Stepan Company — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Stepan makes intermediate chemicals through surfactants, polymers and specialty products. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
- Q2 revenue: $470.2, down 1.4% from $477.0. Gross profit was $73.4 versus $69.6; operating income $34.8 versus $34.1; and net income attributable to Stepan $21.4 versus $20.9. Diluted EPS was $1.89 versus $1.87.
- First-half revenue: $935.5, up 4.0% from $899.6. Gross profit was $150.2 versus $131.4; operating income $70.2 versus $63.9; and net income attributable to Stepan $43.7 versus $39.6. Diluted EPS was $3.85 versus $3.55.
- Margins: Q2 gross margin was approximately 15.6% (14.6% in 2011) and operating margin 7.4% (7.1%). First-half gross margin was 16.1% (14.6%) and operating margin 7.5% (7.1%).
- Segment results, Q2: Surfactants revenue was $335.1 and operating income $31.0; polymers $113.9 and $11.8; specialty products $21.2 and $3.4. Segment operating income totaled $46.2 before $11.4 of unallocated corporate expenses.
- Cash flow, first half: Operating activities provided $36.8, versus $21.3 used in 2011. Investing used $41.9, including $40.8 of capital expenditures; financing used $9.2. Cash declined $14.6 to $69.5.
- Liquidity and debt: Current assets were $510.8 and current liabilities $235.5 (current ratio approximately 2.17). Total debt was $195.3, including $33.3 current and $162.0 long-term; net debt was $125.8, up $10.4 from year-end. The $60.0 revolving facility had no borrowings and $57.4 available after letters of credit. Debt-to-debt-plus-equity was 30.5%; the company reported compliance with its loan covenants.
Changes versus prior period
- Q2 revenue fell despite 5% higher total sales volume: currency translation reduced sales by about $17.5 and lower average selling prices by $12.1, partly offset by volume growth of $22.8. Lower prices primarily reflected reduced commodity raw-material costs.
- Q2 operating income rose 2% as higher margins, improved mix and volume lifted gross profit; higher operating expenses partly offset the gain. Surfactants operating income increased 26%, while polymers fell 22%, mainly due to planned plant maintenance and outsourcing costs. Specialty products sales growth primarily reflected the 2011 Lipid Nutrition acquisition.
- First-half revenue and operating income increased 4% and 10%, respectively. Volume and selling prices contributed to revenue growth, partly offset by $22.5 of unfavorable currency translation. Gross profit rose 14%, while operating expenses increased 19%.
- Foreign-currency translation also reduced comprehensive income: Q2 comprehensive income attributable to Stepan was $11.4, compared with $25.6 a year earlier, principally reflecting a $10.6 currency translation loss.
Outlook, commentary and risks
- Management said the company was positioned for solid 2012 earnings growth despite global economic challenges. It expected higher full-year surfactants earnings, supported by functional products and growth initiatives; polymers earnings growth, though exposed to a possible European recession; and specialty-products earnings growth from Lipid Nutrition.
- Management expected 2012 capital spending of $90–$100, including capacity expansions in Germany and Singapore. Singapore commercial production was expected to begin in July 2012. The phthalic anhydride plant’s Q2 maintenance turnaround was complete.
- Management expected cash from operations, committed facilities and cash on hand to fund planned capital expenditures, working capital, dividends and other commitments for the foreseeable future. Working capital needs are sensitive to crude-oil and natural-oil-derived raw-material costs.
- Environmental and legal possible losses were estimated at $9.1–$28.9, with $14.9 accrued. Certain sites remain unquantifiable; adverse determinations could materially affect cash flow or results in a period, though management did not expect a material effect on financial position overall.
- Other notable items: deferred-compensation expense was $5.0 for the first half versus $0.7 of income in 2011, creating earnings volatility tied to company-stock and investment values. A partial insurance settlement for repairs to a German plant reactor was received; potential business-interruption recovery was not recognized pending final settlement. The China joint-venture plant was expected to relocate, with a new facility targeted for operation in 2014; accelerated depreciation was not expected to materially affect 2012 or 2013 earnings.
- The filing reported no material changes to previously disclosed risk factors or market risks. Disclosure controls were considered effective at June 30, 2012.
Investor verification points
- Check whether second-half volume, raw-material costs and foreign exchange supported management’s full-year earnings outlook.
- Track Singapore start-up, Germany capacity expansion, and the cost and timing of relocating the Nanjing facility.
- Monitor working-capital investment, capital spending versus the $90–$100 range, cash generation and net debt.
- Review environmental/legal exposure against the $9.1–$28.9 estimated loss range and $14.9 accrual, including developments at unresolved sites.
- Assess whether deferred-compensation mark-to-market effects and the pending German business-interruption insurance settlement materially change reported earnings.