Class
Outstanding at April 26, 2024
Common Stock, $1 par value
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(MARK ONE)
FOR THE QUARTERLY PERIOD ENDED
FOR THE TRANSITION PERIOD FROM TO
Commission File Number
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification Number) |
(Address of principal executive offices)
Registrant’s telephone number (
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class |
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Trading symbol(s) |
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Name of each exchange on which registered |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class |
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Outstanding at April 26, 2024 |
Common Stock, $1 par value |
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Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts) |
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Three Months Ended |
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2024 |
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2023 |
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Net Sales |
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$ |
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$ |
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Cost of Sales |
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Gross Profit |
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Operating Expenses: |
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Selling |
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Administrative |
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Research, development and technical services |
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Deferred compensation expense |
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Business restructuring expense |
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— |
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Operating Income |
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Other Income (Expense): |
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Interest, net |
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( |
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( |
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Other, net (Note 15) |
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( |
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( |
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Income Before Provision for Income Taxes |
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Provision for Income Taxes |
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Net Income |
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Net Income Per Common Share (Note 10): |
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Basic |
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$ |
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$ |
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Diluted |
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$ |
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$ |
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Shares Used to Compute Net Income Per Common Share (Note 10): |
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Basic |
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Diluted |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
2
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unaudited
(In thousands) |
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Three Months Ended |
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2024 |
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2023 |
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Net Income |
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$ |
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$ |
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Other Comprehensive Income: |
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Foreign currency translation adjustments (Note 11) |
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( |
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Defined benefit pension adjustments, net of tax (Note 11) |
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Derivative instrument activity, net of tax (Note 11) |
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( |
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Total Other Comprehensive Income |
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( |
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Comprehensive Income |
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$ |
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$ |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
3
STEPAN COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
(Dollars in thousands) |
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March 31, 2024 |
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December 31, 2023 |
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Assets |
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Current Assets: |
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Cash and cash equivalents |
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$ |
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$ |
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Receivables, net |
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Inventories (Note 6) |
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Other current assets |
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Total current assets |
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Property, Plant and Equipment: |
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Cost |
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Less: Accumulated depreciation |
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( |
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Property, plant and equipment, net |
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Goodwill, net |
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Other intangible assets, net |
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Long-term investments (Note 3) |
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Operating lease assets (Note 7) |
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Other non-current assets |
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Total assets |
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$ |
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$ |
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Liabilities and Equity |
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Current Liabilities: |
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Current maturities of debt (Note 14) |
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$ |
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$ |
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Accounts payable |
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Accrued liabilities |
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Total current liabilities |
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Deferred income taxes |
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Long-term debt, less current maturities (Note 14) |
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Non-current operating lease liabilities (Note 7) |
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Other non-current liabilities |
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Commitments and Contingencies (Note 8) |
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Equity: |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated other comprehensive loss (Note 11) |
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( |
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Retained earnings |
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Less: Common treasury stock, at cost, |
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Total equity |
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Total liabilities and equity |
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$ |
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$ |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
4
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
(In thousands) |
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Three Months Ended March 31, |
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2024 |
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2023 |
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Cash Flows From Operating Activities |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash |
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Depreciation and amortization |
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Deferred compensation |
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Realized and unrealized gains on long-term investments |
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( |
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( |
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Stock-based compensation |
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Deferred income taxes |
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( |
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Other non-cash items |
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Changes in assets and liabilities: |
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Receivables, net |
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( |
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( |
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Inventories |
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Other current assets |
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( |
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( |
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Accounts payable and accrued liabilities |
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( |
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Pension liabilities |
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( |
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( |
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Environmental and legal liabilities |
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( |
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( |
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Deferred revenues |
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( |
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( |
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Net Cash Provided By (Used In) Operating Activities |
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( |
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Cash Flows From Investing Activities |
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Expenditures for property, plant and equipment |
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( |
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( |
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Other, net |
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Net Cash Used In Investing Activities |
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( |
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( |
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Cash Flows From Financing Activities |
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Revolving debt and bank overdrafts, net (Note 14) |
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( |
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Dividends paid |
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( |
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( |
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Stock option exercises |
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Other, net |
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( |
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( |
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Net Cash Provided By (Used In) Financing Activities |
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( |
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Effect of Exchange Rate Changes on Cash |
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( |
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Net Decrease in Cash and Cash Equivalents |
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( |
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( |
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Cash and Cash Equivalents at Beginning of Period |
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Cash and Cash Equivalents at End of Period |
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$ |
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$ |
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Supplemental Cash Flow Information |
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Cash payments of income taxes, net of refunds |
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$ |
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$ |
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Cash payments of interest |
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$ |
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$ |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these financial statements.
5
STEPAN COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2024
Unaudited
The condensed consolidated financial statements included herein have been prepared by Stepan Company (the Company), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate and make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly the Company’s financial position as of March 31, 2024, its results of operations for the three months ended March 31, 2024 and 2023 and cash flows for the three months ended March 31, 2024 and 2023, have been included. These financial statements and related footnotes should be read in conjunction with the financial statements and related footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023 (2023 Annual Report on Form 10-K).
Below are reconciliations of total equity for the three months ended March 31, 2024 and 2023:
(In thousands, except share and per share amounts) |
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Total |
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Common |
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Additional |
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Common |
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Accumulated |
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Retained |
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Balance, December 31, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Issuance of |
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— |
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— |
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— |
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Stock-based and deferred compensation |
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( |
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( |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income |
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( |
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— |
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— |
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— |
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( |
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— |
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Cash dividends paid: |
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Common stock ($ |
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( |
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— |
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— |
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— |
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— |
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( |
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Balance, March 31, 2024 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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(In thousands, except share and per share amounts) |
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Total |
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Common |
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Additional |
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Common |
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Accumulated |
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Retained |
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Balance, December 31, 2022 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Issuance of |
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— |
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— |
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— |
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Stock-based and deferred compensation |
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( |
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( |
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— |
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— |
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Net income |
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— |
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— |
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— |
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— |
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Other comprehensive income (loss) |
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— |
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— |
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— |
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— |
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Cash dividends paid: |
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Common stock ($ |
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( |
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— |
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— |
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— |
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— |
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( |
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Balance, March 31, 2023 |
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$ |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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Derivative assets and liabilities include the foreign currency exchange and interest rate swap contracts discussed in Note 4, Derivative Instruments, of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this
6
Form 10-Q). Fair value and carrying value were the same because the contracts were recorded at fair value. The fair values of the foreign currency contracts were calculated as the difference between the applicable forward foreign exchange rates at the reporting date and the contracted foreign exchange rates multiplied by the contracted notional amounts. The fair value of the interest rate swap was calculated as the difference between the contracted swap rate and the floating interest rate multiplied by the present value of the notional amount of the contract.
At March 31, 2024, and December 31, 2023, the fair values and related carrying values of debt, including current maturities, were as follows (the fair value and carrying value amounts are presented without regard to unamortized debt issuance costs of $
(In thousands) |
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March 31, |
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December 31, |
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Fair value |
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$ |
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$ |
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Carrying value |
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The following tables present financial assets and liabilities, excluding cash and cash equivalents, measured on a recurring basis at fair value as of March 31, 2024, and December 31, 2023, and the level within the fair value hierarchy in which the fair value measurements fall:
(In thousands) |
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March 31, |
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Level 1 |
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Level 2 |
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Level 3 |
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Mutual fund assets |
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$ |
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$ |
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$ |
— |
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$ |
— |
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Derivative assets: |
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Interest rate contracts |
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— |
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— |
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Foreign currency contracts |
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— |
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— |
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Total assets at fair value |
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$ |
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$ |
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$ |
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$ |
— |
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Derivative liabilities: |
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Foreign currency contracts |
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$ |
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$ |
— |
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$ |
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$ |
— |
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(In thousands) |
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December 31, |
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Level 1 |
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Level 2 |
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Level 3 |
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Mutual fund assets |
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$ |
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$ |
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$ |
— |
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$ |
— |
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Derivative assets: |
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Interest rate contracts |
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— |
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— |
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Foreign currency contracts |
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— |
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— |
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Total assets at fair value |
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$ |
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$ |
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$ |
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$ |
— |
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Derivative liabilities: |
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Foreign currency contracts |
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$ |
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$ |
— |
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$ |
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$ |
— |
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At March 31, 2024, and December 31, 2023, the Company had open forward foreign currency exchange contracts to buy or sell foreign currencies with U.S. dollar equivalent amounts of $
The Company is currently exposed to volatility in short-term interest rates and has mitigated certain portions of that risk by using an interest rate swap. The interest rate swap is recognized on the balance sheet as either an asset or a liability measured at fair value. At March 31, 2024, the Company held an interest rate swap contract with a notional value of $
The fair values of the derivative instruments held by the Company on March 31, 2024, and December 31, 2023, are disclosed in Note 3, Fair Value Measurements, of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). Derivative instrument gains and losses for the three months ended March 31, 2024 and 2023, were immaterial. For amounts reclassified out of AOCI into earnings for the three months ended March 31, 2024 and 2023, see Note 11, Accumulated Other Comprehensive Income (Loss), of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q).
