Stepan(SCL) - 2024 Q1 - Quarterly Report

Part I - Financial Information This section presents the company's financial statements and related disclosures Item 1 - Financial Statements This section presents the unaudited condensed consolidated financial statements for Q1 2024, showing decreased net sales and net income primarily due to lower selling prices Condensed Consolidated Statements of Income (Q1 2024 vs Q1 2023) | (In thousands, except per share amounts) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Sales | $551,418 | $651,436 | | Gross Profit | $70,281 | $73,560 | | Operating Income | $20,169 | $21,057 | | Net Income | $13,893 | $16,142 | | Diluted EPS | $0.61 | $0.70 | Condensed Consolidated Balance Sheets (As of March 31, 2024) | (Dollars in thousands) | March 31, 2024 | December 31, 2023 | | :--- | :--- | :--- | | Total current assets | $869,806 | $851,883 | | Total assets | $2,373,147 | $2,363,354 | | Total current liabilities | $628,853 | $607,870 | | Total liabilities | $1,158,625 | $1,146,864 | | Total equity | $1,214,522 | $1,216,490 | Condensed Consolidated Statements of Cash Flows (Q1 2024 vs Q1 2023) | (In thousands) | Three Months Ended March 31, 2024 | Three Months Ended March 31, 2023 | | :--- | :--- | :--- | | Net Cash Provided By (Used In) Operating Activities | $41,554 | $(72,058) | | Net Cash Used In Investing Activities | $(24,415) | $(90,341) | | Net Cash Provided By (Used In) Financing Activities | $(19,984) | $113,536 | - As of March 31, 2024, the company estimated a range of possible environmental and legal losses between $20.8 million and $49.8 million, accruing for the lower end of this range[37] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q1 2024 financial results, noting a 15% sales decrease and 14% net income drop due to lower prices, alongside improved liquidity and a positive 2024 outlook Overview The company operates through three main segments: Surfactants, which are key ingredients in cleaning and personal care products; Polymers, used in thermal insulation and specialty coatings; and Specialty Products, which include ingredients for food, nutritional, and pharmaceutical applications - The company's business is divided into three reportable segments: - Surfactants: Accounted for 71% of consolidated net sales in Q1 2024, used in consumer and industrial cleaning products[83] - Polymers: Accounted for 26% of sales, including polyurethane polyols for insulation and coatings[84] - Specialty Products: Accounted for 3% of sales, including flavors and emulsifiers for food and pharmaceutical applications[85] Results of Operations For Q1 2024, net income was $13.9 million ($0.61 per diluted share), a decrease from $16.1 million ($0.70 per diluted share) in Q1 2023, with consolidated net sales falling 15% to $551.4 million primarily due to lower average selling prices Q1 2024 vs Q1 2023 Performance Summary | Metric | Q1 2024 | Q1 2023 | Change | | :--- | :--- | :--- | :--- | | Net Income | $13.9M | $16.1M | -13.7% | | Diluted EPS | $0.61 | $0.70 | -12.9% | | Adjusted Net Income | $14.7M | $16.4M | -10.4% | | Adjusted Diluted EPS | $0.64 | $0.71 | -9.9% | - The 15% decrease in consolidated net sales was driven by: - Lower average selling prices: -$115.5 million impact[89] - Increased sales volume (1%): +$3.7 million impact[89] - Favorable foreign currency translation: +$11.8 million impact[89] - The effective tax rate increased to 28.6% in Q1 2024 from 18.9% in Q1 2023, primarily due to the company's intention to elect "Bonus Depreciation" for its new Pasadena, Texas facility, which is expected to reduce the usability of certain tax deductions and credits in 2024[95] Segment Results In Q1 2024, Surfactants operating income decreased 4% to $26.1 million, Polymers operating income fell 16% to $8.4 million, while Specialty Products operating income surged 69% to $4.3 million Operating Income by Segment (Q1 2024 vs Q1 2023) | (In thousands) | Q1 2024 | Q1 2023 | % Change | | :--- | :--- | :--- | :--- | | Surfactants | $26,079 | $27,056 | -4% | | Polymers | $8,382 | $10,004 | -16% | | Specialty Products | $4,268 | $2,530 | +69% | | Total Segment Operating Income | $38,729 | $39,590 | -2% | - Surfactant sales in North America decreased 17% due to lower demand in the agricultural end market from inventory destocking[97] - Latin American sales volume grew 16%, driven by demand in consumer products[99] - Polymer sales in North America fell 14%, largely due to a 43% volume decline in commodity phthalic anhydride caused by operational interruptions at the Millsdale, Illinois plant[106] - Specialty Products' increase in gross profit and operating income was mainly attributable to higher unit margins and sales volume within the medium chain triglycerides (MCT) product line[113] Liquidity and Capital Resources The company's liquidity position improved significantly, with operating activities generating $41.6 million in cash in Q1 2024, compared to