Stepan(SCL) - 2021 Q3 - Quarterly Report

Part I Part I - Financial Information This section details the company's financial statements, including income, balance sheet, and cash flow data, alongside management's operational and liquidity analysis Item 1 - Financial Statements This section presents Stepan Company's unaudited condensed consolidated financial statements, including income, balance sheets, and cash flows, with detailed notes for the periods ended September 30, 2021 Condensed Consolidated Statements of Income The statements show increased net sales and net income for both the third quarter and nine-month periods ended September 30, 2021, despite a slight decrease in Q3 gross profit Q3 and Nine Months Financial Performance (2021 vs. 2020) | (In thousands, except per share amounts) | Three Months Ended Sep 30, 2021 | Three Months Ended Sep 30, 2020 | Nine Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2020 | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $602,688 | $464,480 | $1,735,939 | $1,375,016 | | Gross Profit | $91,896 | $97,057 | $312,557 | $274,821 | | Operating Income | $40,213 | $42,395 | $150,784 | $127,022 | | Net Income Attributable to Stepan Company | $36,920 | $33,168 | $120,809 | $96,420 | | Diluted EPS | $1.59 | $1.43 | $5.19 | $4.15 | Condensed Consolidated Balance Sheets As of September 30, 2021, total assets and liabilities increased, with total equity also rising, reflecting changes in property, goodwill, receivables, and debt Balance Sheet Summary | (In thousands) | September 30, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total Current Assets | $839,213 | $905,651 | | Total Assets | $1,955,939 | $1,752,336 | | Total Current Liabilities | $491,065 | $416,554 | | Total Liabilities | $896,922 | $763,971 | | Total Equity | $1,059,017 | $988,365 | - Cash and cash equivalents significantly decreased from $349.9 million at the end of 2020 to $105.3 million as of September 30, 2021, largely due to acquisition activities[13] Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities significantly decreased for the nine months ended September 30, 2021, while cash used in investing activities increased due to acquisitions, and financing activities provided cash Cash Flow Summary (Nine Months Ended Sep 30) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Net Cash Provided By Operating Activities | $21,402 | $141,678 | | Net Cash Used In Investing Activities | ($306,037) | ($98,130) | | Net Cash (Used In) Provided By Financing Activities | $42,972 | ($44,640) | | Net Decrease in Cash and Cash Equivalents | ($244,670) | ($4,991) | - The company spent $184.5 million on a business acquisition, net of cash acquired, and $119.5 million on capital expenditures during the first nine months of 2021[15] Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations of the financial statements, covering segment performance, acquisitions, debt, and contingencies, highlighting the impact of the INVISTA acquisition and environmental liabilities - The company has accrued $22.9 million for a range of possible environmental and legal losses estimated between $22.9 million and $41.3 million as of September 30, 2021[38][173] Segment Net Sales (Nine Months Ended Sep 30) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Surfactants | $1,142,672 | $993,245 | | Polymers | $539,764 | $335,582 | | Specialty Products | $53,503 | $46,189 | | Total | $1,735,939 | $1,375,016 | Segment Operating Income (Nine Months Ended Sep 30) | (In thousands) | 2021 | 2020 | | :--- | :--- | :--- | | Surfactants | $133,558 | $125,810 | | Polymers | $60,729 | $45,430 | | Specialty Products | $12,052 | $8,803 | - In Q2 and Q3 2021, the company issued two series of senior notes totaling $100 million to be used for capital expenditures and paying down existing debt[63] - On January 29, 2021, the company acquired INVISTA's aromatic polyester polyol business for a purchase price of $165 million, plus working capital, included in the Polymers segment[71] - 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[76] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, highlighting sales growth driven by pricing and acquisitions, operating income pressures from supply chain issues, and a significant decrease in operating cash flow Results of Operations Consolidated net sales increased significantly in Q3 and the nine-month period, driven by higher selling prices and the INVISTA acquisition, while operating income grew despite supply chain and cost pressures - Net sales increased 30% ($138.2 million), primarily due to higher average selling prices ($126.0 million)[96] - Consolidated sales volume increased 1%, with Polymers up 27% (driven by INVISTA acquisition) and Surfactants down 6%[97] - Operating income decreased 5% ($2.2 million), impacted by lower Surfactant and Polymer operating income and the non-recurrence of a prior-year insurance recovery[98] - Net sales increased 26% ($360.9 million), driven by higher selling prices ($273.1 million) and a 4% volume increase[126] - Polymer sales volume grew 34%, while Surfactant volume declined 4%[127] - Operating income increased 19% ($23.8 million), with growth across all three segments[128] Liquidity and Capital Resources The company's liquidity significantly decreased due to the INVISTA acquisition and working capital use, leading to a sharp decline in operating cash flow and an increase in total debt - Operating cash flow for the first nine months of 2021 was $21.4 million, a significant decrease from $141.7 million in the same period of 2020, primarily due to a $98.5 million greater use of cash for working capital[155][157] - Investing activities used $306.0 million, including $183.7 million for the INVISTA acquisition and $119.5 million for capital expenditures[155][160] - Total debt increased to $279.8 million from $198.7 million at year-end 2020, shifting net debt from a negative $151.2 million to a positive $174.6 million[164] - The company raised its full-year 2021 capital expenditure forecast to a range of $200 million to $220 million, primarily for a new alkoxylation plant in Pasadena, Texas[161] Outlook Management anticipates continued demand recovery in Polymers and improving industrial Surfactant markets, remaining optimistic about full-year earnings growth despite ongoing supply chain challenges - The Polymer segment is expected to deliver growth, driven by the INVISTA acquisition and recovery in construction projects[176] - In Surfactants, higher demand in industrial markets is not expected to fully compensate for lower consumer demand for cleaning and disinfection products compared to the 2020 peak[176] - Management remains optimistic about delivering full-year earnings growth despite continuing supply chain challenges[176] Part II Part II - Other Information This section covers other required disclosures, including legal proceedings, risk factors, and details on equity security sales and repurchases Item 1 – Legal Proceedings The company reports no new environmental proceedings meeting its $1.0 million disclosure threshold and no material changes to previously disclosed legal matters - The company has adopted a $1.0 million threshold for disclosing environmental proceedings and reports no new proceedings meeting this criterion for the period[189] Item 1A – Risk Factors No material changes to the risk factors previously disclosed in the company's 2020 Annual Report on Form 10-K were reported - No material changes to risk factors were reported for the quarter[191] Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2021, the company repurchased 53,202 shares at an average price of $114.48 per share, primarily through its publicly announced program Q3 2021 Share Repurchases | Month | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2021 | 144 | $117.09 | | August 2021 | 16,750 | $118.12 | | September 2021 | 36,308 | $112.79 | | Total | 53,202 | $114.48 | - On October 19, 2021, the Board of Directors authorized a new share repurchase program for up to $150.0 million and terminated the prior authorization[163]