7
Compensation expense recorded for all stock options, performance shares, time-based restricted stock units (RSUs) and stock appreciation rights (SARs) was as follows:
(In thousands) |
|
|||||
Three Months Ended |
|
|||||
2024 |
|
|
2023 |
|
||
$ |
|
|
$ |
|
||
Unrecognized compensation costs for stock options, performance shares, RSUs and SARs were as follows:
(In thousands) |
|
March 31, |
|
|
December 31, |
|
||
Stock options |
|
$ |
|
|
$ |
|
||
Performance shares and RSUs |
|
|
|
|
|
|
||
SARs |
|
|
|
|
|
|
||
The change in unrecognized compensation costs for stock options, performance shares, RSUs and SARs is due to new grants issued in 2024.
The Company granted the following awards in the first three months of 2024:
|
|
Shares |
|
|
Stock options |
|
|
|
|
Performance shares (at target) and RSUs |
|
|
|
|
SARs |
|
|
|
|
The unrecognized compensation costs at March 31, 2024, are expected to be recognized over weighted-average periods of
The composition of inventories at March 31, 2024, and December 31, 2023, was as follows:
(In thousands) |
|
March 31, |
|
|
December 31, |
|
||
Finished goods |
|
$ |
|
|
$ |
|
||
Raw materials |
|
|
|
|
|
|
||
Total inventories |
|
$ |
|
|
$ |
|
||
Lease cost is recognized in both the Cost of Sales and Operating Expenses sections of the Condensed Consolidated Statements of Income.
(In thousands) |
|
Three Months Ended |
|
|
|||||
|
|
2024 |
|
|
2023 |
|
|
||
Lease Cost |
|
|
|
|
|
|
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
|
||
Short-term lease cost |
|
|
|
|
|
|
|
||
Variable lease cost |
|
|
|
|
|
|
|
||
Total lease cost |
|
$ |
|
|
$ |
|
|
||
Other Information |
|
|
|
|
|
|
|
||
Cash paid for amounts included in the |
|
|
|
|
|
|
|
||
Operating cash flow from operating leases |
|
$ |
|
|
$ |
|
|
||
Right-of-use assets obtained in exchange |
|
|
|
|
|
|
|
||
8
The following table outlines the maturities of lease liabilities as of March 31, 2024.
(In thousands) |
|
|
|
|
Undiscounted Cash Flows: |
|
|
|
|
2024 (excluding the three months ended March 31, 2024) |
|
$ |
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
2028 |
|
|
|
|
Subsequent to 2028 |
|
|
|
|
Total Undiscounted Cash Flows |
|
$ |
|
|
Less: Imputed interest |
|
|
( |
) |
Present value |
|
$ |
|
|
Current operating lease liabilities (1) |
|
|
|
|
Non-current operating lease liabilities |
|
|
|
|
Total lease liabilities |
|
$ |
|
|
Weighted-average remaining lease term-operating leases |
|
|
||
Weighted-average discount rate-operating leases |
|
|
% |
|
As of March 31, 2024, the Company had office equipment and automobile leases, valued at approximately $
There are a variety of legal proceedings pending or threatened against the Company that occur in the normal course of the Company’s business, the majority of which relate to environmental assessment, protection and remediation matters. Some of these proceedings may result in fines, penalties, judgments or costs being assessed against the Company at some future time. The Company’s operations are subject to extensive local, state and federal regulations, including the U.S. Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA) and the Superfund amendments of 1986 (Superfund) as well as comparable regulations applicable to the Company’s foreign locations. Over the years, the Company has received requests for information related to or has been named by government authorities as a potentially responsible party at a number of sites where cleanup costs have been or may be incurred by the Company under CERCLA and similar state statutes. In addition, the Company is from time to time involved in routine legal proceedings incidental to the conduct of its business, including personal injury, property damage, tax, trade and labor matters. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these claims.
In determining the appropriate level of environmental reserves, the Company considers several factors such as information obtained from investigatory studies; changes in the scope of remediation; the interpretation, application and enforcement of laws and regulations; changes in the costs of remediation programs; the development of alternative cleanup technologies and methods; and the relative level of the Company’s involvement at various sites for which the Company is allegedly associated. The level of annual expenditures for remedial, monitoring and investigatory activities will change in the future as major components of planned remediation activities are completed and the scope, timing and costs of existing activities are changed. As of March 31, 2024, the Company estimated a range of possible environmental losses and legal losses of $
9
For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based on the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no material liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position. However, in the event of one or more adverse determinations with respect to such sites in any annual or interim period, the effect on the Company’s cash flows and results of operations for those periods could be material.
Following are summaries of the Company’s major contingencies at March 31, 2024:
Maywood, New Jersey Site
The Company’s property in Maywood, New Jersey, property formerly owned by the Company adjacent to its current site and other nearby properties (collectively, the Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of alleged chemical and radiological contamination. Pursuant to (i) a September 21, 1987 Administrative Order on Consent entered into between the U.S. Environmental Protection Agency (USEPA) and the Company for property formerly owned by the Company at the Maywood site and (ii) the issuance of an order on May 2, 1991 by the USEPA to the Company for property currently owned by the Company at the Maywood site, the Company has completed various Remedial Investigation/Feasibility Studies of soil and groundwater at the Maywood site. On September 24, 2014, the USEPA issued its Record of Decision (ROD) for chemically-contaminated soil at the Maywood site. The ROD was amended pursuant to an Explanation of Significant Differences in January 2021. On February 29, 2024, the U.S. District Court for the District of New Jersey entered a consent decree among the Company, the United States, the New Jersey Department of Environmental Protection (NJDEP) and the New Jersey Spill Compensation Fund Administrator that requires the Company to take certain actions and to pay certain past costs of the United States and NJDEP. The USEPA has not yet issued a ROD for chemically-contaminated groundwater at the Maywood site. Based on the most current information available, the Company believes its recorded liability is reasonable having considered the range of estimated costs of remediation for the Maywood site. The estimate of the cost of remediation for the Maywood site could change again as the Company continues to hold discussions with the USEPA, as the design of the remedial action is finalized, if a groundwater ROD is issued or if other potentially responsible parties are identified. The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability.
D’Imperio Property Site
During the mid-1970’s, Jerome Lightman and the Lightman Drum Company disposed of hazardous substances generated by the Company at several sites in New Jersey, including the D’Imperio site. The Company was named as a potentially responsible party in an October 2, 1998 lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Site. The Company is cooperating with other potentially responsible parties to implement the selected remedy. Based on current information, the Company believes that its recorded liability is reasonable having considered the range of estimated cost of remediation for the D’Imperio site. Depending on the ultimate cost of the remediation at this site, the amount for which the Company is liable could differ materially from the Company’s current recorded liability.
Wilmington Site
Property formerly owned and operated by the Company in Wilmington, Massachusetts was listed on the National Priorities List in 2006. The Company, together with the current site owner and another potentially responsible party, entered into an Administrative Order on Consent in July 2007 to undertake a Remedial Investigation and Feasibility Study. A ROD was issued by the USEPA on March 30, 2021. The Company and three other potentially responsible parties entered into a consent decree, dated September 28, 2023, with USEPA and the Commonwealth of Massachusetts that requires the remedial design and remedial action of the remedy selected in the ROD for two operable units and an interim remedy for another operable unit. Remediation at this site is being managed by its current owner, to whom the Company sold the property in 1980. The Company is contractually obligated to contribute up to
On July 29, 2022, the Company and other potentially responsible parties were notified of a possible joint claim by federal and state trustees for alleged natural resource damages related to the Wilmington site. The alleged damages may result in a range
10
of possible penalties and the Company recorded a liability for this matter during the first quarter of 2024. Depending on the ultimate resolution of this matter, the amount for which the Company is liable could differ materially from the current recorded liability.
Millsdale Site
On March 26, 2024, the Company received a Notice and Finding of Violation from the USEPA alleging violations of air regulations at the Company’s Elwood, Illinois (Millsdale) facility. The notice alleges violations related to operating parameters and air emission requirements. The notice does not state whether the USEPA intends to pursue financial penalties or operational remedies. The alleged violations may result in a range of possible penalties; however, at this stage of the matter, the Company is unable to predict the ultimate outcome or what impact, if any, the outcome might have on the Company’s financial position, results of operations or cash flows.
