Stepan(SCL) - 2020 Q4 - Annual Report

PART I Item 1. Business Stepan Company, incorporated in Delaware in 1959, produces specialty and intermediate chemicals across three reportable segments: Surfactants, Polymers, and Specialty Products, and is a leading global merchant producer of surfactants - Stepan Company operates in three reportable segments: Surfactants, Polymers, and Specialty Products, producing specialty and intermediate chemicals for various manufacturers[12] - The company is a leading merchant producer of surfactants globally, competing on product performance, price, and technical assistance[16] 2020 Environmental Compliance Expenditures | Category | Amount (Millions USD) | Percentage of Total Capital Expenditures | | :-------------------------------- | :-------------------- | :--------------------------------------- | | Capital Expenditures for Environment | $7.8 | 6% | | Recurring Environmental Costs | $35.4 | N/A | - The company's manufacturing plants primarily use electricity and interruptible natural gas, switching to fuel oil during gas interruptions. Raw materials are mostly petroleum or plant-based, with contracts covering most 2021 requirements[17][18] Revenue-Generating Products The company's core products include Surfactants for cleaning, Polymers for insulation and coatings, and Specialty Products for food and pharmaceuticals - Surfactants are core cleaning agents in consumer and industrial products, also used as emulsifiers, wetting agents, and biocidal disinfectants[13] - Polymers, including polyurethane polyols, polyester resins, and phthalic anhydride, are used in rigid foam insulation, coatings, adhesives, sealants, elastomers (CASE), and plasticizers[14] - Specialty Products are chemicals utilized in food, flavoring, nutritional supplement, and pharmaceutical applications[15] Competitive Conditions Stepan Company competes across diverse industries by focusing on product performance, price, technical assistance, and customer-specific needs - Stepan Company competes in a wide range of industries, focusing on product performance, price, technical assistance, and meeting specific customer needs, which allows it to differentiate beyond price[16] - Competition varies by segment: Surfactants face large global and regional producers, Polymers compete with chemical divisions of large companies and smaller specialty manufacturers, and Specialty Products compete with large firms and numerous small companies[16] Material Resources Manufacturing plants primarily use electricity and natural gas, with raw materials being petroleum or plant-based, and a power outage occurred in January 2020 - The company's manufacturing plants primarily operate on electricity and interruptible natural gas, switching to fuel oil during peak heating demand periods[17] - Principal raw materials are petroleum or plant-based, with contracts in place for most forecasted 2021 requirements, reducing dependence on any single supplier[18] - A power outage at the Millsdale, Illinois facility in January 2020 caused a temporary shutdown, but all production lines were fully operational by the end of Q1 2020[17] Compliance with Government Regulations The company incurred $7.8 million in environmental capital expenditures in 2020, representing 6% of total, with no material adverse effect expected from compliance 2020 Environmental Compliance Costs | Category | Amount (Millions USD) | | :------------------------------------------- | :-------------------- | | Capital Expenditures for Environmental Compliance | $7.8 | | Recurring Operation & Maintenance Costs | $35.4 | - Environmental capital expenditures represented approximately 6% of the Company's total 2020 capital expenditures[19] - Compliance with environmental regulations is not expected to have a material adverse effect on the Company's earnings or competitive position in the foreseeable future[20] Human Capital Resources Stepan Company employed 2,293 people in 2020, prioritizing safety, responsible chemicals management, and talent development through comprehensive benefits Employee Count (2019-2020) | Date | Number of Employees | | :----------- | :------------------ | | Dec 31, 2020 | 2,293 | | Dec 31, 2019 | 2,284 | - The company prioritizes employee safety, responsible chemicals management, and adherence to ACC Responsible Care Management System (RCMS)® standards[22] - Stepan focuses on attracting and retaining talent through professional development, comprehensive benefits, and Pay-for-Performance incentives, fostering a diverse and inclusive workplace[23] Acquisitions and Dispositions Information regarding the company's acquisition activities is detailed in Note 20 of the consolidated financial statements - Information regarding the Company's acquisition activities is detailed in Note 20 of the consolidated financial statements[24] Website The company's website provides free access to SEC filings, sustainability reports, code of conduct, and corporate governance documents - The Company's website (www.stepan.com) provides free access to SEC filings (10-K, 10-Q, 8-K), sustainability reports, code of conduct, and corporate governance documents[25] Information About our Executive Officers Executive officers are elected annually, with F. Quinn Stepan, Jr. as Chairman and CEO, and Scott R. Behrens as President and COO, effective January 2021 Executive Officers as of February 26, 2021 | Name | Age | Title | Year First Elected Officer | | :---------------- | :-- | :------------------------------------------- | :------------------------- | | F. Quinn Stepan, Jr. | 60 | Chairman and Chief Executive Officer | 1997 | | Scott R. Behrens | 51 | President and Chief Operating Officer | 2014 | | Arthur W. Mergner | 57 | Executive Vice President, Supply Chain | 2014 | | Debra A. Stefaniak | 59 | Vice President, Business Enablement | 2015 | | Sean T. Moriarty | 51 | Vice President and General Manager –Surfactants | 2017 | | Luis E. Rojo | 48 | Vice President and Chief Financial Officer | 2018 | | Janet A. Catlett | 44 | Vice President and Chief Human Resources Officer | 2018 | | Jason S. Keiper | 47 | Vice President and Chief Technology and Sustainability Officer | 2019 | | David G. Kabbes | 58 | Vice President, General Counsel and Secretary | 2019 | | Richard F. Stepan | 44 | Vice President and General Manager –Polymers | 2021 | - F. Quinn Stepan, Jr. became