Stepan Company — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Unaudited consolidated results. Stepan produces intermediate chemicals across Surfactants, Polymers and Specialty Products.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $595.5M | $460.5M | $1,133.3M | $910.5M |
| Gross profit | $111.7M | $98.5M | $220.7M | $177.8M |
| Operating income | $56.7M | $44.6M | $110.6M | $84.6M |
| Net income attributable to Stepan | $43.3M | $35.7M | $83.9M | $63.3M |
| Diluted EPS | $1.85 | $1.54 | $3.59 | $2.72 |
- Q2 revenue rose 29%; operating income increased 27%, net income 21%, and diluted EPS 20%. Six-month revenue rose 24%, operating income 31%, and net income 33%.
- Calculated gross margin was approximately 18.8% in Q2 2021 versus 21.4% in Q2 2020; operating margin was approximately 9.5% versus 9.7%. Higher selling prices largely reflected raw-material cost pass-through and mix; cost inflation and supply-chain pressures weighed on margins.
- Q2 sales increased $135.0M: higher average selling prices contributed $92.0M, volume contributed $22.7M, and foreign-currency translation contributed $20.3M. Polymers sales rose 70%, Surfactants 16%, and Specialty Products 33%.
- Segment operating income in Q2: Surfactants $45.9M, down 5%; Polymers $23.0M, up 48%; Specialty Products $7.0M, up 116%. Surfactants’ lower volume and higher costs offset some price benefits. Polymer growth reflected the INVISTA acquisition and recovering construction-related demand; Specialty Products benefited partly from order timing and improved MCT margins.
Cash flow, liquidity and debt
- For the first half, operating cash flow was $24.7M versus $58.5M in 2020. Receivables used $68.0M of cash and inventory used $35.7M, reflecting higher raw-material costs and the acquired business; payables and accrued liabilities provided $34.0M.
- Capital expenditures were $74.9M. Free cash flow, calculated as operating cash flow less capital expenditures, was negative $50.2M. Investing cash outflow was $261.5M, including $184.6M net cash paid for the INVISTA business and $3.5M for a fermentation plant.
- Cash declined $222.9M from year-end to $127.1M. Total debt was $238.9M, up from $198.7M; net debt was $111.8M versus net cash of $151.2M at December 31, 2020. Total debt to debt plus equity was 18.6%.
- Liquidity included a $350M revolving facility, with no revolver borrowings and $343.0M available after letters of credit at June 30. Management said cash, operating cash flow and committed facilities should fund foreseeable needs and that liquidity was sufficient for potential working-capital increases.
- In June, Stepan issued $50M of 2.30% senior notes due 2028, with principal payments beginning in 2024. The company reported compliance with debt covenants. It paid $13.7M in dividends and repurchased $10.9M of stock during the half.
Material changes, outlook and risks
- The January INVISTA aromatic polyester polyol acquisition added U.S. and European manufacturing sites and is included in Polymers. Preliminary allocation included $65.1M goodwill and $45.5M identifiable intangibles; valuation remained subject to finalization. The February fermentation-plant purchase supports bio-surfactant development.
- Management expects Surfactants demand in institutional cleaning, agriculture and oilfield to improve versus 2020, but not enough to offset lower consumer cleaning and personal-wash demand versus the pandemic peak. Polymer demand was recovering from pandemic-related construction delays; management expected the segment to grow versus the prior year. Specialty Products results were expected to improve slightly.
- Management was “cautiously optimistic” for the rest of 2021, while citing continuing raw-material price increases, supply-chain inflation and planned second-half maintenance. Full-year capital expenditures were estimated at $150M–$170M; no quantified earnings or EPS guidance was provided.
- Environmental and legal loss estimates ranged from $22.5M to $40.9M; $22.5M was accrued because management considered no amount in the range more likely than another. Additional reserves may be needed, and adverse determinations could materially affect cash flow or results in a period.
- Other risks identified include COVID-19 effects, manufacturing disruptions, raw-material and energy-cost volatility, transportation constraints, competition, acquisition integration, environmental regulation, litigation, foreign exchange and debt-covenant compliance.
- Reported earnings include potentially volatile deferred-compensation and investment effects. Q2 other income included $2.2M of realized and unrealized investment gains; the Latin American segment also recognized $2.1M of VAT-tax recovery revenue.
Important facts for investors to verify
- Whether pricing and acquisition-driven sales growth convert into sustained volume and operating-margin improvement, particularly as consumer cleaning demand normalizes.
- How quickly raw-material and logistics cost increases can be passed through, and whether supply constraints and planned maintenance affect output or margins.
- INVISTA integration, final purchase-price allocation, acquired-asset performance and the commercial progress of the bio-surfactant platform.
- Working-capital recovery, operating cash generation and funding needs against the $150M–$170M capital-spending plan and dividend and repurchase commitments.
- Potential movement in environmental and legal exposures above the $22.5M recorded reserve, including the Maywood and other remediation matters.