Other U.S. Sites
Through the regular environmental monitoring of its plant production sites, the Company discovered levels of chemical contamination that were above thresholds allowed by law at its Millsdale and Fieldsboro, New Jersey plants. The Company voluntarily reported its results to the applicable state environmental agencies. As a result, the Company is required to perform self-remediation of the affected areas. Based on current information, the Company believes that its recorded liability for the remediation of the affected areas is appropriate based on an estimate of expected costs. However, actual costs could differ materially from the current recorded liability.
Defined Benefit Pension Plans
The Company sponsors various funded qualified and unfunded non-qualified defined benefit pension plans, the most significant of which cover employees in the U.S. and U.K. locations. The U.S. and U.K. defined benefit pension plans are frozen and service benefits are no longer being accrued.
Components of Net Periodic Benefit Cost
|
|
UNITED STATES |
|
|||||
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Interest cost |
|
$ |
|
|
$ |
|
||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
Amortization of net actuarial loss |
|
|
( |
) |
|
|
( |
) |
Net periodic benefit cost |
|
$ |
( |
) |
|
$ |
( |
) |
|
|
UNITED KINGDOM |
|
|||||
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Interest cost |
|
$ |
|
|
$ |
|
||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
Amortization of net actuarial loss |
|
|
|
|
|
|
||
Net periodic benefit cost |
|
$ |
|
|
$ |
|
||
Employer Contributions
U.S. Plans
As a result of pension funding relief provisions included in the Highway and Transportation Funding Act of 2014, the Company is not required to make contributions to its funded U.S. qualified defined benefit plans. Approximately $
U.K. Plan
The Company’s U.K. subsidiary does not expect to contribute to its defined benefit pension plan in 2024.
11
Defined Contribution Plans
The Company sponsors retirement defined contribution plans that cover eligible U.S. and U.K. employees. The Company’s U.S. retirement plans include two qualified plans, one of which is a 401(k) plan and one of which is an employee stock ownership plan (profit sharing plan), and one non-qualified supplemental executive plan. In the three months ended March 31, 2024 and 2023, the Company made contributions into the qualified retirement plans for U.S. employees and for certain non-U.S. employees. Profit sharing contributions were determined using a formula applied to Company earnings. Approximately
Defined contribution plan expenses for the Company’s qualified contribution plans were as follows:
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Retirement savings contributions |
|
$ |
|
|
$ |
|
||
Profit sharing contributions |
|
|
|
|
|
|
||
Total defined contribution plan expenses |
|
$ |
|
|
$ |
|
||
The Company has a rabbi trust to fund the obligations of its non-qualified supplemental executive defined contribution plans (supplemental plans). The trust is comprised of various mutual fund investments selected by the participants of the supplemental plans. In accordance with the accounting guidance for rabbi trust arrangements, the assets of the trust and the obligations of the supplemental plans are reported on the Company’s condensed consolidated balance sheets. The Company elected the fair value option for the mutual fund investment assets so that offsetting changes in the mutual fund values and defined contribution plan obligations would be recorded in earnings in the same period. Therefore, the mutual funds are reported at fair value with any subsequent changes in fair value recorded in the condensed consolidated statements of income. The liabilities related to the supplemental plans increase (i.e., supplemental plan expense is recognized) when the value of the trust assets appreciate and decrease when the value of the trust assets decline (i.e., supplemental plan income is recognized). At March 31, 2024, the balance of the trust assets was $
12
Below are the computations of basic and diluted earnings per share for the three months ended March 31, 2024 and 2023:
(In thousands, except per share amounts) |
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Computation of Basic Earnings per Share |
|
|
|
|
|
|
||
Net income attributable to Stepan Company |
|
$ |
|
|
$ |
|
||
Weighted-average number of common shares |
|
|
|
|
|
|
||
Basic earnings per share |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Computation of Diluted Earnings per Share |
|
|
|
|
|
|
||
Net income attributable to Stepan Company |
|
$ |
|
|
$ |
|
||
Weighted-average number of shares outstanding |
|
|
|
|
|
|
||
Add weighted-average net shares from assumed |
|
|
|
|
|
|
||
Add weighted-average net shares related to unvested |
|
|
|
|
|
|
||
Add weighted-average net shares from assumed |
|
|
|
|
|
|
||
Add weighted-average contingently issuable net |
|
|
|
|
|
|
||
Weighted-average shares applicable to diluted |
|
|
|
|
|
|
||
Diluted earnings per share |
|
$ |
|
|
$ |
|
||
Below is the change in the Company’s accumulated other comprehensive income (loss) (AOCI) balance by component (net of income taxes) for the three months ended March 31, 2024 and 2023:
(In thousands) |
|
Foreign |
|
|
Defined |
|
|
Cash Flow |
|
|
Total |
|
||||
Balance at December 31, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive income before |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Amounts reclassified from AOCI |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
||
Net current-period other comprehensive income |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Balance at March 31, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at December 31, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive income before |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Amounts reclassified from AOCI |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Net current-period other comprehensive income |
|
|
( |
) |
|
|
|
|
|
|
|
|
( |
) |
||
Balance at March 31, 2024 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
13
Information regarding the reclassifications out of AOCI for the three months ended March 31, 2024 and 2023, is displayed below:
(In thousands) |
|
Amount Reclassified from AOCI (1) |
|
|
|
|||||
AOCI Components |
|
Three Months Ended |
|
|
Affected Line Item in |
|||||
|
|
2024 |
|
|
2023 |
|
|
|
||
Amortization of defined benefit |
|
$ |
( |
) |
|
$ |
( |
) |
|
(2) |
|
|
|
|
|
|
|
|
Tax benefit |
||
|
|
$ |
( |
) |
|
$ |
( |
) |
|
Net of tax |
Gains and losses on cash flow |
|
|
|
|
|
|
|
|
||
Foreign exchange contracts |
|
|
|
|
|
|
|
Cost of sales |
||
|
|
|
|
|
|
|
|
Total before tax |
||
|
|
|
— |
|
|
|
— |
|
|
Tax benefit |
|
|
$ |
|
|
$ |
|
|
Net of tax |
||
Total reclassifications for the period |
|
$ |
( |
) |
|
$ |
( |
) |
|
Net of tax |
The Company has
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Segment Net Sales |
|
|
|
|
|
|
||
Surfactants |
|
$ |
|
|
$ |
|
||
Polymers |
|
|
|
|
|
|
||
Specialty Products |
|
|
|
|
|
|
||
Total |
|
$ |
|
|
$ |
|
||
14
Segment operating income and reconciliations of segment operating income to income before provision for income taxes for the three months ended March 31, 2024 and 2023, are summarized below:
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Segment Operating Income |
|
|
|
|
|
|
||
Surfactants |
|
$ |
|
|
$ |
|
||
Polymers |
|
|
|
|
|
|
||
Specialty Products |
|
|
|
|
|
|
||
Segment operating income |
|
|
|
|
|
|
||
Business restructuring |
|
|
— |
|
|
|
( |
) |
Unallocated corporate expenses (1) |
|
|
( |
) |
|
|
( |
) |
Total operating income |
|
|
|
|
|
|
||
Other Income (Expense) |
|
|
|
|
|
|
||
Interest, net |
|
|
( |
) |
|
|
( |
) |
Other, net |
|
|
|
|
|
|
||
Income before provision for income taxes |
|
$ |
|
|
$ |
|
||
As of March 31, 2024, the Company had $
In addition, during 2020, the Company recorded $
The tables below provide a geographic disaggregation of net sales for the three months ended March 31, 2024 and 2023. The Company’s business disaggregation by geographic region most effectively captures the nature and economic characteristics of the Company’s revenue streams impacted by economic factors.