Chairman in January 2017 and has served as CEO since January 2006. Scott R. Behrens assumed the role of President and COO in January 2021[27][28] Item 1A. Risk Factors Stepan Company faces significant risks from operational hazards, cost volatility, supply chain disruptions, the COVID-19 pandemic, market competition, and stringent environmental regulations - The COVID-19 pandemic has disrupted operations, reduced demand for certain products (e.g., rigid polyols), and could continue to impact the business due to closures, supply chain issues, and health risks[37] - Chemical manufacturing is inherently hazardous, posing risks of accidents, unplanned shutdowns, and significant losses or liabilities from contamination, spills, and regulatory fines, which may not be fully covered by insurance[38][39][40] - Volatility in raw material, natural gas, and electricity costs, along with supply disruptions, can increase operating costs, which the company may struggle to pass on to customers due to competitive pressures[41] - Customer product reformulations (e.g., reducing 1,4 dioxane in surfactants) or new technologies can decrease demand for existing products, requiring continuous new product development, which may not always yield expected growth or profits[45][46][47] - The company faces significant global competition from numerous companies, some with greater financial resources or internal raw material capabilities, potentially leading to competitive disadvantages[51][52] - Extensive environmental, health, and safety regulations (e.g., TSCA, FIFRA, REACH, ethylene oxide rules) could necessitate additional costs, product reformulations, or operational changes, exposing the company to liabilities and enforcement actions[56][57][58][59][60][61] - International operations, accounting for approximately 40% of net sales in 2020, expose the company to risks such as currency exchange rate fluctuations, inflation, political instability, trade restrictions, and varying intellectual property and tax laws[70][71][73][74][75] - The company's significant indebtedness ($198.7 million as of December 31, 2020) and potential future debt could limit cash flow for operations and expansion, increase vulnerability to economic downturns, and subject it to restrictive debt covenants[78][80] Business and Operations Risks Operational risks include COVID-19 impacts, chemical manufacturing hazards, raw material cost volatility, supply chain disruptions, geopolitical events, and capital project delays - The COVID-19 pandemic caused temporary facility closures and production halts in 2020, reducing demand for rigid polyol products due to construction delays[37] - Chemical manufacturing hazards include accidents, unplanned shutdowns, and environmental contamination, which can lead to significant losses, liabilities, and operational disruptions[38][39] - Volatility in raw material, natural gas, and electricity costs, along with potential supply disruptions, can increase operating expenses and negatively impact profitability if not passed on to customers[41] - Disruptions in third-party transportation (railroads, ships, trucks) or significant cost changes could hinder raw material delivery and product shipment, affecting revenues and operating results[42] - Conflicts, military actions, and terrorist attacks, especially in energy-producing nations, can cause economic instability, raw material cost increases, and disruptions to company operations or supply chains[43] - Expansion and capital projects are subject to risks like cost overruns, delays, and miscalculations in capacity needs, which could adversely affect return on investment and cash flows[44] Market, Competition and Strategic Risks Market risks involve customer reformulations, new technologies, acquisition integration challenges, intense global competition, economic downturns, and intellectual property protection issues - Customer product reformulations or new technologies, such as concerns over 1,4 dioxane in consumer products, can reduce demand for existing products and necessitate continuous new product development[45][46][47] - Acquisition opportunities carry risks including difficulties in identifying suitable candidates, negotiating terms, obtaining financing, and successfully integrating acquired businesses, which may not perform as planned[48][49][50] - Significant global competition from companies with greater financial resources or raw material access could put Stepan at a competitive disadvantage if it fails to maintain service levels, product quality, and competitive pricing[51][52] - Downturns in specific industries (e.g., consumer products) or general economic recessions, along with changing consumer preferences, can reduce demand for the company's products[53][54] - Inability to protect intellectual property rights could allow competitors to develop similar products, impacting the company's ability to compete and potentially leading to expensive infringement claims[55] Regulatory and Legal Risks Regulatory and legal risks include extensive environmental, health, and safety laws, stringent ethylene oxide regulations, potential liabilities for contamination, and non-compliance with anti-corruption laws - The company is subject to extensive environmental, health, and safety laws (e.g., TSCA, FIFRA, REACH, Clean Air/Water Acts) that could require costly compliance, product reformulation, or operational changes[56][57][58][59] - Increasingly stringent regulation of ethylene oxide emissions, particularly in Georgia and Illinois, could impair the company's ability to manufacture certain products at affected facilities[60] - Compliance with environmental laws may restrict facility expansion, necessitate costly pollution control equipment, and expose the company to liabilities for historical contamination at sites like U.S. Superfund locations[61][62] - Failure to comply with manufacturing, storage, distribution, and labeling regulations (e.g., FIFRA, EU Biocidal Products Regulation) could result in fines, injunctions, permit revocations, and material adverse effects on business[63][64] - The company faces inherent exposure to various liability claims, including product liability, toxic tort, and environmental, which could lead to significant legal expenses and damage awards not fully covered by insurance[67][68] - Non-compliance with anti-corruption laws like FCPA