Stepan(SCL) - 2023 Q4 - Annual Report

Part I Item 1. Business Stepan Company produces specialty and intermediate chemicals across three segments, competing on performance, price, and capacity - The Company operates through three reportable segments: Surfactants, Polymers, and Specialty Products, producing specialty and intermediate chemicals for various end products[18] - Competition is based on product performance, price, technical assistance, and capacity, competing with large global producers and internal divisions of customers[22] - The company's employee count decreased from 2,453 in 2022 to 2,389 at the end of 2023[29] Revenue-Generating Products The company's revenue is generated from three main product categories: Surfactants, Polymers, and Specialty Products - Surfactants serve as basic cleaning agents in detergents, personal care products, and various commercial and industrial applications[19] - Polymers, including polyurethane polyols and polyester resins, are primarily used in rigid foam for thermal insulation and CASE applications[20] - Specialty Products are chemicals utilized in food, flavoring, nutritional supplement, and pharmaceutical sectors[21] Compliance with Government Regulations The company is subject to extensive environmental, health, and safety regulations, with significant compliance costs 2023 Environmental Compliance Costs | Cost Category | Amount (USD) | | :--- | :--- | | Capital Expenditures | $8.5M | | Recurring Operating & Maintenance Costs | $38.3M | - The company has made capital investments to modify its manufacturing process to reduce 1,4 dioxane content in ethoxylated surfactants in response to recent regulations[28] Information About our Executive Officers The company's executive officers are elected annually by the Board of Directors, with key roles in various functions Executive Officers (as of Feb 29, 2024) | Name | Age | Title | | :--- | :--- | :--- | | Scott R. Behrens | 54 | President and Chief Executive Officer | | Sean T. Moriarty | 54 | Vice President and General Manager – Surfactants | | Luis E. Rojo | 51 | Vice President and Chief Financial Officer | | Jason S. Keiper | 50 | Vice President and Chief Technology and Sustainability Officer | | David G. Kabbes | 61 | Vice President, General Counsel and Secretary | | Richard F. Stepan | 47 | Vice President and General Manager – Polymers | | Robert J. Haire | 51 | Executive Vice President, Supply Chain | | Sharon N. Purnell | 46 | Vice President and Chief Human Resources Officer | Item 1A. Risk Factors The company identifies significant risks across business, market, regulatory, international, and financial operations - Business and operational risks include hazardous chemical manufacturing, which can lead to accidents and production shutdowns, and volatility in raw material and energy costs[46][49] - Market risks stem from customer product reformulations, such as reducing 1,4 dioxane, which can lessen demand for existing products, and intense global competition[56][57][61] - The company is subject to extensive environmental regulations (e.g., TSCA, REACH, ethylene oxide rules) that could require costly product reformulations or process changes[68][71][73] - International operations, which constituted 44% of net sales in 2023, expose the company to risks from currency fluctuations, foreign laws, and adverse tax consequences[85] - Financial risks include potential credit rating downgrades and the constraints of significant indebtedness, which was $654.1 million as of year-end 2023[91][93][175] Item 1C. Cybersecurity Stepan manages cybersecurity risks through its ERM program, following COSO and NIST guidelines, with Board oversight - The company's cybersecurity risk management is based on its ERM program, the COSO framework, and NIST guidelines[103][104][105] - The Audit Committee of the Board of Directors oversees cybersecurity risk management, with the Vice President of Information Technology in charge of assessment and management[110] - As of the filing date, the company is not aware of any cybersecurity incidents since the beginning of 2023 that have materially affected its business, operations, or financial condition[109] Item 2. Properties The company's principal physical properties include manufacturing facilities and technology centers globally Principal Physical Properties | Facility Name | Location | Segment | | :--- | :--- | :--- | | Millsdale | Elwood, Illinois | Surfactants/Polymers | | Winder | Winder, Georgia | Surfactants | | Maywood | Maywood, New Jersey | Surfactants / Specialty Products | | Pasadena | Pasadena, Texas | Surfactants | | Stepan France | Voreppe, France | Surfactants | | Stepan Ecatepec | Ecatepec, Mexico | Surfactants | | Stepan China | Nanjing, China | Polymers | | Stepan Brazil | Vespasiano, Brazil | Surfactants | | Global Technology Center | Northfield, Illinois | N/A | | Company Headquarters | Northbrook, Illinois | N/A (leased) | Item 3. Legal Proceedings The company is involved in various legal proceedings, primarily environmental remediation under CERCLA - The company is a potentially responsible party at the Maywood, New Jersey Superfund site for chemical and radiological contamination and is conducting remediation studies under USEPA orders[115] - At the Wilmington, Massachusetts site, the company is contractually obligated to contribute up to 5% of environmental response costs incurred by the current owner, with no ultimate limit on contributions[117] - The company is also performing self-remediation for chemical contamination discovered at its Elwood, Illinois (Millsdale) and Fieldsboro, New Jersey plants[119] Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stepan Company's common stock trades on the NYSE, with a share repurchase program and underperforming stock returns - The company's common stock trades on the NYSE under the symbol SCL[123] - A share repurchase program authorized for up to $150 million has approximately $125.1 million remaining for future repurchases as of Q4 2023[124] Stock Performance Comparison (Cumulative Value of $100 Invested on 12/31/2018) | Year | Stepan Company (USD) | Dow Jones Chemical Industry Index (USD) | Russell 2000 Index (USD) | | :--- | :--- | :--- | :--- | | 2018 | $100.00 | $100.00 | $100.00 | | 2019 | $138.43 | $119.10 | $125.52 | | 2020 | $164.76 | $138.54 | $150.58 | | 2021 | $172.94 | $171.15 | $172.90 | | 2022 | $149.56 | $155.30 | $137.56 | | 2023 | $134.98 | $169.84 | $160.85 | Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations In 2023, Stepan Company experienced a significant downturn with net income falling 73% due to decreased sales and volumes 2023 vs 2022 Financial Highlights | Metric | 2023 (USD) | 2022 (USD) | % Change | | :--- | :--- | :--- | :--- | | Net Sales | $2,325.8M | $2,773.3M | -16% | | Operating Income | $58.6M | $207.3M | -72% | | Net Income | $40.2M | $147.2M | -73% | | Diluted EPS | $1.75 | $6.38 | -73% | | Adjusted Net Income | $50.7M | $153.5M | -67% | | Adjusted Diluted EPS | $2.21 | $6.65 | -67% | - The decrease in 2023 net sales was driven by an 11% decline in consolidated sales volume and lower average selling prices, reflecting a slowdown in demand and significant customer and channel inventory destocking[140][146] - For 2024, management anticipates sales volume and margin improvements and is implementing cost reduction activities to deliver $50 million in pre-tax savings[195] Segment Results In 2023, all segments reported lower operating income due to volume declines and margin pressures Operating Income by Segment (in thousands USD) | Segment | 2023 (USD) | 2022 (USD) | % Change | | :--- | :--- | :--- | :--- | | Surfactants | $72.4M | $162.7M | -56% | | Polymers | $60.8M | $82.9M | -27% | | Specialty Products | $11.5M | $29.9M | -62% | | Total Segment Operating Income | $144.6M | $275.5M | -48% | - Surfactant sales volume declined 9%, primarily due to demand slowdown and inventory destocking across most end markets[146] - Polymer sales volume decreased 15%, reflecting customer destocking and reduced construction-related activities[155] Liquidity and Capital Resources The company's liquidity is supported by cash from operations, with increased debt and significant capital expenditures Cash Flow Summary (in millions USD) | Activity | 2023 (USD) | 2022 (USD) | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $174.9M | $160.8M | | Net Cash Used In Investing Activities | ($258.7M) | ($308.1M) | | Net Cash Provided By Financing Activities | $33.3M | $166.2M | Net Debt Position (in millions USD) | Metric | Dec 31, 2023 (USD) | Dec 31, 2022 (USD) | | :--- | :--- | :--- | | Total Debt | $654.1M | $587.1M | | Less: Cash & Cash Equivalents | ($129.8M) | ($173.8M) | | Net Debt | $524.3M | $413.3M | | Net Debt/Net Debt plus Equity Ratio | 30.1% | 26.2% | - Capital expenditures for 2024 are estimated