(In thousands) |
|
For the Three Months Ended March 31, 2024 |
|
|||||||||||||
Geographic Market |
|
Surfactants |
|
|
Polymers |
|
|
Specialty |
|
|
Total |
|
||||
North America |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(In thousands) |
|
For the Three Months Ended March 31, 2023 |
|
|||||||||||||
Geographic Market |
|
Surfactants |
|
|
Polymers |
|
|
Specialty |
|
|
Total |
|
||||
North America |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
15
At March 31, 2024 and December 31, 2023, debt was comprised of the following:
(In thousands) |
|
Maturity |
|
March 31, |
|
|
December 31, |
|
||
Senior unsecured notes |
|
|
|
|
|
|
|
|
||
|
|
|
$ |
|
|
$ |
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|
|||
Revolving credit facility and term loan borrowing |
|
|
|
|
|
|
|
|||
Debt of foreign subsidiaries |
|
|
|
|
|
|
|
|
||
Unsecured bank debt, foreign currency |
|
|
|
|
|
|
|
|||
Total debt |
|
|
|
$ |
|
|
$ |
|
||
Less current maturities |
|
|
|
|
|
|
|
|
||
Long-term debt |
|
|
|
$ |
|
|
$ |
|
||
The Company's long-term debt financing is comprised of certain senior unsecured notes issued to insurance companies in private placement transactions pursuant to note purchase agreements (the “Note Purchase Agreements”), totaling $
The Company's credit agreement (the "Credit Agreement") with a syndicate of banks provides for credit facilities in an initial aggregate principal amount of $
The Company’s material debt agreements contain provisions which, among other covenants, require maintenance of certain financial ratios and place limitations on additional debt, investments and payment of dividends. Based on the loan agreement provisions that place limitations on dividend payments, unrestricted retained earnings (i.e., retained earnings available for dividend distribution) were $
Other, net in the condensed consolidated statements of income included the following:
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2024 |
|
|
2023 |
|
||
Foreign exchange losses |
|
$ |
( |
) |
|
$ |
( |
) |
Investment income |
|
|
|
|
|
|
||
Realized and unrealized gains on investments |
|
|
|
|
|
|
||
Net periodic benefit cost |
|
|
|
|
|
|
||
Other, net |
|
$ |
|
|
$ |
|
||
16
Noncash investing activities included liabilities (accounts payable) incurred for property, plant and equipment expenditures of approximately $
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848) Facilitation of the Effect of Reference Rate Reform on Financial Reporting. This update provides optional guidance for a limited period of time to ease the burden of implementing the usage of new reference rates. The amendments apply to contract modifications that replace a reference rate affected by reference rate reform and contemporaneous modifications of other contract terms related to the replacement of the reference rate. If elected, the optional expedients to contract modifications must be applied consistently for all eligible contracts or eligible transactions. The original timeframe for electing optional expedients to contract modifications was between March 12, 2020 and December 31, 2022. In December 2022, the FASB issued ASU No. 2022-06 deferring the sunset date of Topic 848 from December 31, 2022 to December 31, 2024. The guidance should be applied prospectively. Other than electing select expedients associated with an interest rate swap, the Company has not currently utilized any of the optional expedients of exceptions available under this ASU. The Company will continue to assess whether this ASU is applicable throughout the effective period.
In October 2023, the FASB issued ASU No. 2023-06, Disclosure Improvements, Codification Amendments in Response to the SEC’s Disclosure Update and Simplification Initiative. The amendments in this update represent changes to clarify or improve disclosures and presentation requirements of a variety of topics, including Statement of Cash Flows-Overall (disclosures in annual periods where cash flows associated with derivative instruments and their related gains and losses are presented), Earnings Per Share-Overall (disclosures of the methods used in the diluted earnings-per-share computation for each dilutive security), and Debt-Overall (disclosures of amounts and terms of unused lines of credit and unfunded commitments and the weighted-average interest rate on outstanding short-term borrowings). The amendments in this update are effective two years after the SEC removes related disclosure requirements from Regulation S-X or Regulation S-K. The implementation of ASU No. 2023-06 will not have an impact on the Company’s financial position, results of operations and cash flow, but will impact the Company’s interim and annual disclosures related to the relevant subtopics in this update.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280) Improvements to Reportable Segment Disclosures. This update requires more enhanced and detailed interim and annual disclosures regarding significant segment expenses and other segment items that are regularly provided to the chief operating decision maker. These items include the difference between segment revenue less the segment expenses that have been already disclosed under the significant expense principle and each reported measure of segment profit and loss. These requirements are in addition to the disclosures that are currently required by Topic 280, Segment reporting. The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024 and should be applied retrospectively to all periods presented in the financial statements. The implementation of ASU No. 2023-07 will not have an impact on the Company’s financial position, results of operations and cash flow but will impact the Company’s interim and annual segment reporting disclosures.
In December 2023, the FASB issued ASU No. 2023-09, Income taxes (Topic 740) Improvement to Income Tax Disclosures. This update requires that public entities on an annual basis disclose specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. In addition, the amendments in this update require the disclosure on an annual basis of the amount of income taxes paid (net of refund received) disaggregated by federal, state and foreign taxes and the amount of income taxes paid (net of refunds received) disaggregated by individual jurisdictions in which income taxes paid is equal or greater than five percent of total income taxes paid (net of refunds received). This update requires all entities to disclose income (or loss) from continuing operations before income tax expense (or benefit) disaggregated between domestic and foreign and income tax expense (or benefit) from continuing operations disaggregated by federal, state, and foreign. The amendments in this update are effective for annual periods beginning after December 15, 2024 and should be applied on a prospective basis. The implementation of ASU No. 2023-09 will not have an impact on the Company’s financial position, results of operations and cash flow but will impact the Company’s annual income tax disclosures.
The Organisation for Economic Co-operation and Development (OECD) proposed a global minimum tax of
17
adjust local tax incentives in response to Pillar Two. While it is uncertain whether the U.S. will enact legislation to adopt Pillar Two, certain countries in which the Company operates have enacted such legislation, and other countries are in the process of introducing legislation to implement Pillar Two. The Company does not expect Pillar Two to have a material impact on its financial position, results of operations, cash flow and effective tax rate.
18
Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion and analysis (MD&A) of certain significant factors that have affected the Company’s financial condition and results of operations during the interim periods included in the accompanying condensed consolidated financial statements.
Certain statements in this Quarterly Report on Form 10-Q, other than purely historical information, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the Exchange Act). These statements include statements about Stepan Company’s and its subsidiaries’ (the Company) plans, objectives, strategies, financial performance and outlook, trends, the amount and timing of future cash distributions, prospects or future events and involve known and unknown risks that are difficult to predict. As a result, the Company’s actual financial results, performance, achievements or prospects may differ materially from those expressed or implied by these forward-looking statements. In some cases, forward-looking statements can be identified by the use of words such as “may,” “could,” “expect,” “intend,” “plan,” “seek,” “anticipate,” “believe,” “estimate,” “guidance,” “predict,” “potential,” “continue,” “likely,” “will,” “would,” “should,” “illustrative” and variations of these terms and similar expressions, or the negative of these terms or similar expressions. Such forward-looking statements are necessarily based upon estimates and assumptions that, while considered reasonable by the Company and its management based on their knowledge and understanding of the business and industry, are inherently uncertain. These statements are not guarantees of future performance, and stockholders should not place undue reliance on forward-looking statements. There are a number of risks, uncertainties and other important factors, many of which are beyond the Company’s control, that could cause the Company’s actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q.
Such risks, uncertainties and other important factors, include, among others, the risks, uncertainties and factors set forth under “Part II-Item IA - Risk Factors” of this Quarterly Report on Form 10-Q and under “Part I-Item IA. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, including the risks and uncertainties related to the following:
19
These factors are not necessarily all of the important factors that could cause the Company’s actual financial results, performance, achievements or prospects to differ materially from those expressed in or implied by any of its forward-looking statements. Other unknown or unpredictable factors could also impact the Company’s results. All forward-looking statements attributable to the Company or persons acting on the Company’s behalf are expressly qualified in their entirety by the cautionary statements set forth above. Forward-looking statements speak only as of the date they are made, and the Company does not undertake or assume any obligation to update publicly any of these forward-looking statements to reflect actual results, new information or future events, changes in assumptions or changes in other factors affecting forward-looking statements, except to the extent required by applicable laws. If the Company updates one or more forward-looking statements, no inference should be drawn that the Company will make additional updates with respect to those or other forward-looking statements.
The “Company,” “we,” “our” or “us” means Stepan Company and one or more of its subsidiaries only.
Overview
The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business is comprised of three reportable segments:
Surfactants – Surfactants, which accounted for 71 percent of consolidated net sales for the first three months of 2024, are principal ingredients in consumer and industrial cleaning and disinfection products such as detergents for washing clothes, dishes, carpets, floors and walls, as well as shampoos and body washes. Other applications include fabric softeners, germicidal quaternary compounds, disinfectants, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites. Surfactants are manufactured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines and Singapore).
Polymers – Polymers, which accounted for 26 percent of consolidated net sales for the first three months of 2024, include polyurethane polyols, polyester resins and phthalic anhydride. Polyurethane polyols are used in the manufacture of rigid foam for thermal insulation in the construction industry and are also a base raw material for coatings, adhesives, sealants and elastomers (collectively, CASE products). Powdered polyester resins are used in coating applications. CASE and powdered polyester resins are collectively referred to as specialty polyols. Phthalic anhydride is used in unsaturated polyester resins, alkyd resins and plasticizers for applications in construction materials and components of automotive, boating and other consumer products. In addition, the Company uses phthalic anhydride internally in the production of polyols. In the United States, polyurethane polyols are manufactured at the Company’s Elwood, Illinois (Millsdale) and Wilmington, North Carolina sites. Phthalic anhydride is manufactured at the Company’s Millsdale site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. In Europe, polyurethane polyols are manufactured at the Company’s plants in Germany and the Netherlands and specialty polyols are manufactured at the Company’s Poland site. In Asia, polyurethane polyols and specialty polyols are manufactured at the Company’s China plant.