and the U.K. Bribery Act, especially in countries with high perceived corruption, could result in reputational harm, significant sanctions, and increased costs of doing business[69] International Operations Risks International operations, representing 40% of 2020 net sales, expose the company to foreign currency fluctuations, political instability, trade restrictions, and diverse legal frameworks - International sales constituted approximately 40% of net sales in 2020, exposing the company to risks from foreign currency exchange rate fluctuations, high inflation, and political/economic instability[70][71] - Risks include variability of intellectual property laws, corruption, differing economic cycles, trade and currency restrictions (tariffs, exchange controls), and changes in foreign tax rates or U.S. laws regarding foreign income[71] - Fluctuations in foreign currency exchange rates can reduce reported international sales and earnings when the U.S. dollar strengthens, impacting profitability and cash flows[74] - Foreign investment, trade, and currency exchange laws may limit the company's ability to repatriate cash or efficiently allocate funds for strategic initiatives[75] Financial Risks Financial risks include potential credit rating downgrades, increased cost of funds, significant indebtedness, and restrictive debt covenants limiting financial flexibility - Downgrades to credit ratings or disruptions in access to capital markets could increase the cost of funds, reduce liquidity, and negatively impact the company's competitive position[76][77] Debt Profile as of December 31, 2020 | Metric | Amount (Millions USD) | | :----------------------------------- | :-------------------- | | Total Debt | $198.7 | | Revolving Credit Facility (available) | $343.8 | - Significant indebtedness and potential future debt could reduce cash flow available for operations and expansion, limit borrowing capacity, and increase vulnerability to adverse economic conditions[80] - Debt agreements contain covenants requiring maintenance of financial ratios (e.g., interest coverage, net leverage, net worth) and limiting additional debt, investments, and dividends, with non-compliance potentially leading to debt repayment or restructuring[80][189] General Risks General risks encompass IT system interruptions, cyber-attacks, and the critical dependence on retaining executive management and key personnel for business success - Reliance on IT systems means interruptions, damage, or security breaches (cyber-attacks) could impact production, shipments, order processing, financial reporting, and lead to theft of intellectual property or data, harming reputation and financial results[82][83] - The company's success depends on retaining executive management and other key personnel; a failure to attract, retain, and develop qualified talent or implement adequate succession plans could materially affect the business[85] Item 1B. Unresolved Staff Comments There are no unresolved staff comments to report for the period - No unresolved staff comments were reported[86] Item 2. Properties Stepan Company's principal properties include manufacturing facilities across the U.S., Europe, Latin America, and Asia, with headquarters in Northfield, Illinois, all deemed suitable for current operations Principal Physical Properties and Segments | Name of Facility | Location | Segment | | :------------------------------- | :---------------------------- | :---------------------- | | Millsdale | Millsdale (Joliet), Illinois | Surfactants/Polymers | | Winder | Winder, Georgia | Surfactants | | Maywood | Maywood, New Jersey | Surfactants/Specialty Products | | Stepan France | Voreppe, France | Surfactants | | Stepan Ecatepec | Ecatepec, Mexico | Surfactants | | Stepan China | Nanjing, China | Polymers | | Stepan Brazil | Vespasiano, Minas Gerais, Brazil | Surfactants | | Company Headquarters | Northfield, Illinois | N/A | | Company Corporate Supply Chain, etc. | Northbrook, Illinois | N/A | - Management believes the current facilities are suitable and adequate for the Company's operations[86] Item 3. Legal Proceedings Stepan Company is involved in environmental assessment and remediation legal proceedings, primarily under CERCLA, with provisions made for estimated costs at various sites, though actual costs may differ - The majority of legal proceedings against the Company relate to environmental assessment, protection, and remediation matters, often under CERCLA and similar statutes[88] - The Company believes it has made adequate provisions for likely costs related to these sites and claims, but the ultimate resolution and costs could differ materially from current estimates[88] Maywood, New Jersey Site The Maywood site is on the National Priorities List due to chemical contamination, requiring soil and buried waste cleanup, with groundwater remediation still awaiting a USEPA decision - The Maywood site is on the National Priorities List due to chemical contamination, requiring Stepan to perform remedial cleanup of soil and buried waste as per a 2014 USEPA Record of Decision[89] - The USEPA has not yet issued a Record of Decision for chemically-contaminated groundwater at the Maywood site[89] - The U.S. Department of Justice and the Company agreed in 2004 that the United States is responsible for radioactive waste removal and associated remediation costs at the Maywood site[91] D'Imperio Property Site Stepan Company was named a Potentially Responsible Party at the D'Imperio Property Superfund Site, with ongoing remediation and potential for ultimate liability to differ from current estimates - The Company was named a Potentially Responsible Party (PRP) at the D'Imperio Property Superfund Site in New Jersey due to hazardous substance disposal in the mid-1970s[92] - Remediation work is ongoing, and while updated cost estimates were considered in 2019, the ultimate liability could differ materially from current estimates[92] Wilmington Site Stepan is contractually obligated to contribute up to five percent of future environmental response costs at its formerly-owned Wilmington, Massachusetts site, having paid $2.97 million through 2020 - Stepan is contractually obligated to contribute up to five percent of future environmental response costs at its formerly-owned Wilmington, Massachusetts site, with no ultimate limitation on contributions[93] - The