Business context and reporting period
Stepan Company’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2020, compared with the same periods in 2019. It makes surfactants, polymers and specialty products for consumer, industrial and other markets. Amounts below are in millions of U.S. dollars unless noted.
Financial performance and position
| Metric | Q2 2020 | Q2 2019 | H1 2020 | H1 2019 |
|---|---|---|---|---|
| Net sales | $460.5 | $473.0 | $910.5 | $962.2 |
| Gross profit | $98.5 | $93.0 | $177.8 | $177.6 |
| Operating income | $44.6 | $41.1 | $84.6 | $70.8 |
| Net income attributable to Stepan | $35.7 | $30.2 | $63.3 | $55.2 |
| Diluted EPS | $1.54 | $1.30 | $2.72 | $2.37 |
| Gross margin | 21.4% | 19.7% | 19.5% | 18.5% |
| Operating margin | 9.7% | 8.7% | 9.3% | 7.4% |
For the first half, operating cash flow was $58.5 million, capital expenditures were $54.7 million, and cash dividends paid were $12.4 million. Cash declined $42.5 million from year-end 2019 to $272.9 million at June 30, including a $6.2 million unfavorable currency effect. Working capital was a $47.4 million cash use.
Total debt was $207.9 million, down from $222.1 million at December 31, 2019; cash exceeded debt by $65.0 million. The $350 million revolving facility had no borrowings and $344.5 million available after letters of credit. The current ratio was approximately 2.5, based on $796.4 million in current assets and $319.2 million in current liabilities. The company reported covenant compliance.
Changes versus comparable periods
- Q2 sales fell 3%, but operating income rose 9%, net income attributable to Stepan rose 18%, and diluted EPS rose from $1.30 to $1.54. First-half sales declined 5%, while operating income increased 20% and net income attributable to Stepan increased 15%.
- Surfactants drove earnings growth: Q2 segment operating income increased 51% to $48.5 million, supported by 10% volume growth and demand for cleaning, disinfection and personal-care products. First-half segment operating income increased 22% to $84.7 million.
- Polymers weakened: Q2 sales fell 20% and segment operating income fell 32%; first-half sales fell 16% and operating income fell 34%. COVID-related construction delays and cancellations, lower phthalic anhydride sales, and Millsdale-related costs contributed.
- Specialty Products Q2 sales decreased 17% and operating income decreased 46%; first-half sales and operating income decreased 16% and 21%, respectively.
- Foreign exchange reduced sales by $20.2 million in Q2 and $28.5 million in H1. Lower selling prices, largely reflecting raw-material cost pass-through, also reduced sales. Despite lower H1 sales, gross profit was nearly unchanged year over year.
Outlook, commentary, risks and unusual items
- Management described 2020 as challenging because of the pandemic. It expected surfactants to benefit from consumer demand for cleaning and personal-care products, while oilfield surfactant demand was expected to remain weak. Polymers were expected to face continued construction-market challenges; management also anticipated higher North American costs from Illinois River lock closures in H2. Specialty Products results were expected to approximate 2019. No full-year earnings guidance was provided.
- Estimated 2020 capital expenditures were $100 million to $120 million. Management said cash from operations, available credit and cash on hand should fund planned requirements for the foreseeable future.
- A January–February 2020 power and wastewater-treatment disruption at Millsdale caused temporary production stoppages and force majeure declarations; production was fully operational before quarter-end. The company was pursuing insurance recovery for incremental supply-chain costs and business interruption.
- COVID-19 could disrupt facilities, staffing, supplies, transportation and customer demand; the company reported a temporary mandated closure in one jurisdiction and a temporary production halt in one area after employee diagnoses. Management said the pandemic’s overall impact could not be reasonably estimated.
- Environmental and legal losses were estimated at $22.7 million to $41.7 million; $22.7 million was accrued, the low end of the range. Management cautioned actual costs could differ materially. Some site exposures could not be estimated.
- Q2 included $4.0 million of investment gains and income, helping lift “Other, net” to $4.4 million. Polymers results included a $1.1 million government reimbursement and a $0.5 million vendor settlement. These items, as well as deferred compensation tied to the company’s share price, affect period comparisons.
- The March acquisition of NatSurFact bio-surfactant assets cost $2.0 million and was funded with cash. The filing also identifies risks including raw-material and energy costs, production disruptions, competition, currency movements, regulation, litigation, capital-project execution and debt-covenant constraints.
Investor verification points
- Track whether cleaning-product demand and Surfactants’ margins persist as pandemic-related demand changes, and whether oilfield demand recovers.
- Assess recovery in Polymers volumes and margins, including construction demand, phthalic anhydride customer exposure, Millsdale costs and Illinois River lock-closure impacts.
- Check operating cash conversion and working-capital needs against planned capital spending of $100–$120 million and ongoing dividends and repurchases.
- Monitor environmental claims against the $22.7–$41.7 million estimated loss range, including whether additional reserves become necessary.
- Separate recurring performance from investment gains, settlements, reimbursements, deferred compensation and other adjustments; review the company’s non-GAAP reconciliations alongside GAAP results.