Specialty Products – Specialty products, which accounted for three percent of consolidated net sales for the first three months of 2024, include flavors, emulsifiers and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications. Specialty products are primarily manufactured at the Company’s Maywood, New Jersey, site and, in some instances, by third-party contractors.
Deferred Compensation Plans
The accounting for the Company’s deferred compensation plans can cause period-to-period fluctuations in Company income and expenses. Compensation expense is recognized when the value of the Company's common stock and mutual fund investment assets held for the plans increase, and compensation income is recognized when the value of the Company's common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following table:
|
|
Income (Expense) |
|
|
|
|
|
||||||
|
|
For the Three Months |
|
|
|
|
|
||||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
Change |
|
|
|||
Deferred Compensation (Administrative expenses) |
|
$ |
(1.8 |
) |
|
$ |
(1.5 |
) |
|
$ |
(0.3 |
) |
(1) |
Realized/Unrealized Gains on Investments (Other, net) |
|
|
2.2 |
|
|
|
1.5 |
|
|
|
0.7 |
|
|
Investment Income (Other, net) |
|
|
0.1 |
|
|
|
0.1 |
|
|
|
— |
|
|
Pretax Income Effect |
|
$ |
0.5 |
|
|
$ |
0.1 |
|
|
$ |
0.4 |
|
|
20
Effects of Foreign Currency Translation
The Company’s foreign subsidiaries transact business and report financial results in their respective local currencies. As a result, foreign subsidiary income statements are translated into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.S. dollar over time, foreign currency translation affects period-to-period comparisons of financial statement items (i.e., because foreign exchange rates fluctuate, similar period-to-period local currency results for a foreign subsidiary may translate into different U.S. dollar results). The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three months ended March 31, 2024 and 2023:
|
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
(In millions) |
|
2024 |
|
|
2023 |
|
|
Decrease |
|
|
Increase |
|
||||
Net Sales |
|
$ |
551.4 |
|
|
$ |
651.4 |
|
|
$ |
(100.0 |
) |
|
$ |
11.8 |
|
Gross Profit |
|
|
70.3 |
|
|
|
73.6 |
|
|
|
(3.3 |
) |
|
|
1.3 |
|
Operating Income |
|
|
20.2 |
|
|
|
21.1 |
|
|
|
(0.9 |
) |
|
|
0.7 |
|
Pretax Income |
|
|
19.5 |
|
|
|
19.9 |
|
|
|
(0.4 |
) |
|
|
0.6 |
|
RESULTS OF OPERATIONS
Three Months Ended March 31, 2024 and 2023
Summary
Net income in the first quarter of 2024 was $13.9 million, or $0.61 per diluted share, versus $16.1 million, or $0.70 per diluted share, in the first quarter of 2023. Adjusted net income was $14.7 million, or $0.64 per diluted share, versus $16.4 million, or $0.71 per diluted share in the first quarter of 2023 (see the “Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share” section of this MD&A for a reconciliation between reported net income and reported earnings per diluted share and non-GAAP adjusted net income and adjusted earnings per diluted share). Earnings before interest, taxes, depreciation and amortization (EBITDA) was $50.2 million in the first quarter of 2024 versus $48.3 million in the first quarter of 2023. Adjusted EBITDA was $51.2 million, up five percent, versus $48.7 million in the first quarter of 2023 (see the "Reconciliation of non-GAAP EBITDA and Adjusted EBITDA" section of this MD&A for a reconciliation between reported operating income and non-GAAP EBITDA and adjusted EBITDA). Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the first quarter of 2024 compared to the first quarter of 2023. A detailed discussion of segment operating performance for the first quarter of 2024 compared to the first quarter of 2023 follows the summary.
Consolidated net sales decreased $100.0 million, or 15 percent, versus the prior year quarter. Lower average selling prices negatively impacted the year-over-year change in net sales by $115.5 million. The decrease in average selling prices was mainly attributable to the pass-through of lower raw material costs, less favorable product mix and increased competitive activity primarily within the European and Latin American end-markets. Consolidated sales volume increased one percent, which favorably impacted the change in net sales by $3.7 million. Surfactant sales volume was flat year-over-year while sales volume in the Polymer and Specialty Products segments increased one percent and 11 percent, respectively. Foreign currency translation favorably impacted the year-over-year change in net sales by $11.8 million due to a weaker U.S. dollar against most currencies in foreign locations where the Company has operations.
Operating income in the first quarter of 2024 decreased $0.9 million, or four percent, versus operating income in the first quarter of 2023. Surfactant and Polymer operating income decreased $1.0 million and $1.6 million, respectively, versus the first quarter of 2023. Specialty Products operating income increased $1.7 million versus the first quarter of 2023. Corporate expenses, including business restructuring, environmental remediation and deferred compensation expenses were flat year-over-year. Corporate expenses, excluding business restructuring, environmental remediation and deferred compensation expenses, decreased $1.2 million, or seven percent year-over-year. Foreign currency translation had a $0.7 million favorable impact on operating income in the first quarter of 2024 versus the prior year.
Operating expenses (including deferred compensation and business restructuring) decreased $2.4 million, or five percent, versus the prior year quarter. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:
21
Net interest expense for the first quarter of 2024 increased $0.2 million, or nine percent, versus the first quarter of 2023. This increase was primarily attributable to higher interest rates on borrowings under the Company's revolving credit facility during the first quarter of 2024 versus 2023, partially offset by higher capitalized interest and non-U.S. interest income.
Other, net was $2.4 million of income in the first quarter of 2024 versus $1.7 million of income in the first quarter of 2023. The Company recognized $2.3 million of investment income (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the first quarter of 2024 compared to $1.7 million of investment income in the first quarter of 2023. The Company's net periodic pension income was $0.4 million in the first quarter of 2024 versus $0.3 million of income in the first quarter of 2023. In addition, the Company reported $0.4 million of foreign exchange losses in the first quarter of 2024 versus $0.3 million of foreign exchange losses in the first quarter of 2023.
The Company’s effective tax rate was 28.6 percent in the first quarter of 2024 versus 18.9 percent in the first quarter of 2023. The increase was primarily attributable to the Company’s intention to elect “Bonus Depreciation” for its new alkoxylation facility that is being built in Pasadena, Texas and expected to start up in the fourth quarter of 2024. As a result of this election, the Company is expected to lose its ability to use its global intangible low-taxed income (GILTI) deduction and related GILTI foreign tax credits for 2024, resulting in a higher effective tax rate. The Organisation for Economic Co-operation and Development (OECD) has proposed a global minimum tax of 15 percent on reported profits (entitled "Pillar Two"). The Company does not expect Pillar Two to have a material impact on its financial position, results of operations, cash flow and effective tax rate.
Segment Results
(Dollars in thousands) |
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
Net Sales |
|
2024 |
|
|
2023 |
|
|
Decrease |
|
|
Percent |
|
||||
Surfactants |
|
$ |
390,820 |
|
|
$ |
467,828 |
|
|
$ |
(77,008 |
) |
|
|
-16 |
|
Polymers |
|
|
145,508 |
|
|
|
161,127 |
|
|
|
(15,619 |
) |
|
|
-10 |
|
Specialty Products |
|
|
15,090 |
|
|
|
22,481 |
|
|
|
(7,391 |
) |
|
|
-33 |
|
Total Net Sales |
|
$ |
551,418 |
|
|
$ |
651,436 |
|
|
$ |
(100,018 |
) |
|
|
-15 |
|
(Dollars in thousands) |
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
Operating Income |
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Percent |
|
||||
Surfactants |
|
$ |
26,079 |
|
|
$ |
27,056 |
|
|
$ |
(977 |
) |
|
|
-4 |
|
Polymers |
|
|
8,382 |
|
|
|
10,004 |
|
|
|
(1,622 |
) |
|
|
-16 |
|
Specialty Products |
|
|
4,268 |
|
|
|
2,530 |
|
|
|
1,738 |
|
|
|
69 |
|
Segment Operating Income |
|
$ |
38,729 |
|
|
$ |
39,590 |
|
|
$ |
(861 |
) |
|
|
-2 |
|
Corporate Expenses, Excluding Deferred Compensation |
|
$ |
16,782 |
|
|
$ |
16,874 |
|
|
$ |
(92 |
) |
|
|
-1 |
|
Deferred Compensation Expense |
|
|
1,778 |
|
|
|
1,502 |
|
|
|
276 |
|
|
|
18 |
|
Business Restructuring |
|
|
- |
|
|
|
157 |
|
|
|
(157 |
) |
|
|
-100 |
|
Total Operating Income |
|
$ |
20,169 |
|
|
$ |
21,057 |
|
|
$ |
(888 |
) |
|
|
-4 |
|
22
Surfactants
Surfactant net sales for the first quarter of 2024 decreased $77.0 million versus net sales for the first quarter of 2023. Lower average selling prices negatively impacted the change in net sales by $85.6 million. The lower average selling prices were mainly attributable to declining raw material costs, less favorable product mix and increased competitive activity within the European and Latin American end-markets. Sales volume was relatively flat year-over-year and positively impacted the change in net sales by $0.9 million. Foreign currency translation had a $7.7 million favorable impact on the year-over-year change in net sales. A comparison of net sales by region follows:
(Dollars in thousands) |
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
Net Sales |
|
2024 |
|
|
2023 |
|
|
Decrease |
|
|
Percent |
|
||||
North America |
|
$ |
229,590 |
|
|
$ |
277,139 |
|
|
$ |
(47,549 |
) |
|
|
-17 |
|
Europe |
|
|
70,778 |
|
|
|
91,120 |
|
|
|
(20,342 |
) |
|
|
-22 |
|
Latin America |
|
|
77,868 |
|
|
|
81,099 |
|
|
|
(3,231 |
) |
|
|
-4 |
|
Asia |
|
|
12,584 |
|
|
|
18,470 |
|
|
|
(5,886 |
) |
|
|
-32 |
|
Total Surfactants Segment |
|
$ |
390,820 |
|
|
$ |
467,828 |
|
|
$ |
(77,008 |
) |
|
|
-16 |
|
Net sales for North American operations decreased $47.5 million, or 17 percent, year-over-year. Lower average selling prices had a $32.5 million unfavorable impact on the change in net sales and were primarily due to the pass-through of lower raw material costs and less favorable product mix. Sales volume declined five percent and negatively impacted the change in net sales by $15.0 million. The lower sales volume was primarily due to lower demand for products sold into the agricultural end market due to continued customer and channel inventory destocking. Higher demand for products sold into the personal care end markets, driven by prior year investments in low 1,4 dioxane, along with higher demand in the industrial cleaning and oil field end markets partially offset the lower agricultural demand.