to be in the range of $120.0 million to $140.0 million[172] Critical Accounting Estimates and Policies Critical accounting estimates involve significant judgment for environmental liabilities and goodwill impairment - Environmental liabilities are estimated based on factors like the nature of contamination and remediation costs. The company has accrued the low end of its estimated loss range[198][192] - Goodwill impairment testing uses market and income approaches, relying on estimates of EBITDA, growth rates, and discount rates. The Mexico reporting unit's goodwill of $6.7 million was tested in Q4 2023 due to declining earnings, and its fair value was not substantially above its carrying value[200][202][323] Item 7A. Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency, interest rates, and commodity prices, using hedging strategies - The company uses forward contracts to hedge foreign currency exposure, with an aggregate notional amount of $106.6 million at December 31, 2023. A hypothetical 10% adverse change in exchange rates would result in an $8.4 million reduction in earnings[212] - As of December 31, 2023, debt consisted of $360.7 million in fixed-rate and $283.0 million in variable-rate borrowings[213] - The company uses forward contracts to manage natural gas costs, with open contracts for 0.7 million dekatherms at a cost of $3.4 million at year-end 2023[215] Item 8. Financial Statements and Supplementary Data This section presents audited consolidated financial statements for 2021-2023 with an unqualified auditor's report - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and identified two Critical Audit Matters: environmental contingencies for the Maywood site and the goodwill valuation for the Mexico reporting unit[219][224][226] Consolidated Statement of Income Highlights (in thousands USD) | Line Item | 2023 (USD) | 2022 (USD) | 2021 (USD) | | :--- | :--- | :--- | :--- | | Net Sales | $2,325.8M | $2,773.3M | $2,346.0M | | Gross Profit | $277.6M | $427.1M | $395.8M | | Operating Income | $58.6M | $207.3M | $170.8M | | Net Income Attributable to Stepan | $40.2M | $147.2M | $137.8M | | Diluted EPS | $1.75 | $6.38 | $5.92 | Consolidated Balance Sheet Highlights (in thousands USD) | Line Item | Dec 31, 2023 (USD) | Dec 31, 2022 (USD) | | :--- | :--- | :--- | | Total Current Assets | $851.9M | $1,044.8M | | Total Assets | $2,363.4M | $2,433.2M | | Total Current Liabilities | $607.9M | $670.6M | | Total Liabilities | $1,146.9M | $1,267.1M | | Total Stepan Company Stockholders' Equity | $1,216.5M | $1,166.1M | Notes to Consolidated Financial Statements The notes provide detailed disclosures on goodwill impairment, total debt, tax rates, and environmental contingencies - In 2023, the company recorded goodwill and other intangible impairment charges of $2.0 million related to its Specialty Products (Lipid Nutrition) and Surfactants (Colombia) segments[322][327][233] - Total debt was $654.1 million as of Dec 31, 2023, comprised of senior unsecured notes, revolving credit facility borrowings, and foreign subsidiary debt[330] - The company recorded $11.6 million in restructuring and asset impairment charges in 2023, including $5.5 million for a voluntary early retirement program and $2.9 million for workforce productivity measures[441][233] Item 9A. Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2023 - The CEO and CFO concluded that disclosure controls and procedures were effective as of December 31, 2023[447] - Management's assessment, based on the COSO 2013 framework, concluded that internal control over financial reporting was effective[449] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the company's internal control over financial reporting[450] Part III Items 10-14 Information for Items 10 through 14 is incorporated by reference from the company's definitive Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the 2024 Proxy Statement[460][462][463][464][465] Part IV Item 15. Exhibits, Financial Statement Schedules This section lists exhibits filed as part of the Form 10-K report, including governance and material contracts - This section contains a list of all exhibits filed with the Form 10-K, including governance documents, material contracts, and required certifications[467][468][469][470] Item 16. Form 10-K Summary The company has indicated that there is no summary provided for this item - No summary is provided under this item[471]