Company has paid $2.97 million for its portion of costs through December 31, 2020, and has recorded a liability, but actual costs could differ materially[93][94] - An agreement in April 2004 waived certain statute of limitations defenses for potential claims by the Town of Wilmington, Massachusetts[95] Other U.S. Sites The company is performing self-remediation at its Millsdale, Illinois, and Fieldsboro, New Jersey, plants due to chemical contamination, with actual costs potentially differing from estimates - The Company is performing self-remediation at its Millsdale, Illinois, and Fieldsboro, New Jersey, plants after discovering chemical contamination levels above legal thresholds[96] - Recorded liabilities for these remediations are based on expected costs, but actual costs could materially differ from current estimates[96] Item 4. Mine Safety Disclosures The company has no disclosures related to mine safety - Not Applicable[97] PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Stepan Company's common stock (SCL) is listed on the NYSE, with 1,737 holders of record as of January 31, 2021, and the company repurchased 31,548 shares in Q4 2020 - Stepan Company's common stock (SCL) is traded on the New York Stock Exchange[100] Shares Outstanding and Holders of Record | Metric | Value | | :----------------------------------- | :---------- | | Shares Outstanding (Jan 31, 2021) | 22,476,752 | | Holders of Record (Jan 31, 2021) | 1,737 | Q4 2020 Share Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :------- | :--------------------- | :--------------------------- | | October | 32 | $118.03 | | November | 18,175 | $118.71 | | December | 13,341 | $113.90 | | Total | 31,548 | $116.68 | - As of December 31, 2020, 175,874 shares remained available for repurchase under the Board's authorization[100] Stock Performance Graph Stepan Company's common stock significantly outperformed the Dow Jones Chemical Industry Index and the Russell 2000 Index from 2015 to 2020 Cumulative Value at December 31 (Indexed to $100 at 2015) | Index | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | | :------------------------------- | :------ | :------ | :------ | :------ | :------ | :------ | | Stepan Company | $100.00 | $165.99 | $162.55 | $154.08 | $215.64 | $253.86 | | Dow Jones Chemical Industry Index | $100.00 | $113.77 | $143.13 | $123.10 | $146.61 | $170.55 | | Russell 2000 Index | $100.00 | $121.31 | $139.08 | $123.76 | $155.35 | $186.36 | - Stepan Company's common stock significantly outperformed both the Dow Jones Chemical Industry Index and the Russell 2000 Index in cumulative return from December 31, 2015, to December 31, 2020[102][103] Item 6. (Removed and Reserved) This item has been removed and reserved - Item 6 has been removed and reserved[104] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations MD&A reviews Stepan Company's financial performance for 2020, 2019, and 2018, highlighting increased net income in 2020 driven by Surfactant sales, strategic acquisitions, and details on liquidity, debt, and accounting policies Overview Stepan Company, a global intermediate chemical producer, saw Surfactants account for 72% of 2020 net sales, with key acquisitions and a power disruption impacting results - Stepan Company produces and sells intermediate chemicals globally, with Surfactants accounting for 72% of consolidated net sales in 2020, Polymers 24%, and Specialty Products 4%[106][108][109] - The Millsdale, Illinois facility experienced a power disruption in January 2020, causing production and operational challenges, but all lines were fully operational by the end of Q1 2020. An $18.0 million pre-tax insurance recovery was recognized[107] - Key acquisitions in 2020 included Clariant's anionic surfactant business in Mexico and Logos Technologies' rhamnolipid-based bio-surfactant business, enhancing growth in Latin America and sustainable product offerings[107] - A fermentation plant in Lake Providence, Louisiana, was acquired in February 2021 to complement bio-surfactant technology, representing a new platform for the company[107] - Deferred compensation plans can cause period-to-period fluctuations in expenses and profits due to changes in the value of Company common stock and mutual fund investment assets[114] Pretax Income Effect of Deferred Compensation (Millions USD) | Metric | 2020 | 2019 | | :----------------- | :----- | :------ | | Pretax Income Effect | $(5.3) | $(10.4) | - Foreign currency translation negatively impacted 2020 net sales by $45.7 million and operating income by $7.7 million, primarily due to a stronger U.S. dollar against Latin American currencies[116] Results of Operations This section analyzes Stepan Company's financial performance, including net sales, operating income, and segment-specific results, for 2020 compared to 2019, and 2019 compared to 2018 2020 Compared with 2019 In 2020, consolidated net income increased by 23% to $126.8 million, and operating income rose by 35% to $171.5 million, driven by higher sales volume and prices Consolidated Financial Highlights (2020 vs. 2019) | Metric | 2020 (Millions USD) | 2019 (Millions USD) | Change (Millions USD) | Change (%) | | :----------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Net Income Attributable to Company | $126.8 | $103.1 | $23.7 | 23% | | Diluted EPS | $5.45 | $4.42 | $1.03 | 23.3% | | Adjusted Net Income | $132.0 | $119.4 | $10.6 | 11% | | Adjusted Diluted EPS | $5.68 | $5.12 | $0.56 | 10.9% | | Consolidated Net Sales | $1,869.8 | $1,858.7 | $11.1 | 1% | | Consolidated Operating Income | $171.5 | $127.3 | $44.2 | 35% | - Consolidated net sales increased 1% due to a 3% increase in sales volume ($49.6 million positive impact) and higher average selling prices ($7.1 million positive impact), partially offset by a negative foreign currency translation impact of $45.7 million[118] - Operating income increased 35%, driven by a $46.3 million (38%) increase in Surfactant operating income, and decreases in deferred compensation and business restructuring expenses, partially offset by higher corporate expenses and unfavorable foreign currency translation[119] - Net interest expense declined 9% due to lower interest expense from debt repayments and non-recurrence of one-time events in 2019, partially offset by lower interest income[121] - The effective tax rate increased to 25.4% in 2020 from 