Stepan Company — Q3 2022 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2022. Stepan produces intermediate chemicals through Surfactants, Polymers and Specialty Products. Unless noted, financial amounts below are in millions of dollars.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | First nine months 2022 | First nine months 2021 |
|---|---|---|---|---|
| Net sales | $719.2 | $602.7 | $2,146.1 | $1,735.9 |
| Gross profit | $118.5 | $91.9 | $359.3 | $312.6 |
| Operating income | $54.7 | $40.2 | $195.6 | $150.8 |
| Net income attributable to Stepan | $39.4 | $36.9 | $136.3 | $120.8 |
| Diluted EPS | $1.71 | $1.59 | $5.90 | $5.19 |
| Gross margin | 16.5% | 15.2% | 16.7% | 18.0% |
| Operating margin | 7.6% | 6.7% | 9.1% | 8.7% |
Q3 sales increased 19%; higher average selling prices added $201.6 million, while an 8% volume decline reduced sales by $49.4 million and foreign currency translation reduced them by $35.7 million. Management attributed pricing primarily to pass-through of higher raw-material and logistics costs, plus product and customer mix. Q3 adjusted net income, a non-GAAP measure, was $46.3 million, or $2.01 per diluted share, versus $36.4 million, or $1.57, a year earlier; reported net income also includes deferred compensation and remediation effects.
For the first nine months, sales rose 24%, with higher prices contributing $540.8 million; volume fell 3% and currency translation reduced sales by $72.9 million. Segment operating income increased in all three businesses: Surfactants $141.0 million (+6%), Polymers $79.9 million (+32%) and Specialty Products $23.2 million (+93%). In Q3, segment gains were strongest in Polymers and Specialty Products; corporate costs rose, largely due to environmental remediation reserves.
Cash flow and liquidity. For the first nine months, operating cash flow was $74.9 million, versus $21.4 million a year earlier. Working capital used $145.0 million, including $100.1 million for inventory, reflecting higher quantities and costs and preparation for planned maintenance. Capital expenditures were $205.3 million; investing cash outflow was $211.9 million. Cash was $165.7 million at September 30, 2022, compared with $159.2 million at December 31, 2021. Current assets were $1,072.7 million and current liabilities $603.2 million.
Total debt rose to $564.9 million from $363.6 million at year-end 2021; net debt was $399.2 million versus $204.4 million. Net debt to net debt plus equity increased to 26.1% from 16.0%. A $450 million credit agreement matures in 2027; $155.0 million was borrowed and $288.2 million remained available at quarter-end. The company reported compliance with debt covenants. Nine-month financing included $22.5 million of dividends and $22.3 million of share repurchases.
Material changes, outlook and risks
- Sales growth was price-led, while volume declined across the business overall. Q3 weakness included commodity laundry demand, raw-material availability constraints, lost customer share, weaker European construction demand and COVID-related restrictions in China.
- Q3 reported net income increased 7%, less than operating income growth of 36%. The effective tax rate was 21.9%, compared with 6.1% in Q3 2021, which benefited from a non-recurring Brazilian tax benefit. Nine-month rates were 24.0% and 19.6%, respectively.
- Environmental and legal loss estimates were $33.3 million to $57.0 million; $33.3 million was accrued. The increase primarily reflected revised remediation estimates for the Maywood, New Jersey site. Management said the majority of Maywood soil remediation is anticipated to be completed over the next two to three years, but final costs may differ materially. A separate Wilmington natural-resource-damages claim is at an early stage and its outcome and allocation are uncertain.
- The company recorded a $1.0 million non-cash goodwill impairment for its Philippines Surfactants reporting unit, attributed primarily to lost share at a major customer and higher unit overhead costs. A September acquisition of PerformanX’s surfactant business cost $9.7 million and was not material to current-period results.
- Management expects all three segments to deliver full-year earnings growth versus 2021 and expects functional-products and industrial-cleaning surfactant volume growth. It anticipates $330–$350 million of 2022 capital spending, including the Pasadena alkoxylation plant and 1,4-dioxane-related equipment upgrades. No specific full-year earnings target is provided in the filing.
- Management cited risks from slowing global growth, weaker consumer and construction demand, inflation, a stronger U.S. dollar, raw-material and energy volatility, supply and transportation disruptions, manufacturing interruptions, regulation and environmental liabilities, acquisitions, litigation, and debt covenants. Fourth-quarter expense pressure is expected from North American phthalic-anhydride maintenance and low 1,4-dioxane transition costs.
Important facts for investors to verify
- Whether price increases continue to offset lower volumes, input-cost inflation and unfavorable mix, and whether demand weakness persists by segment and region.
- Progress, spending and potential cost changes for the Maywood remediation and other environmental matters, including the Wilmington claim.
- Execution, timing and returns on the Pasadena project and other capital spending; compare actual spending with the $330–$350 million estimate.
- Debt growth, interest expense, available credit and covenant headroom as investment and working-capital needs evolve.
- Whether full-year segment earnings growth expectations are achieved and how much reported results depend on non-GAAP adjustments and deferred-compensation fluctuations.