Net sales for European operations decreased $20.3 million, or 22 percent, primarily due to lower average selling prices that negatively impacted the change in net sales by $22.2 million. The lower average selling prices were primarily due to the pass-through of lower raw material costs, less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the change in net sales by $1.5 million. A weaker U.S. dollar relative to the European euro and British pound sterling led to the favorable foreign currency translation effect. Sales volume was up slightly year-over-year and positively impacted the change in net sales by $0.4 million. Higher demand for products sold to our distribution partners and into the industrial cleaning and personal care end markets was mostly offset by lower demand for products sold into the agricultural and the laundry and cleaning end markets.
Net sales for Latin American operations decreased $3.2 million, or four percent, primarily due to lower average selling prices that negatively impacted the change in net sales by $22.9 million. The lower average selling prices primarily reflect less favorable product mix, the pass-through of lower raw material costs and increased competitive pressures from imports. Sales volume increased 16 percent and positively impacted the change in net sales by $13.3 million. The sales volume improvement was primarily due to higher demand for products sold into the consumer products end markets and to our distribution customers, partially offset by lower demand for products sold into the agricultural and industrial cleaning end markets. A weaker U.S. dollar relative to all currencies within the region led to an $6.4 million positive foreign currency translation effect.
Net sales for Asian operations decreased $5.9 million, or 32 percent, versus the prior year quarter. A 17 percent decline in sales volume and lower average selling prices negatively impacted the change in net sales by $3.1 million and $2.6 million, respectively. Foreign currency translation negatively impacted the change in net sales by $0.2 million.
23
Surfactant operating income for the first quarter of 2024 decreased $1.0 million, or four percent, versus operating income for the first quarter of 2023. Gross profit decreased $2.4 million, or five percent, and operating expenses decreased $1.5 million, or six percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow:
(Dollars in thousands) |
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
Gross Profit and Operating Income |
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Percent |
|
||||
North America |
|
$ |
31,368 |
|
|
$ |
35,213 |
|
|
$ |
(3,845 |
) |
|
|
-11 |
|
Europe |
|
|
8,322 |
|
|
|
10,220 |
|
|
|
(1,898 |
) |
|
|
-19 |
|
Latin America |
|
|
8,766 |
|
|
|
7,172 |
|
|
|
1,594 |
|
|
|
22 |
|
Asia |
|
|
1,986 |
|
|
|
283 |
|
|
|
1,703 |
|
|
NM |
|
|
Surfactants Segment Gross Profit |
|
$ |
50,442 |
|
|
$ |
52,888 |
|
|
$ |
(2,446 |
) |
|
|
-5 |
|
Operating Expenses |
|
|
24,363 |
|
|
|
25,832 |
|
|
|
(1,469 |
) |
|
|
-6 |
|
Surfactants Segment Operating Income |
|
$ |
26,079 |
|
|
$ |
27,056 |
|
|
$ |
(977 |
) |
|
|
-4 |
|
Gross profit for North American operations decreased $3.8 million, or 11 percent, versus the prior year primarily due to lower average unit margins and a five percent decline in sales volume. These items negatively impacted the year-over-year change in gross profit by $1.9 million each. The lower average unit margins were primarily attributable to less favorable product mix, higher pre-operating expenses associated with the alkoxylation production facility that is being built in Pasadena, Texas and higher expenses incurred at the Company's Millsdale, Illinois plant site, inclusive of waste water disposal costs, due to operational interruptions during the first quarter of 2024.
Gross profit for European operations decreased $1.9 million, or 19 percent, primarily due to lower average unit margins that negatively impacted the year-over-year change in gross profit by $2.0 million. The lower average unit margins primarily reflect less favorable product mix and increased competitive activity within certain end-use markets. Foreign currency translation positively impacted the change in gross profit by $0.1 million.
Gross profit for Latin American operations increased $1.6 million, or 22 percent, primarily due to the 16 percent increase in sales volume and the favorable impact of foreign currency translation. These items positively impacted the year-over-year change in gross profit by $1.2 million and $0.7 million, respectively. Lower average unit margins negatively impacted the change in gross profit by $0.3 million and primarily reflect a less favorable product mix and competitive pricing pressures from imports.
Gross profit for Asia operations increased $1.7 million year-over-year due to higher average unit margins. The higher average unit margins reflect a more favorable product mix and lower overhead costs due to the timing of production runs.
Operating expenses for the Surfactants segment decreased $1.5 million, or six percent, in the first quarter of 2024 versus the first quarter of 2023. This decrease was mostly attributable to lower salaries, travel-related and bad debt expenses.
Polymers
Polymers net sales for the first quarter of 2024 decreased $15.6 million, or 10 percent, versus net sales for the same period of 2023. Lower average selling prices negatively impacted the change in net sales by $22.0 million. Foreign currency translation and a one percent increase in sales volume positively impacted the change in net sales by $4.1 million and $2.3 million, respectively. A comparison of net sales by region follows:
(Dollars in thousands) |
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
Net Sales |
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Percent |
|
||||
North America |
|
$ |
69,809 |
|
|
$ |
81,169 |
|
|
$ |
(11,360 |
) |
|
|
-14 |
|
Europe |
|
|
63,877 |
|
|
|
69,057 |
|
|
|
(5,180 |
) |
|
|
-8 |
|
Asia and Other |
|
|
11,822 |
|
|
|
10,901 |
|
|
|
921 |
|
|
|
8 |
|
Total Polymers Segment |
|
$ |
145,508 |
|
|
$ |
161,127 |
|
|
$ |
(15,619 |
) |
|
|
-10 |
|
Net sales for North American operations decreased $11.4 million, or 14 percent, due to lower average selling prices and a five percent decrease in sales volume. These items negatively impacted the year-over-year change in net sales by $7.6 million and $3.8 million, respectively. The lower average selling prices primarily reflect the pass-through of lower raw material costs. Sales volume of polyols used in rigid foam applications increased five percent year-over-year but was more than offset by a 43 percent decline within the commodity phthalic anhydride business due largely to operational interruptions at the Millsdale, Illinois plant during the first quarter of 2024.
24
Net sales for European operations decreased $5.2 million, or eight percent, versus the first three months of 2023. This decrease was primarily due to lower average selling prices that negatively impacted the year-over-year change in net sales by $12.8 million. The lower average selling prices were primarily due to the pass-through of lower raw material costs and increased competitive activity. Foreign currency translation and a four percent increase in sales volume positively impacted the change in net sales by $4.7 million and $2.9 million, respectively. A weaker U.S. dollar relative to the Polish zloty and British pound sterling led to the favorable foreign currency translation effect.
Net sales for Asia and Other operations increased $0.9 million, or eight percent, primarily due to a 16 percent increase in sales volume which positively impacted the year-over-year change in net sales by $1.7 million. The higher sales volume was largely driven by the non-recurrence of COVID lock downs and restrictions that were in place in China during the first quarter of 2023 and higher demand in specialty polyols resulting from the Company's product diversification efforts. The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the year-over-year change in net sales by $0.6 million and $0.2 million, respectively.
