its MCT product line.
Cash flow, liquidity and debt
- Operating cash flow was a use of $72.1 million, versus a $20.9 million use in Q1 2022. The filing attributes working-capital cash use mainly to accounts payable and accrued-liability outflows, partly offset by lower inventory.
- Capital expenditures were $92.2 million, compared with $60.3 million. Operating cash flow less capital expenditures was a cash outflow of approximately $164.2 million, derived from reported figures.
- Cash and equivalents ended the quarter at $127.0 million, down $46.8 million from year-end 2022. Current assets were $1,006.5 million and current liabilities were $662.7 million.
- Total debt was $711.0 million, up from $587.1 million at December 31, 2022; net debt increased to $584.0 million from $413.3 million. Net debt to net debt plus equity was 32.9%, versus 26.2% at year-end.
- The company had $129.5 million available under its $450 million credit agreement after borrowings and letters of credit. It reported compliance with debt covenants. Management said cash on hand, operating cash and committed credit facilities should fund anticipated needs for the foreseeable future.
Outlook, risks and notable items
- Management expected Q2 2023 sales volume to remain depressed year over year as markets adjusted demand to inventory levels. It expected year-over-year volume growth in the second half, supported by modest rigid-polyol demand recovery, new contracted Surfactant business and a low comparison base.
- Estimated 2023 capital expenditures were $220–$240 million, including the Pasadena, Texas alkoxylation plant, U.S. 1,4-dioxane regulatory upgrades, and growth and infrastructure projects. The upgrades were expected to be completed by the end of Q2 2023; the Pasadena facility was expected to start up in the first half of 2024.
- Environmental and legal loss exposure was estimated at $29.2–$52.9 million; $29.2 million was accrued. Management considered reserves adequate but noted additional reserves could be required and outcomes at certain sites could differ materially from estimates. Remediation and certain legal cash expenditures were $3.5 million in Q1, versus $0.4 million a year earlier.
- Deferred compensation produced $1.5 million of expense, compared with $7.5 million of income in Q1 2022, materially affecting the comparison. Higher interest expense reflected increased debt and interest rates. The effective tax rate fell to 18.9% from 24.6%, mainly due to more favorable stock-compensation tax benefits.
- Key disclosed risks include demand and customer reformulations, raw-material and energy cost or supply volatility, manufacturing disruptions, competition, foreign exchange, environmental regulation and litigation, capital-project execution, cybersecurity, and debt-covenant compliance. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether destocking and weak demand persist, and whether management’s expected second-half volume recovery materializes.
- Whether margins recover as input costs, pricing, product mix and new-capacity start-up costs change.
- Execution, cost and timing of the $220–$240 million capital plan, including the Pasadena plant and 1,4-dioxane upgrades.
- Working-capital trends, cash generation, debt maturities and remaining credit-facility capacity.
- Environmental and legal reserve adequacy, particularly where remediation costs or allocation among responsible parties remain uncertain.
- Non-GAAP adjusted results and the effects of volatile deferred-compensation and investment valuation items; compare these with reported GAAP results.