Stepan Company — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011. The filing also reports unaudited fourth-quarter results. Stepan makes specialty and intermediate chemicals for manufacturers, across surfactants, polymers and specialty products; surfactants generated 74% of 2011 sales. Approximately 41% of sales were outside the U.S.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net sales | $1,843.1 million | $1,431.1 million |
| Gross profit / margin | $255.6 million / 13.9% | $236.0 million / 16.5% |
| Operating income / margin | $118.5 million / 6.4% | $107.9 million / 7.5% |
| Net income attributable to Stepan | $72.0 million | $65.4 million |
| Diluted EPS | $6.42 | $5.90 |
| Cash from operations | $77.4 million | $66.1 million |
| Capital expenditures | $83.2 million | $73.7 million |
- Sales rose 29%, driven primarily by higher selling prices reflecting raw-material inflation; volume contributed about $43.8 million and currency translation about $27.6 million to the increase.
- Net income attributable to Stepan increased 10%, while gross and operating margins declined as costs and expenses rose faster than gross profit.
- At year-end, cash was $84.1 million, total debt $199.5 million and net debt $115.4 million. Working capital was $246.5 million and the current ratio 2.1.
- The $60 million revolving credit facility had no borrowings and $57.4 million available after letters of credit. The company reported compliance with debt covenants.
- Cash decreased $27.1 million during the year. Receivables used $60.8 million of operating cash, reflecting higher sales and prices. Capital expenditures exceeded operating cash flow by $5.8 million.
Fourth-quarter results
Fourth-quarter sales were $444.2 million, versus $360.8 million in 2010; gross profit was $60.1 million versus $50.5 million. Net income attributable to Stepan was $13.2 million, or $1.17 per diluted share, compared with $8.5 million, or $0.76 per share. Fourth-quarter operating income is not separately shown in the supplied quarterly table.
Changes, segments and notable items
- Surfactants sales increased 29% to $1,362.0 million and operating income rose 8% to $100.8 million. North American margins improved, but European and Latin American gross profit fell; the latter was affected by Brazilian expansion start-up costs and delayed price recovery.
- Polymers sales increased 28% to $421.5 million and operating income rose 11% to $40.9 million. Growth reflected higher prices and volume; raw-material costs weighed on margins, particularly in North America in the fourth quarter.
- Specialty Products sales rose 40% to $59.6 million, partly due to the June acquisition of Lipid Nutrition product lines for $13.6 million. Segment operating income declined 8% to $13.3 million, as food-ingredient input costs were difficult to pass through.
- Raw-material inflation was the main driver of selling-price increases. Management said raw-material prices rose through the first three quarters and began declining in the fourth quarter; customer contracts and competition can delay or limit cost recovery.
- Interest expense, net, increased to $9.1 million from $6.3 million, largely due to higher average borrowing. The effective tax rate fell to 30.8% from 35.4%, mainly due to a new holding-company structure expected to benefit foreign earnings.
- In 2011, Stepan issued $65 million of fixed-rate notes at 4.86%, due in 2023. It also bought 23,145 common shares in the open market and paid common dividends of $1.06 per share.
Outlook, risks and contingencies
- Management anticipated continued earnings improvement in 2012, supported by Brazil surfactants, higher-value functional surfactants, polyol volume and the acquired specialty-product lines. It projected $100–$110 million of 2012 capital expenditures, including completion of Singapore capacity expansion; commercial production there was expected in Q2 2012.
- Management stated that cash, operations and committed facilities should fund 2012 working capital, capital expenditures, dividends and other planned commitments. It expected covenant compliance through 2012.
- Key risks include volatile petroleum- and plant-based inputs, energy and freight costs; inability to pass costs through; global competition, customer reformulations and economic weakness; foreign-exchange exposure; and potential operational interruptions, including reliance on some single-site products.
- Environmental and legal losses were estimated at $8.8–$28.6 million, with $14.6 million accrued. The Maywood remediation estimate remains subject to EPA decisions; the company says its recorded liability is adequate, but actual costs may differ. Some other sites have unresolved exposure that cannot be estimated.
- A fire damaged a German polyol reactor in 2011; it returned to service in Q4. Property insurance was expected to cover repairs, but any business-interruption recovery would not be recorded until settlement.
- Defined-benefit pension plans were underfunded by $36.0 million at year-end; management expected approximately $7.6 million of funded-plan contributions in 2012. The filing identifies no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether lower raw-material prices and customer pricing terms restore margins, especially in polymers and specialty products.
- Whether the Singapore plant began commercial production on schedule and whether planned capital spending generates the expected growth.
- Working-capital and cash conversion trends, given the substantial receivables outflow and capex exceeding operating cash flow in 2011.
- Progress on Maywood and other environmental matters, any changes to the $14.6 million accrual, and potential insurance recoveries for the German incident.
- Debt maturities, covenant headroom and the availability of the revolving facility; confirm the effect of pension funding and dividend restrictions.