18.1% in 2019, primarily due to the non-recurrence of a favorable tax benefit from R&D credits in 2019, an unfavorable tax cost related to cash repatriations for the INVISTA acquisition, and a less favorable geographical mix of income[123] Segment Results (2020 vs. 2019) In 2020, Surfactant net sales increased by 6% and operating income by 38%, while Polymers and Specialty Products experienced declines in both sales and operating income Net Sales by Segment (2020 vs. 2019, Thousands USD) | Segment | 2020 | 2019 | Increase (Decrease) | Percent Change | | :--------------- | :---------- | :---------- | :------------------ | :------------- | | Surfactants | $1,351,686 | $1,272,723 | $78,963 | 6% | | Polymers | $452,277 | $512,347 | $(60,070) | -12% | | Specialty Products | $65,787 | $73,675 | $(7,888) | -11% | | Total Net Sales | $1,869,750 | $1,858,745 | $11,005 | 1% | Operating Income by Segment (2020 vs. 2019, Thousands USD) | Segment | 2020 | 2019 | Increase (Decrease) | Percent Change | | :--------------- | :---------- | :---------- | :------------------ | :------------- | | Surfactants | $169,101 | $122,780 | $46,321 | 38% | | Polymers | $68,214 | $69,567 | $(1,353) | -2% | | Specialty Products | $13,966 | $16,415 | $(2,449) | -15% | Surfactants (2020 vs. 2019) Surfactant net sales increased 6% due to higher volume and prices, driven by strong demand for cleaning and personal wash products, especially in North and Latin America - Surfactant net sales increased 6% ($79.0 million) due to a 6% increase in sales volume and higher average selling prices, partially offset by unfavorable foreign currency translation[126] - North American sales volume grew 6% due to higher demand for cleaning, disinfection, and personal wash products driven by COVID-19, despite lower demand in agriculture and oilfield[126] - Latin American sales increased 10% with an 18% volume increase, driven by cleaning product demand and a fully operational Ecatepec, Mexico facility, but negatively impacted by a stronger U.S. dollar[128] - Surfactant operating income increased 38% ($46.3 million), primarily from a 22% increase in gross profit due to higher unit margins and favorable customer/product mix, especially in North and Latin America[130][131][132] Polymers (2020 vs. 2019) Polymer net sales decreased 12% due to lower volume and prices, impacted by the Millsdale plant outage and reduced rigid polyol demand, despite an insurance recovery - Polymer net sales decreased 12% ($60.1 million) due to a 5% decrease in sales volume, lower average selling prices, and unfavorable foreign currency translation[136] - North American sales declined 16%, with phthalic anhydride volume down 38% due to the Millsdale plant outage and soft market demand, and rigid polyols down 2% from COVID-19 related construction delays[136] - Polymer operating income decreased 2% ($1.4 million), with gross profit down 2% due to lower sales volume and unit margins in North America, partially offset by a $12.8 million insurance recovery from the Millsdale power outage[139] - Asian operations' gross profit improved 68% due to higher unit margins (including a $3.7 million government reimbursement) and 9% volume growth[141] Specialty Products (2020 vs. 2019) Specialty Products net sales decreased 11% due to lower volume and average selling prices, resulting in reduced gross profit and operating income from lower margins - Specialty Products net sales decreased 11% ($7.9 million) due to a 3% decrease in sales volume and lower average selling prices[143] - Gross profit and operating income both decreased, primarily due to lower margins within the medium chain triglycerides product line[143] Corporate Expenses (2020 vs. 2019) Corporate expenses decreased by $1.7 million in 2020, primarily due to lower deferred compensation and business restructuring expenses - Corporate expenses decreased $1.7 million, from $81.5 million in 2019 to $79.8 million in 2020, primarily due to lower deferred compensation ($5.2 million) and business restructuring expenses ($1.5 million)[144] - Deferred compensation expense decreased $5.2 million because the market price increase of Company common stock was smaller in 2020 ($16.88/share) compared to 2019 ($28.44/share)[145] 2019 Compared with 2018 In 2019, consolidated net sales decreased by 7% to $1,858.7 million, and operating income declined by 15% to $127.3 million, primarily due to lower selling prices and higher deferred compensation Consolidated Financial Highlights (2019 vs. 2018) | Metric | 2019 (Millions USD) | 2018 (Millions USD) | Change (Millions USD) | Change (%) | | :----------------------------------- | :------------------ | :------------------ | :-------------------- | :--------- | | Net Income Attributable to Company | $103.1 | $111.1 | $(8.0) | -7% | | Diluted EPS | $4.42 | $4.76 | $(0.34) | -7.1% | | Adjusted Net Income | $119.4 | $111.7 | $7.7 | 7% | | Adjusted Diluted EPS | $5.12 | $4.79 | $0.33 | 6.9% | | Consolidated Net Sales | $1,858.7 | $1,993.9 | $(135.2) | -7% | | Consolidated Operating Income | $127.3 | $149.3 | $(22.0) | -15% | - Consolidated net sales decreased 7% ($135.1 million) due to lower average selling prices (pass-through of lower raw material costs), unfavorable foreign currency translation, and a 2% decrease in sales volume[147] - Operating income declined 15% ($22.0 million), primarily due to higher deferred compensation expenses ($17.5 million increase) and increased environmental remediation expenses[148][149] - Net interest expense declined 45% ($4.8 million) due to higher interest earned on U.S. cash balances (from foreign cash repatriation) and lower interest expense from debt repayments and a voluntary prepayment of senior notes[150] - The effective tax rate decreased to 18.1% in 2019 from 19.4% in 2018, mainly due to incremental U.S. research and development tax credits, partially offset by non-recurring favorable tax benefits in 2018[152] Segment Results (2019 vs. 2018) In 2019, Surfactant net sales and operating income declined, while Polymers saw a sales decrease but an operating income increase, and Specialty Products improved significantly Net Sales by Segment (2019 vs. 2018, Thousands USD) | Segment | 2019 | 2018 | (Decrease) | Percent Change | | :--------------- | :---------- | :---------- | :---------- | :------------- | | Surfactants | $1,272,723 | $1,385,932 | $(113,209) | -8% | | Polymers | $512,347 | $527,420 | $(15,073) | -3% | | Specialty Products | $73,675 | $80,505 | $(6,830) | -8% | | Total Net Sales | $1,858,745 | $1,993,857 | $(135,112) | -7% | Operating Income by Segment (2019 vs. 2018, Thousands USD) | Segment | 2019 | 2018 | Increase (Decrease) | Percent Change | | :--------------- | :---------- | :---------- | :------------------ | :------------- | | Surfactants | $122,780 | $133,518 | $(10,738) | -8% | | Polymers | $69,567 | $66,373 | $3,194 | 5% | | Specialty Products | $16,415 | $11,661 | $4,754 | 41% | Surfactants (2019 vs. 2018) Surfactant net sales decreased 8% due to lower volume, average selling prices, and unfavorable foreign currency, with European sales impacted by a German plant shutdown - Surfactant net sales decreased 8% ($113.2 million) due to lower sales volume (3% decline, with 46% from Germany sulfonation shutdown), lower average selling prices, and unfavorable foreign currency translation[155] - North American sales declined 8% due to lower average selling prices (pass-through of raw material costs) and reduced personal care commodity demand[155] - European sales declined 13% primarily due to a 9% decrease in sales volume from ceasing German Surfactant production in Q4 2018[156] - Surfactant operating income declined 8% ($10.7 million), with gross profit down 4% due to lower unit margins in North America and Asia, partially offset by improved margins in Europe (from German plant shutdown) and Latin America (VAT recovery, insurance recovery)[158][159][160][161][162] Polymers (2019 vs. 2018) Polymer net sales decreased 3% despite a 4% volume increase, offset by lower selling prices and unfavorable foreign currency, while operating income increased 5% due to improved margins in Asia - Polymer net sales decreased 3% ($15.1 million) despite a 4% increase in sales volume (driven by rigid foam polyols), offset by lower average selling prices and unfavorable foreign currency translation[165] - North American sales declined 3% due to lower average selling prices, partially offset by volume growth in rigid foam polyols[165] - Asian and Other operations saw a 25% increase in net sales, primarily from a 37% increase in sales volume[167] - Polymer operating income increased 5% ($3.2 million), with gross profit up 4% due to higher unit margins and sales volume growth in Asia, and flat margins in North America[168][170] Specialty Products (2019 vs. 2018) Specialty Products net sales decreased 8% due to lower average selling prices, but gross profit and operating income increased, reflecting improved margins and lower expenses - Specialty Products net sales decreased 8% ($6.8 million) due to lower average selling prices, despite a 1% increase in sales volume[172] - Gross profit increased $4.3 million and operating income increased $4.8 million, reflecting improved margins in medium chain triglycerides (MCTs) and lower operating expenses from 2019 restructuring efforts[172] Corporate Expenses (2019 vs. 2018) Corporate expenses increased by $19.2 million in 2019, primarily driven by a $17.5 million rise in deferred compensation expense due to common stock price appreciation - Corporate expenses increased $19.2 million, from $62.3 million in 2018 to $81.5 million in 2019, primarily due to a $17.5 million increase in deferred compensation expense[173] - Deferred compensation expense increased significantly due to a $28.44 per share increase in the Company's common stock market price in 2019, compared to a $4.97 per share decrease in 2018[174] Liquidity and Capital Resources Stepan Company's liquidity is strong, supported by operating cash flow, available cash, and debt facilities, with net debt improving in 2020 and sufficient resources for future commitments - Principal liquidity sources include cash flows from operating activities, available cash, and proceeds from debt issuance and credit facilities[175] Cash Flow Summary (Millions USD) | Activity | 2020 | 2019 | | :------------------- | :----- | :----- | | Operating Activities | $235.2 | $218.4 | | Investing Activities | $(139.0) | $(112.7) | | Financing Activities | $(64.9) | $(90.5) | - Cash and cash equivalents increased by $34.6 million in 2020 to $349.9 million, including $150.1 million held by non-U.S. subsidiaries[175] - The Company's net debt decreased by $57.9 million in 2020, from a negative $93.3 million to a negative $151.2 million, as cash balances exceeded total debt[184] - For 2021, estimated capital expenditures are projected to range from $150 million to $170 million, including growth initiatives and infrastructure spending[181] - The Company expects cash from operations, committed credit facilities, and cash on hand to be sufficient for anticipated capital expenditures, working capital, dividends, and other financial commitments[187] - Environmental and legal accruals totaled $22.9 million at December 31, 2020, with estimated possible losses ranging from $22.9 million to $41.1 million[200] - Management anticipates continued heightened demand for cleaning, disinfection, and personal wash products in the Surfactant segment, modest recovery in rigid polyols demand for Polymers, and slight improvement in Specialty Products in 2021[203][204] Overview Stepan Company's liquidity is primarily derived from operating cash flows, available cash, and credit facilities, used for operations, capital investments, and acquisitions - The Company's primary liquidity sources are cash flows from operating activities, available cash, and debt issuance/credit facilities[175] - Principal uses of cash include funding operating activities, capital investments, and acquisitions[175] Cash and Cash Equivalents (Millions USD) | Date | Amount | | :----------- | :----- | | Dec 31, 2020 | $349.9 | | Dec 31, 2019 | $315.4 | - Non-U.S. subsidiaries held $150.1 million of cash outside the United States as of December 31, 2020[175] Operating Activity Cash generated from operating activities increased to $235.2 million in 2020, with working capital as a cash source, supporting increased demand for consumer products Cash Generated from Operating Activities (Millions USD) | Year | Amount | | :--- | :----- | | 2020 | $235.2 | | 2019 | $218.4 | - Working capital was a cash source of $2.4 million in 2020, down from $17.6 million in 2019, primarily due to higher accounts receivable and inventory usage, partially offset