Stepan(SCL) - 2021 Q1 - Quarterly Report

Part I - Financial Information Item 1 - Financial Statements Unaudited Q1 2021 consolidated financial statements detail significant revenue and net income growth, asset increases from acquisitions, and a net cash decrease from investment activities Condensed Consolidated Statements of Income Q1 2021 Net Sales increased 19.5% to $537.7 million, Net Income Attributable to Stepan Company rose 47.4% to $40.6 million, and Diluted EPS grew to $1.74 Q1 2021 vs Q1 2020 Income Statement Highlights | Metric | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $537.7 | $450.0 | 19.5% | | Gross Profit | $109.0 | $79.3 | 37.5% | | Operating Income | $53.9 | $40.0 | 34.8% | | Net Income Attributable to Stepan Company | $40.6 | $27.5 | 47.4% | | Diluted EPS | $1.74 | $1.18 | 47.5% | Condensed Consolidated Balance Sheets Total assets increased to $1.83 billion as of March 31, 2021, primarily due to acquisitions, while cash and cash equivalents decreased to $150.7 million from acquisition-related cash usage Balance Sheet Highlights | Metric | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Cash and cash equivalents (Millions) | $150.7 | $349.9 | | Total current assets (Millions) | $797.7 | $905.7 | | Goodwill, net (Millions) | $96.3 | $28.0 | | Total assets (Billions) | $1.83 | $1.75 | | Total current liabilities (Millions) | $464.1 | $416.6 | | Total liabilities (Millions) | $824.0 | $764.0 | | Total equity (Billions) | $1.00 | $0.99 | Condensed Consolidated Statements of Cash Flows Q1 2021 cash flows show a net use of $11.7 million from operations, $223.8 million used in investing (mainly acquisitions), and $39.9 million provided by financing, leading to a $199.2 million net cash decrease Q1 2021 vs Q1 2020 Cash Flow Summary | Metric | Three Months Ended March 31, 2021 (Millions) | Three Months Ended March 31, 2020 (Millions) | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | ($11.7) | ($6.5) | | Net Cash Used In Investing Activities | ($223.8) | ($32.9) | | Net Cash (Used In) Provided By Financing Activities | $39.9 | ($14.4) | | Net Decrease in Cash and Cash Equivalents | ($199.2) | ($61.0) | Notes to Condensed Consolidated Financial Statements Notes detail key financial events, including 2021 acquisitions of INVISTA's polyester polyol business for $165 million and a fermentation plant for $3.5 million, strong segment performance, and increased debt to $248.4 million - On January 29, 2021, the company acquired INVISTA's aromatic polyester polyol business for a purchase price of $165 million, plus working capital, including two manufacturing sites and expanding capabilities in the U.S. and Europe[69] - On February 2, 2021, the company acquired a fermentation plant in Lake Providence, Louisiana for $3.5 million to support its bio-surfactant technology platform[73] Q1 2021 Segment Performance | Segment | Net Sales (Millions) | Operating Income (Millions) | | :--- | :--- | :--- | | Surfactants | $370.9 | $53.2 | | Polymers | $150.4 | $18.0 | | Specialty Products | $16.4 | $2.6 | - Total debt increased to $248.4 million as of March 31, 2021, up from $198.7 million at year-end 2020, primarily due to borrowings under the revolving credit facility, with $298.2 million available under its $350 million revolving credit agreement[63][130][131] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses strong Q1 performance, with net income up 47% driven by segment growth, attributing it to market recovery and acquisitions, while affirming sufficient liquidity despite cash used for investments Overview The company operates in Surfactants (69% of Q1 2021 sales), Polymers (28%), and Specialty Products (3%), with recent acquisitions expanding Polymers and advancing Surfactants' bio-surfactant capabilities - The Surfactants segment produces ingredients for consumer and industrial cleaning and disinfection products[83] - The Polymers segment includes polyurethane polyols for thermal insulation and specialty polyols for coatings, adhesives, sealants, and elastomers (CASE)[88] - In January 2021, the company acquired INVISTA's aromatic polyester polyol business, including two manufacturing sites, expanding its capabilities in the U.S. and Europe[86][88] - In February 2021, the company