a $72.1 million use in Q1 2023, primarily due to better working capital management - Cash from operating activities was a source of $41.6 million in Q1 2024, a stark contrast to a cash use of $72.1 million in Q1 2023, mainly due to improved working capital[116] - Capital expenditures were $30.2 million in Q1 2024, a decrease from $92.2 million in Q1 2023[121] - The full-year 2024 forecast for capital expenditures is between $120.0 million and $140.0 million[122] - As of March 31, 2024, total debt was $646.0 million and net debt was $520.2 million[126] - The company had $152.8 million available under its credit agreement[128] - The company did not purchase any shares on the open market in Q1 2024[125] - $125.1 million remains authorized under its share repurchase program[125] Outlook Management anticipates a gradual improvement in sales volumes, driven by recovery in Rigid Polyols demand and an expected rebound in the agricultural business in the second half of 2024, alongside a focus on achieving $50.0 million in pre-tax savings - Management expects gradual sales volume improvement, with recovery in the agricultural business anticipated in the second half of the year[135] - The company is focused on delivering $50.0 million in pre-tax savings from its cost reduction program to offset inflation and increased expenses from the new Pasadena facility commissioning[135] - The company believes it is positioned to deliver full-year adjusted EBITDA growth and positive free cash flow in 2024[135] Non-GAAP Reconciliations This section provides detailed reconciliations of non-GAAP financial measures to their most directly comparable GAAP measures, which management uses to evaluate core operating performance by excluding certain non-operational items Reconciliation of Non-GAAP Adjusted Net Income (Q1 2024) | (In millions, except per share amounts) | Net Income | Diluted EPS | | :--- | :--- | :--- | | As Reported | $13.9 | $0.61 | | Deferred Compensation Income | (0.5) | (0.02) | | Environmental Remediation Expense | 1.5 | 0.06 | | Cumulative Tax Effect | (0.2) | (0.01) | | Adjusted Net Income | $14.7 | $0.64 | Reconciliation of Non-GAAP Adjusted EBITDA (Q1 2024 vs Q1 2023) | ($ in millions) | Q1 2024 | Q1 2023 | | :--- | :--- | :--- | | Operating Income | $20.2 | $21.1 | | Depreciation and Amortization | 27.6 | 25.5 | | Other, Net Income | 2.4 | 1.7 | | EBITDA | $50.2 | $48.3 | | Adjustments | 1.0 | 0.4 | | Adjusted EBITDA | $51.2 | $48.7 | Item 3 – Quantitative and Qualitative Disclosures about Market Risk The company reported that there have been no material changes to the market risks described in its 2023 Annual Report on Form 10-K - There have been no material changes to the market risks disclosed in the Company's 2023 Annual Report on Form 10-K[144] Item 4 – Controls and Procedures Based on an evaluation as of March 31, 2024, the Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2024[145] - No changes occurred during the quarter ended March 31, 2024, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[145] Part II - Other Information This section covers other important information including legal proceedings, risk factors, and equity transactions Item 1 – Legal Proceedings This section provides updates on significant legal matters, including a consent decree entered regarding the Maywood, New Jersey site and a Notice and Finding of Violation from the USEPA concerning the Millsdale facility - A consent decree was entered on February 29, 2024, among the Company, the United States, and NJDEP regarding the Maywood, New Jersey site, requiring certain actions and payment of past costs[147] - On March 26, 2024, the Company received a Notice and Finding of Violation from the USEPA for its Millsdale facility, alleging violations of air regulations related to operating parameters and emissions[148] Item 1A – Risk Factors The company states that there have been no material changes to the risk factors that were disclosed in its Annual Report on Form 10-K for the year ended December 31, 2023 - There have been no material changes to the risk factors disclosed in the Company's 2023 Annual Report on Form 10-K[150] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2024, the company purchased 46,002 shares, primarily surrendered by employees for tax withholding, with $125.1 million remaining under the share repurchase program Share Purchases in Q1 2024 | Month | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January 2024 | 1,614 | $94.43 | | February 2024 | 34,904 | $89.99 | | March 2024 | 9,484 | $87.52 | | Total | 46,002 | $89.64 | - The shares purchased were surrendered by employees to settle statutory withholding taxes related to equity awards and were not part of the publicly announced open-market repurchase program[153][154][155] - The company has $125.1 million remaining under its $150 million share repurchase program authorized in October 2021, which has no expiration date[151][152]