Stepan(SCL) - 2023 Q1 - Quarterly Report

Part I Item 1 - Financial Statements Unaudited condensed consolidated financial statements for Q1 2023 and 2022 are presented, covering income, balance sheets, cash flows, and notes Condensed Consolidated Statements of Income Q1 2023 financial performance declined significantly, with net sales decreasing and gross profit, operating income, and net income falling sharply Q1 2023 vs Q1 2022 Income Statement Highlights (in thousands, except per share amounts) | Financial Metric | Q1 2023 | Q1 2022 | | :--- | :--- | :--- | | Net Sales | $651,436 | $675,276 | | Gross Profit | $73,560 | $109,219 | | Operating Income | $21,057 | $63,346 | | Net Income | $16,142 | $44,809 | | Diluted EPS | $0.70 | $1.93 | Condensed Consolidated Balance Sheets As of March 31, 2023, total assets slightly increased to $2.45 billion, total liabilities saw a minor rise, and total equity grew to $1.19 billion Balance Sheet Summary (in thousands) | Account | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total current assets | $1,006,524 | $1,044,802 | | Total assets | $2,445,937 | $2,433,172 | | Total current liabilities | $662,744 | $670,649 | | Total liabilities | $1,256,024 | $1,267,107 | | Total equity | $1,189,913 | $1,166,065 | Condensed Consolidated Statements of Cash Flows Q1 2023 saw significantly higher cash usage in operations and investing, with financing providing less cash, resulting in a $46.8 million decrease in cash Cash Flow Summary (in thousands) | Cash Flow Activity | Three Months Ended March 31, 2023 | Three Months Ended March 31, 2022 | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | ($72,058) | ($20,930) | | Net Cash Used In Investing Activities | ($90,341) | ($57,132) | | Net Cash Provided By Financing Activities | $113,536 | $154,833 | | Net (Decrease) Increase in Cash | ($46,794) | $76,855 | Notes to Condensed Consolidated Financial Statements Notes detail segment performance, debt, and legal contingencies, highlighting Surfactants as the largest segment, increased total debt, and $29.2 million accrued for environmental and legal matters - The company accrued $29.15 million for potential environmental and legal losses, estimated to range up to $52.95 million as of March 31, 2023[36] Segment Net Sales and Operating Income (Q1 2023, in thousands) | Segment | Net Sales | Operating Income | | :--- | :--- | :--- | | Surfactants | $467,828 | $27,056 | | Polymers | $161,127 | $10,004 | | Specialty Products | $22,481 | $2,530 | - Total debt increased from $587.1 million at year-end 2022 to $711.0 million at March 31, 2023, primarily due to increased revolving credit facility borrowings[62][119] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the 64% Q1 2023 net income decrease, attributing it to a 14% sales volume decline from lower demand and inventory destocking - Net income for Q1 2023 decreased 64% to $16.1 million ($0.70 per diluted share) from $44.8 million ($1.93 per diluted share) in Q1 2022[79] - The decline was primarily driven by a 14% drop in consolidated sales volume due to lower market demand and ongoing customer inventory destocking[80] - Management anticipates depressed Q2 2023 sales volume, with year-over-year growth expected to return in the second half of the year[129] Results of Operations Q1 2023 operating income fell 67% to $21.1 million, with all segments experiencing significant declines due to volume drops and lower margins Segment Operating Income Change (Q1 2023 vs Q1 2022, in thousands) | Segment | Q1 2023 Operating Income | Q1 2022 Operating Income | % Change | | :--- | :--- | :--- | :--- | | Surfactants | $27,056 | $53,769 | -50% | | Polymers | $10,004 | $14,129 | -29% | | Specialty Products | $2,530 | $3,695 | -32% | - North American Surfactant sales volume fell 18% due to lower commodity laundry demand, 1,4 dioxane transition delays, and customer backward integration[88] - North American Polymer sales volume decreased 25%, with polyols for rigid foam applications dropping 30% due to customer inventory destocking and reduced construction activity[98][99] Liquidity and Capital Resources Q1 2023 liquidity was impacted by $72.1 million cash used in operations, with total debt increasing to $711.0 million and 2023 capital expenditures projected at $220-240 million - Net cash used in operating activities was $72.1 million for Q1 2023, a significant increase from $20.9 million in Q1 2022[110] - Capital expenditures are estimated to be in the range of $220.0 million to $240.0 million for the full year 2023[116] - Net debt increased by $170.7 million during the quarter to $584.0 million as of March 31, 2023[119] Non-GAAP Reconciliations This section reconciles non-GAAP financial measures, showing adjusted net income of $16.4 million for Q1 2023, down from $40.7 million in Q1 2022, and an increased net debt to equity ratio Reconciliation of Non-GAAP Adjusted Net Income (in millions, except per share) | | Q1 2023 Net Income | Q1 2023 Diluted EPS | Q1 2022 Net Income | Q1 2022 Diluted EPS | | :--- | :--- | :--- | :--- | :--- | | As Reported (GAAP) | $16.1 | $0.70 | $44.8 | $1.93 | | Adjustments | $0.3 | $0.01 | $(4.1) | $(0.17) | | Adjusted (Non-GAAP) | $16.4 | $0.71 | $40.7 | $1.76 | Net Debt Calculation (in millions) | | March 31, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Total Debt | $711.0 | $587.1 | | Less: Cash | ($127.0) | ($173.8) | | Net Debt | $584.0 | $413.3 | Item 3 – Quantitative and Qualitative Disclosures about Market Risk No material changes to market risks previously disclosed in the Company's 2022 Annual Report on Form 10-K - There have been no material changes to the market risks described in the Company's 2022 Annual Report on Form 10-K[136] Item 4 – Controls and Procedures As of March 31, 2023, the CEO and CFO concluded disclosure controls and procedures were effective, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of March 31, 2023[137] - No changes occurred during Q1 2023 that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[137] Part II Item 1 – Legal Proceedings No new environmental proceedings meeting the $1.0 million disclosure threshold were reported, and no material changes occurred to previously disclosed legal proceedings - There are no new environmental proceedings to disclose for the period, based on the company's adopted disclosure threshold of $1.0 million for monetary sanctions in governmental proceedings[138] - There have been no material changes to the legal proceedings disclosed in the Company's 2022 Annual Report on Form 10-K[139] Item 1A – Risk Factors No material changes to the risk factors previously disclosed in the Company's 2022 Annual Report on Form 10-K - There have been no material changes to the risk factors disclosed in the Company's 2022 Annual Report on Form 10-K[140] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2023, the company did not repurchase shares via its public program but acquired 40,401 shares from employees for tax withholding, with $125.1 million remaining for future repurchases - The company did not purchase any shares of its common stock on the open market during Q1 2023[118] - A total of 40,401 shares were acquired from employees to settle statutory withholding taxes related to equity compensation distributions and exercises[142][143][144] - As of the end of the quarter, approximately $125.1 million remained available for repurchase under the Board of Directors' authorized program[142]