Polymer operating income in the first quarter of 2024 decreased $1.6 million, or 16 percent, versus operating income in the first quarter of 2023. Gross profit decreased $2.2 million, or 13 percent and operating expenses decreased $0.6 million or nine percent between years. Comparisons of gross profit by region and total segment operating expenses and operating income follow:
(Dollars in thousands) |
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
Gross Profit and Operating Income |
|
2024 |
|
|
2023 |
|
|
Increase |
|
|
Percent |
|
||||
North America |
|
$ |
4,643 |
|
|
$ |
6,144 |
|
|
$ |
(1,501 |
) |
|
|
-24 |
|
Europe |
|
|
9,022 |
|
|
|
10,312 |
|
|
|
(1,290 |
) |
|
|
-13 |
|
Asia and Other |
|
|
1,411 |
|
|
|
867 |
|
|
|
544 |
|
|
|
63 |
|
Polymers Segment Gross Profit |
|
$ |
15,076 |
|
|
$ |
17,323 |
|
|
$ |
(2,247 |
) |
|
|
-13 |
|
Operating Expenses |
|
|
6,694 |
|
|
|
7,319 |
|
|
|
(625 |
) |
|
|
-9 |
|
Polymers Segment Operating Income |
|
$ |
8,382 |
|
|
$ |
10,004 |
|
|
$ |
(1,622 |
) |
|
|
-16 |
|
Gross profit for North American operations decreased $1.5 million, or 24 percent, due to lower average unit margins and the five percent decline in sales volume. These items negatively impacted the change in gross profit by $1.2 million and $0.3 million, respectively. The lower average unit margins largely reflect higher maintenance, tolling fees and waste water disposal costs incurred at the Company's Millsdale, Illinois plant site due to operational interruptions during the first quarter of 2024.
Gross profit for European operations decreased $1.3 million, or 13 percent, versus the first quarter of 2023. The decrease was primarily due to lower average unit margins that negatively impacted the change in gross profit by $2.2 million. Foreign currency translation and a four percent increase in sales volume positively impacted the year-over-year change in gross profit by $0.5 million and $0.4 million, respectively.
Gross profit for Asia and Other operations increased $0.5 million, or 63 percent, primarily due to higher average unit margins and a 16 percent increase in sales volume. These items positively impacted the change in gross profit by $0.5 million and $0.1 million, respectively. The unfavorable impact of foreign currency translation negatively impacted the year-over-year change in gross profit by $0.1 million.
Operating expenses for the Polymer segment decreased $0.6 million, or nine percent, in the first quarter of 2024 versus the first quarter of 2023. This decrease was mainly attributable to lower salary expenses.
Specialty Products
Specialty Products net sales for the first quarter of 2024 decreased $7.4 million, or 33 percent, versus net sales for the first quarter of 2023. The decrease was due to lower average selling prices that more than offset an 11 percent increase in sales volume. Gross profit and operating income increased by $1.6 million and $1.7 million, respectively, year-over-year. The year-over-year increases in gross profit and operating income were mostly attributable to higher unit margins and sales volume within the medium chain triglycerides (MCT) product line.
25
Corporate Expenses
Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, were relatively flat year-over-year. Corporate expenses were $18.6 million in the first quarter of 2024 versus $18.5 million in the first quarter of 2023. Deferred compensation and environmental reserve expenses were up $0.3 million and $1.1 million, respectively, year-over-year. The higher environmental reserve expense reflects a reserve adjustment for environmental costs related to property formerly owned and operated by the Company in Wilmington, Massachusetts. These higher expenses were mostly offset by lower salaries and hiring-related expenses due to productivity efforts implemented in late 2023.
The $0.3 million increase in deferred compensation expense was primarily due to a larger increase in the market value of mutual fund investment assets held for the plans in the first quarter of 2024 versus the first quarter of 2023. This increase was partially offset by a $4.51 per share decrease in the market price of the Company's common stock in the first quarter of 2024 compared to a $3.43 per share decrease in the first quarter of 2023. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation income/expense for the three months ended March 31, 2024 and 2023:
|
|
2024 |
|
|
2023 |
|
|
2022 |
|
|||||||
|
|
March 31 |
|
|
December 31 |
|
|
March 31 |
|
|
December 31 |
|
||||
Company Common Stock Price |
|
$ |
90.04 |
|
|
$ |
94.55 |
|
|
$ |
103.03 |
|
|
$ |
106.46 |
|
LIQUIDITY AND CAPITAL RESOURCES
Overview
For the three months ended March 31, 2024, operating activities were a cash source of $41.6 million versus a cash use of $72.1 million for the comparable period in 2023. For the first three months of 2024, investing cash outflows totaled $24.4 million versus cash outflows of $90.3 million in the prior year period. Financing activities were a cash use of $20.0 million versus a cash source of $113.5 million in the prior year period.
Cash and cash equivalents decreased $4.0 million compared to December 31, 2023, inclusive of a $1.2 million unfavorable foreign exchange rate impact. On March 31, 2024, the Company's cash and cash equivalents totaled $125.8 million. Cash in U.S. demand deposit accounts totaled $2.7 million. The Company’s non-U.S. subsidiaries held $123.1 million of cash as of March 31, 2024.
Operating Activities
Net income during the first three months of 2024 decreased $2.2 million versus the comparable period in 2023. Working capital was a cash use of $2.8 million during the first three months of 2024 versus a cash use of $109.9 million in the comparable period in 2023.
Accounts receivable were a cash use of $26.0 million during the first three months of 2024 compared to a cash use of $40.4 million for the comparable period in 2023. Inventories were a cash source of $3.2 million in 2024 versus a cash source of $38.3 million in 2023. Accounts payable and accrued liabilities were a cash source of $26.0 million in 2024 compared to a cash use of $98.5 million for the same period in 2023.
Working capital requirements were lower in the first three months of 2024 compared to 2023 primarily due to the changes noted above. The change in accounts receivable working capital primarily reflects lower selling prices due to the pass through of lower raw material costs. The change in inventories reflects unit costs dropping less significantly during the first quarter of 2024 versus 2023. The change in accounts payable and accrued liabilities was due in large part to lower first quarter 2024 cash outlays required to meet lower incentive-based compensation, tax and other year-end obligations closely linked to lower 2023 earnings. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 2024.
Investing Activities
Cash used for investing activities decreased $65.9 million year-over-year. Cash used for capital expenditures was $30.2 million in the first three months of 2024 versus $92.2 million in the same period of 2023. The lower capital spending in 2024 was largely attributable to reduced spending required to complete construction of the alkoxylation plant the Company is building at its Pasadena, Texas site.
For 2024, the Company estimates that total capital expenditures will be in the range of $120.0 million to $140.0 million. This full year projected spending includes completion of the new alkoxylation plant that is being built in Pasadena, Texas, along with growth initiatives, infrastructure and optimization initiatives.
Financing Activities
Cash flow from financing activities was a use of $20.0 million in 2024 versus a source of $113.5 million in 2023. The year-over-year change was primarily due to a lower level of borrowings against the Company's revolving credit facility.
26
The Company purchases shares of its common stock in the open market or from its benefit plans from time to time to fund its own benefit plans and to mitigate the dilutive effect of new shares issued under its compensation plans. The Company may, from time to time, seek to purchase additional amounts of its outstanding equity and/or retire debt securities through cash purchases and/or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise, including pursuant to plans meeting the requirements of Rule 10b5-1 promulgated by the SEC. Such repurchases or exchanges, if any, will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. The Company did not purchase any shares of its common stock on the open market during the three months ended March 31, 2024. At March 31, 2024, the Company had $125.1 million remaining under the share repurchase program authorized by its Board of Directors.
Debt and Credit Facilities
Consolidated balance sheet debt decreased from $654.1 million on December 31, 2023 to $646.0 million on March 31, 2024, primarily due to lower domestic borrowings from the Company’s revolving credit facility and lower foreign credit line borrowings. Net debt (which is defined as total debt minus cash – see the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) decreased $4.1 million, from $524.3 million at December 31, 2023 to $520.2 million at March 31, 2024. This change reflects a debt decrease of $8.1 million and a cash decrease of $4.0 million.
As of March 31, 2024, the ratio of net debt to net debt plus shareholders’ equity was 30.0 percent versus 30.1 percent at December 31, 2023 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details). On March 31, 2024, the Company’s debt included $359.9 million of unsecured notes, with maturities ranging from 2024 through 2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements (the “Note Purchase Agreements”), a $93.8 million delayed draw term loan borrowed pursuant to the Company's credit agreement, $186.2 million of short term loans borrowed under the Company's revolving credit facility and $6.0 million of foreign credit line borrowings. The proceeds from the note issuances have been the Company’s primary source of long-term debt financing and are supplemented by borrowings under bank credit facilities to meet short and medium-term liquidity needs.