by higher accounts payable and accrued liabilities[176][177][178] - Higher accounts receivable and inventory cash usage in 2020 supported increased demand for consumer cleaning, disinfection, and personal wash products[178] - Management believes liquidity is sufficient for potential increases in 2021 working capital requirements[179] Investing Activity Cash used for investing activities increased to $139.0 million in 2020, driven by higher capital expenditures and acquisitions of bio-surfactant and anionic surfactant businesses Cash Used for Investing Activities (Millions USD) | Year | Amount | | :--- | :----- | | 2020 | $(139.0) | | 2019 | $(112.7) | - Cash used for capital expenditures increased to $125.8 million in 2020 from $105.6 million in 2019[180] - Other investing activities in 2020 included the acquisition of Logos Technologies' bio-surfactant business ($2.0 million) and Clariant's Mexico anionic surfactant business ($13.5 million)[180] - Estimated capital expenditures for 2021 are projected to be $150 million to $170 million, including growth initiatives and infrastructure spending[181] Financing Activity Cash used for financing activities decreased to $64.9 million in 2020, primarily due to the non-recurrence of a 2019 voluntary debt prepayment, while share repurchases continued Cash Used for Financing Activities (Millions USD) | Year | Amount | | :--- | :----- | | 2020 | $(64.9) | | 2019 | $(90.5) | - The lower cash usage in 2020 primarily reflects the non-recurrence of a $17.1 million voluntary prepayment of senior notes in 2019[182] - The Company repurchased 173,956 shares of common stock at a cost of $15.3 million in 2020, with 175,874 shares remaining under authorization[183] Debt and Credit Facilities Stepan Company's total debt decreased to $198.7 million in 2020, resulting in a negative net debt position, and the company remained compliant with all debt covenants Debt and Net Debt (Millions USD) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Total Debt | $198.7 | $222.1 | | Net Debt | $(151.2) | $(93.3) | | Ratio of Total Debt to Total Debt + Equity | 16.8% | 19.9% | | Ratio of Net Debt to Net Debt + Equity | -18.1% | -11.7% | - The Company's debt consists of $198.7 million in unsecured promissory notes with maturities from 2021 to 2027[185] - A $350.0 million multi-currency revolving credit facility, maturing in January 2023, had $343.8 million available as of December 31, 2020, with no borrowings[186] - The Company was in compliance with all debt covenants as of December 31, 2020, which include minimum interest coverage, maximum net leverage, and minimum net worth requirements[189] Contractual Obligations As of December 31, 2020, total contractual obligations amounted to $341.8 million, primarily comprising long-term debt, interest payments, and operating lease obligations Contractual Obligations as of December 31, 2020 (Thousands USD) | Type of Obligation | Total | Less than 1 year | 1-3 years | 3-5 years | More than 5 years | | :-------------------------- | :-------- | :--------------- | :-------- | :-------- | :---------------- | | Long-term debt obligations | $199,286 | $37,857 | $75,714 | $57,144 | $28,571 | | Interest payments on debt | $25,401 | $7,785 | $10,870 | $5,053 | $1,693 | | Operating lease obligations | $75,380 | $12,704 | $20,445 | $9,779 | $32,452 | | Purchase obligations | $5,952 | $3,999 | $1,953 | — | — | | Other | $35,773 | $12,093 | $3,720 | $3,780 | $16,180 | | Total | $341,792 | $74,438 | $112,702 | $75,756 | $78,896 | - The table excludes $78.2 million of other non-current liabilities (e.g., defined benefit pension, deferred compensation, environmental, legal liabilities, and unrecognized tax benefits) for which payment periods cannot be reasonably determined[192] Pension Plans The underfunded status of defined benefit pension plans improved to $9.1 million in 2020, with expected contributions of $0.5 million to the U.K. plan in 2021 Underfunded Status of Defined Benefit Pension Plans (Millions USD) | Date | Amount | | :----------- | :----- | | Dec 31, 2020 | $9.1 | | Dec 31, 2019 | $13.6 | - The Company contributed $0.8 million to its defined benefit plans in 2020 and expects to contribute $0.5 million to the U.K. plan in 2021, with no U.S. pension plan contribution required for 2021 due to funding relief[194][196] Letters of Credit As of December 31, 2020, the company had $6.2 million in outstanding standby letters of credit for workers' compensation and other purposes - As of December 31, 2020, the Company had $6.2 million in outstanding standby letters of credit for workers' compensation insurance and other purposes[197] Off-Balance Sheet Arrangements The company was not party to any material off-balance sheet arrangements during the periods covered by this Form 10-K - The Company was not party to any material off-balance sheet arrangements during the periods covered by this Form 10-K[198] Environmental and Legal Matters Environmental capital expenditures were $7.8 million in 2020, with total environmental and legal accruals at $22.9 million, and estimated possible losses ranging up to $41.1 million Environmental Expenditures (Millions USD) | Year | Capital Projects | Recurring Costs | | :--- | :--------------- | :-------------- | | 2020 | $7.8 | $35.4 | | 2019 | N/A | $31.8 | | 2018 | N/A | $28.3 | Environmental and Legal Losses (Millions USD) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Estimated Range of Possible Losses | $22.9 - $41.1 | $25.9 - $43.7 | | Accrued Environmental and Legal Liabilities | $22.9 | $25.9 | - Cash outlays for legal and environmental matters approximated $4.5 million in 2020, compared to $3.8 million in 2019[200] Outlook Management projects continued strong demand for Surfactants, modest recovery in Polymers' rigid polyols, and slight improvement in Specialty Products for 2021 - Management expects continued heightened demand for cleaning, disinfection, and personal wash products in the Surfactant segment[203] - Demand for rigid polyols in the Polymer segment is expected to recover at a modest pace in 2021, with attractive long-term prospects due to energy conservation and stricter building codes[203][204] - Specialty Products results are projected to improve slightly in 2021[204] Climate Change Legislation The company does not anticipate existing or pending climate change legislation to