Stepan Company: FY 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited quarterly results, including fourth quarter. Stepan manufactures specialty and intermediate chemicals through Surfactants, Polymers and Specialty Products; Surfactants generated 67% of 2016 sales. The financial statements received an unqualified audit opinion.
Financial performance
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net sales | $1,766.2 million | $1,776.2 million |
| Gross profit / gross margin | $338.5 million / 19.2% | $308.2 million / 17.4% |
| Operating income / operating margin | $126.2 million / 7.1% | $122.8 million / 6.9% |
| Net income attributable to Stepan | $86.2 million | $76.0 million |
| Diluted EPS | $3.73 | $3.32 |
| Operating cash flow | $212.2 million | $183.7 million |
| Capital expenditures | $103.1 million | $119.3 million |
| Cash and cash equivalents at year-end | $225.7 million | $176.1 million |
| Total debt at year-end | $317.0 million | $331.4 million |
| Working capital / current ratio | $388.3 million / 2.3 | $376.3 million / 2.5 |
Net debt declined to $91.3 million from $155.2 million. The company had $120.2 million available under its $125 million revolving credit facility, with no borrowings and $4.8 million of letters of credit outstanding. Cash and operating cash flow provided liquidity; management said available cash, operating cash flow and committed credit facilities should cover planned needs. Operating cash flow less capital expenditures was approximately $109.1 million.
Material changes and segment results
- Sales fell 1% year over year despite 6% higher volume; lower selling prices reduced sales by $81.1 million and foreign-currency translation by $42.9 million. Higher volume was a $114.0 million offset. Management said unit margins improved slightly.
- Operating income rose 3%, while net income attributable to Stepan increased 13%. The effective tax rate fell to 24.3% from 26.1%; early adoption of stock-compensation accounting contributed a $2.0 million tax benefit, and the filing cautions that 2016 selected financial data is not fully comparable with earlier years.
- Surfactants sales declined 2% to $1,181.6 million and segment operating income declined 4% to $99.8 million. Polymer sales increased 1% to $498.8 million and segment operating income rose 20% to $96.8 million. Specialty Products sales rose 9% to $85.8 million and segment operating income increased to $10.7 million from $4.4 million.
- Fourth-quarter sales were $420.6 million versus $419.3 million a year earlier, but operating income fell to $9.9 million from $20.2 million and diluted EPS to $0.36 from $0.56. Fourth-quarter results included customer claim settlements, restructuring and impairment items, among other factors.
- Segment operating income totaled $207.3 million, before $74.0 million of unallocated corporate expenses and $7.1 million of restructuring and impairment charges.
Outlook, unusual items and risks
- Management said 2016 was a record year and the base business remained strong, expressing confidence in further growth in 2017. It cited product and end-market diversification, continued growth in core polymer markets and internal efficiencies. This is qualitative outlook, not quantified earnings guidance.
- Management estimated 2017 capital expenditures of $100 million to $120 million, including capacity expansions in the United States and Germany.
- The company acquired Tebras’ commercial business and PBC’s Brazilian sulfonation facility for approximately $29.1 million. The acquisition’s 2016 contribution to sales and net income was insignificant. Management expects broader customer access and portfolio-selling opportunities.
- In 2016, Stepan closed its Canadian surfactant plant; production moved to other North American sites. Recorded restructuring costs were $2.8 million, with total costs expected at $4.0 million to $4.5 million. Accelerated depreciation was $4.5 million.
- Asset impairment charges were $4.2 million, including costs for a cancelled Louisiana project and the Bahia, Brazil, facility after a major customer exited a product line. The customer separately agreed to pay $4.25 million for future lost revenue, recorded in sales.
- Two customer claims were settled for a combined $7.4 million, recorded as a reduction of sales. Insurance recovery was uncertain and no benefit was recorded. Environmental and legal loss estimates ranged from $25.7 million to $46.5 million; the accrued liability was $25.8 million. The Maywood groundwater remedy remained unresolved.
- Key risks include volatile raw-material and energy costs, competition, foreign-exchange exposure, manufacturing or transportation disruptions, customer demand and product reformulation, environmental and product-regulatory obligations, litigation, and debt covenant compliance. The company reported compliance with its loan agreements at year-end and expected continued compliance in 2017.
Important facts for investors to verify
- Whether sales-volume growth and improved margins can persist as raw-material prices, selling prices and foreign-exchange rates change.
- Whether the Brazilian acquisition delivers expected customer and cross-selling benefits, and how the Bahia customer exit affects facility utilization and future earnings.
- The final cost and timing of the Canadian plant closure, asset decommissioning and environmental remediation, including the Maywood groundwater decision.
- Whether fourth-quarter customer settlements or other unusual items recur, and whether any related insurance recoveries are obtained.
- 2017 capital spending, cash generation, debt maturities and dividend capacity under debt covenants; the company declared $0.78 per share in 2016 and reported 49 consecutive years of dividend increases.