acquired a fermentation plant in Louisiana to complement its rhamnolipid-based bio-surfactant technology acquired in 2020[84][87] Results of Operations Q1 2021 net income increased 47% to $40.6 million, with consolidated net sales up 20% to $537.7 million, driven by higher prices and volume, while Polymer sales volume surged 32% and Surfactant sales volume remained flat due to regional variations Q1 2021 vs Q1 2020 Performance Summary | Metric | Q1 2021 (Millions) | Q1 2020 (Millions) | Change (%) | | :--- | :--- | :--- | :--- | | Net Income Attributable to Company | $40.6 | $27.5 | 47% | | Adjusted Net Income (Non-GAAP) | $42.4 | $24.2 | 75% | | Consolidated Net Sales | $537.7 | $450.0 | 20% | - Polymer segment sales volume increased 32%, reflecting recovery from COVID-19 project delays, the INVISTA acquisition, and non-recurrence of a 2020 plant outage[92][108] - Surfactant segment sales volume was flat, with higher volumes in Europe, Latin America, and Asia offset by lower North American volume due to supply chain disruptions from severe weather in Texas[92][99] - Specialty Products operating income decreased by $1.4 million due to lower unit margins from raw material shortages and manufacturing challenges[116] Liquidity and Capital Resources Q1 2021 cash and cash equivalents decreased by $199.2 million to $150.7 million, mainly due to $223.8 million in investing activities, including the $184.0 million INVISTA acquisition, but liquidity remains sufficient with $298.2 million available credit Q1 2021 Cash Flow Summary | Metric | Q1 2021 (Millions) | | :--- | :--- | | Cash Used In Operating Activities | ($11.7) | | Cash Used In Investing Activities | ($223.8) | | Cash Provided By Financing Activities | $39.9 | | Net Decrease in Cash | ($199.2) | - The primary use of cash in investing activities was the $184.0 million (net of cash received) for the INVISTA business acquisition[124] - The company estimates total capital expenditures for 2021 will range from $150 million to $170 million[125] - As of March 31, 2021, the company had $298.2 million available under its $350 million revolving credit facility[131] Outlook Management expects Surfactant volumes to recover and global demand for cleaning products to remain strong, while the Polymer segment is poised for growth from construction recovery and the INVISTA acquisition, with attractive long-term prospects driven by energy conservation and building codes - Management believes Surfactant volumes in North American consumer markets will recover from Q1 supply chain disruptions[140] - The Polymer segment is expected to deliver growth, benefiting from the recovery of construction projects and the INVISTA acquisition[140] - Long-term prospects for Polymers are viewed as attractive, supported by trends in energy conservation and building codes[140] Item 4 – Controls and Procedures As of March 31, 2021, the CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting during the quarter - Management, including the CEO and CFO, evaluated disclosure controls and procedures and found them to be effective as of March 31, 2021[151] - No changes occurred during the quarter that materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[151] Part II - Other Information Item 1 & 1A – Legal Proceedings & Risk Factors The company reports no material changes to legal proceedings or risk factors since its 2020 Annual Report on Form 10-K - There have been no material changes to legal proceedings since the 2020 Annual Report on Form 10-K[152] - There have been no material changes to risk factors since the 2020 Annual Report on Form 10-K[153] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds In Q1 2021, the company repurchased 30,116 shares at an average price of $120.52 per share, with 167,574 shares remaining authorized under the repurchase program Q1 2021 Share Repurchases | Month | Total Shares Purchased | Average Price Paid per Share | Shares Purchased on Open Market | | :--- | :--- | :--- | :--- | | January 2021 | 381 | $129.03 | 0 | | February 2021 | 17,418 | $119.18 | 8,300 | | March 2021 | 12,317 | $122.16 | 0 | | Total | 30,116 | $120.52 | 8,300 | - As of March 31, 2021, 167,574 shares may yet be purchased under the company's authorized share repurchase program[128][154]