materially affect its financial condition, results of operations, or cash flows - The Company does not believe that existing or pending climate change legislation or regulation is reasonably likely to have a material effect on its financial condition, results of operations, or cash flows[205] Critical Accounting Policies Critical accounting policies involve significant estimates for deferred compensation, environmental liabilities, and revenue recognition, which can impact reported financial results Deferred Compensation Deferred compensation plans allow income deferral with investment options, where market value changes for cash-settled obligations cause significant earnings fluctuations - Deferred compensation plans allow employees and directors to defer income, with investment options including Company common stock and mutual funds[207] - For cash-settled obligations, market value changes in investment choices result in compensation expense or income, leading to significant period-to-period fluctuations in earnings[208] Deferred Compensation Liability (Millions USD) | Date | Amount | | :----------- | :----- | | Dec 31, 2020 | $61.6 | | Dec 31, 2019 | $59.0 | - Approximately 53% of the 2020 deferred compensation liability was tied to Company common stock performance[209] Environmental Liabilities Environmental liabilities are accrued when probable and estimable, based on assessments and remedial plans, with estimates subject to change as new information emerges - Environmental liabilities are recorded when assessments and/or remedial efforts are probable and costs can be reasonably estimated, with the minimum amount accrued when a range of costs exists[211] - Estimates are based on factors like regulatory decisions, feasibility studies, and remedial action plans, and are subject to significant fluctuations as new facts emerge[212][213] Revenue Recognition Revenue is generally recognized upon product shipment and transfer of control to the customer, with specific rules for consigned products and discounts - Revenue is generally recognized when product is shipped and control passes to the customer, or upon delivery for a small portion of the business[214] - For consigned products, revenue is recognized when the customer uses the inventory[214] - Shipping and handling fees billed to customers are recorded in Net Sales, while costs incurred are in Cost of Sales. Volume and cash discounts are recorded as reductions of revenue[214] Recent Accounting Pronouncements The company adopted several new accounting standards in 2020, including those for credit losses and goodwill impairment, with no material impact on financial statements, and anticipates no material impact from future pronouncements - The Company adopted ASU No. 2016-13 (Credit Losses), ASU No. 2017-4 (Goodwill Impairment), ASU No. 2018-13 (Fair Value Measurement Disclosures), and ASU No. 2018-15 (Cloud Computing Implementation Costs) in Q1 2020[298][299][300][301] - The adoption of these ASUs did not have a material effect on the Company's financial position, results of operations, or cash flows, except for ASU No. 2018-14 which impacted defined benefit plan disclosures[298][299][300][301][302] - ASU No. 2019-12 (Income Taxes) is effective for fiscal years beginning after December 15, 2020, with no material impact expected[303] - ASU No. 2020-04 (Reference Rate Reform) provides optional guidance for contract modifications related to reference rate reform, which the Company has not yet utilized[304] Non-GAAP Reconciliations Stepan Company provides non-GAAP reconciliations for measures like Adjusted Net Income and Net Debt, offering supplementary insights into performance, liquidity, and leverage by excluding non-operational items - Non-GAAP measures are used internally to evaluate performance and management effectiveness, and are considered supplementary to GAAP measures[216] Reconciliations of Non-GAAP Adjusted Net Income and Diluted Earnings per Share This section reconciles non-GAAP Adjusted Net Income and Diluted EPS to GAAP measures, excluding non-operational items like deferred compensation and business restructuring for performance evaluation Non-GAAP Adjusted Net Income and Diluted EPS (Millions USD, except per share) | Metric | 2020 Net Income | 2020 Diluted EPS | 2019 Net Income | 2019 Diluted EPS | 2018 Net Income | 2018 Diluted EPS | | :----------------------------------- | :-------------- | :--------------- | :-------------- | :--------------- | :-------------- | :--------------- | | Net Income Attributable to Company | $126.8 | $5.45 | $103.1 | $4.42 | $111.1 | $4.76 | | Deferred Compensation (Income) Expense | $5.3 | $0.23 | $10.5 | $0.45 | $(1.0) | $(0.04) | | Business Restructuring | $1.2 | $0.05 | $2.7 | $0.12 | $2.6 | $0.11 | | Cash-Settled SARs | $0.4 | $0.02 | $2.8 | $0.12 | $(0.7) | $(0.03) | | Environmental Remediation | $0.0 | — | $4.30 | $0.18 | — | — | | Voluntary Debt Prepayment | $0.0 | — | $1.20 | $0.05 | — | — | | Cumulative Tax Effect | $(1.7) | $(0.07) | $(5.2) | $(0.22) | $(0.3) | $(0.01) | | Adjusted Net Income | $132.0 | $5.68 | $119.4 | $5.12 | $111.7 | $4.79 | - Management excludes non-operational items like deferred compensation, business restructuring, cash-settled SARs, environmental remediation, and voluntary debt prepayment to evaluate operating performance[217] Reconciliations of Non-GAAP Net Debt This section reconciles non-GAAP Net Debt to total debt, providing a comprehensive view of the company's liquidity, financial flexibility, and leverage by offsetting cash and equivalents Non-GAAP Net Debt Reconciliation (Millions USD) | Metric | Dec 31, 2020 | Dec 31, 2019 | | :----------------------------------- | :----------- | :----------- | | Current Maturities of Long-Term Debt | $37.9 | $23.6 | | Long-Term Debt | $160.8 | $198.5 | | Total Debt as Reported | $198.7 | $222.1 | | Less Cash and Cash Equivalents | $(349.9) | $(315.4) | | Net Debt | $(151.2) | $(93.3) | | Equity | $986.7 | $891.8 | | Net Debt plus Equity | $835.5 | $798.5 |\ | Net Debt/Net Debt plus Equity | -18% | -12% | - The non-GAAP net debt metric provides a more complete view of the Company's overall liquidity, financial flexibility, and leverage level[218] Item 7A. Quantitative and Qualitative Disclosures About Market Risk Stepan Company manages market risks from foreign currency, interest rates, and commodity prices through he