The Company's credit agreement with a syndicate of banks provides for credit facilities in an initial aggregate principal amount of $450.0 million, consisting of (a) a $350.0 million multi-currency revolving credit facility and (b) a $100.0 million delayed draw term loan credit facility, each of which matures on June 24, 2027. The Company maintains import letters of credit, and standby letters of credit under its workers’ compensation insurance agreements and for other purposes, as needed from time to time, which are issued under the revolving credit agreement. As of March 31, 2024, the Company had outstanding loans totaling $280.0 million, inclusive of a $93.8 million delayed draw term loan, and letters of credit totaling $11.0 million under the credit agreement, with $152.8 million remaining available.
The Company anticipates that cash from operations, committed credit facilities and cash on hand will be sufficient to fund anticipated capital expenditures, working capital, dividends and other planned financial commitments for the foreseeable future.
Certain foreign subsidiaries of the Company maintain short-term bank lines of credit in their respective local currencies to meet working capital requirements as well as to fund capital expenditures and acquisitions. At March 31, 2024, the Company’s foreign subsidiaries had $6.0 million of outstanding debt.
The Company is subject to covenants under its material debt agreements that require the maintenance of minimum interest coverage and minimum net worth. These debt covenants also limit the incurrence of additional debt as well as the payment of dividends and repurchase of shares. Under the most restrictive of these debt covenants:
|
1. |
The Company is required to maintain a minimum interest coverage ratio, as defined within the agreements, of 3.50 to 1.00, for the preceding four calendar quarters. |
|
2. |
The Company is required to maintain an existing maximum net leverage ratio, as defined within the agreements, not to exceed 4.00 to 1.00. |
|
3. |
The Company is required to maintain net worth of at least $750.0 million. |
|
4. |
The Company is permitted to pay dividends and purchase treasury shares after June 24, 2022, in amounts of up to $100.0 million plus 100 percent of net income and cash proceeds of stock option exercises, measured cumulatively beginning January 1, 2022. The maximum amount of dividends that could have been paid within this limitation is disclosed as unrestricted retained earnings in Note 14, Debt, of the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q). |
The Company believes it was in compliance with the covenants under its material debt agreements as of March 31, 2024.
27
ENVIRONMENTAL AND LEGAL MATTERS
The Company’s operations are subject to extensive federal, state and local environmental laws and regulations and similar laws in the other countries in which the Company does business. Although the Company's environmental policies and practices are designed to ensure compliance with these laws and regulations, future developments and increasingly stringent environmental regulation may require the Company to make additional unforeseen environmental expenditures. The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations. During the first three months of 2024 and 2023, the Company’s expenditures for capital projects related to environmental matters were $1.5 million for both years. These projects are capitalized and depreciated over their estimated useful lives, which are typically 10 years. Recurring costs associated with the operation and maintenance of facilities for waste treatment and disposal and managing environmental compliance in ongoing operations at the Company’s manufacturing locations were $10.8 million and $8.9 million for the three months ended March 31, 2024 and 2023, respectively.
Over the years, the Company has received requests for information related to or has been named by the government as a potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes. In addition, the Company is from time to time involved in routine legal proceedings incidental to the conduct of its business, including personal injury, property damage, tax, trade and labor matters. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these claims. It is the Company’s accounting policy to record liabilities when environmental assessments, remediation expenses or legal proceeding losses are probable, and the cost or range of possible costs can be reasonably estimated. When no amount within the range is a better estimate than any other amount, the minimum is accrued. Estimating the possible costs of environmental remediation requires making assumptions related to the nature and extent of contamination and the methods and resulting costs of remediation. Some of the factors on which the Company bases its estimates include information provided by decisions rendered by State and Federal environmental regulatory agencies, information provided by feasibility studies, and remedial action plans developed. After partial remediation payments at certain sites, the Company has estimated a range of possible environmental and legal losses of $20.8 million to $49.8 million at March 31, 2024 and $20.6 million to $49.4 million at December 31, 2023. Within the range of possible environmental and legal losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range. The Company's environmental and legal accruals totaled $20.8 million at March 31, 2024 and $20.6 million at December 31, 2023. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to environmental remediation and certain other legal matters approximated $1.6 million for the three months ended March 31, 2024, compared to $3.5 million for the same period in 2023.
For certain sites, the Company has responded to information requests made by federal, state or local government agencies but has received no response confirming or denying the Company’s stated positions. As such, estimates of the total costs, or range of possible costs, of remediation, if any, or the Company’s share of such costs, if any, cannot be determined with respect to these sites. Consequently, the Company is unable to predict the effect thereof on the Company’s financial position, cash flows and results of operations. Based on the Company’s present knowledge with respect to its involvement at these sites, the possibility of other viable entities’ responsibilities for cleanup, and the extended period over which any costs would be incurred, management believes that the Company has no material liability at these sites and that these matters, individually and in the aggregate, will not have a material effect on the Company’s financial position. Certain of these matters are discussed in Item 1, Part 2, of the Company’s Annual Report on Form 10-K, Legal Proceedings, in this report and in other filings of the Company with the SEC, which are available upon request from the Company. See also Note 8, Contingencies, in the notes to the Company’s condensed consolidated financial statements (included in Item 1 of this Form 10-Q) for a summary of the significant environmental proceedings related to certain environmental sites.
28
OUTLOOK
Management believes sales volumes will continue to gradually improve due to ongoing recovery in Rigid Polyols demand and growth in Surfactant sales volumes, inclusive of the expected recovery of the agricultural business in the second half of the year. Management remains focused on delivering $50.0 million in pre-tax savings from its previously shared cost reduction program to help offset inflationary pressures, increased expenses associated with the commissioning of the Company's new Pasadena, Texas alkoxylation assets, higher incentive-based compensation expenses and expenses associated with operational issues at the Company's Millsdale site. Management believes free cash flow should continue to improve versus prior year as the Company finishes construction on its Pasadena investment and benefits from higher anticipated agricultural sales volumes in the second half of the year. Management believes continued gradual sales volume growth, improved operational performance and its continued focus on cost reduction should position the Company to deliver full year adjusted EBITDA growth and positive free cash flow in 2024. Management remains confident in the Company's long-term growth and innovation initiatives.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies disclosed in the Company’s 2023 Annual Report on Form 10-K.
NON-GAAP RECONCILIATIONS
The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company’s performance and financial condition. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management’s effectiveness with specific reference to these indicators. Management uses these non-GAAP financial measures to assist in analyzing what management views as the Company’s core operating performance for purposes of business decision making. Management believes that presenting these non-GAAP financial measures provides investors with useful supplemental information because they (i) provide meaningful supplemental information regarding financial performance by excluding items affective comparability between periods, (ii) permit investors to view performance using the same tools that management uses to budget, make operating and strategic decisions and evaluate the Company’s core operating performance across periods, and (iii) otherwise provide supplemental information that may be useful to investors in evaluating the Company’s financial results. In addition, the Company believes that the presentation of these non-GAAP financial measures, when considered together with the most directly comparable GAAP financial measures and the reconciliations to those GAAP financial measures, provides investors with additional tools to understand the factors and trends affective the Company’s underlying business than could be obtained absent these disclosures. These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP and there are limitations to using non-GAAP financial measures. For example, the non-GAAP financial measures presented in this Form 10-Q may differ from similarly titled non-GAAP financial measures presented by other companies and other companies may not define these non-GAAP financial measures the same way as the Company does.
Reconciliation of Non-GAAP Adjusted Net Income and Earnings Per Share
Management uses the non-GAAP adjusted net income metrics to evaluate the Company’s operating performance. Management excludes the items listed in the table below because they are non-operational items. The cumulative tax effect was calculated using the statutory tax rates for the jurisdictions in which the noted transactions occurred.
|
|
Three Months Ended |
|
|||||||||||||
(In millions, except per share amounts) |
|
March 31, 2024 |
|
|
March 31, 2023 |
|
||||||||||
|
|
Net Income |
|
|
Diluted EPS |
|
|
Net Income |
|
|
Diluted EPS |
|
||||
Net Income Attributable to the Company as Reported |
|
$ |
13.9 |
|
|
$ |
0.61 |
|
|
$ |
16.1 |
|
|
$ |
0.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred Compensation Income (including |
|
|
(0.5 |
) |
|
|
(0.02 |
) |
|
|
(0.1 |
) |
|
|
— |
|
Business Restructuring Expense |
|
|
— |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
Environmental Remediation Expense |
|
|
1.5 |
|
|
|
0.06 |
|
|
|
0.4 |
|
|
|
0.01 |
|
Cumulative Tax Effect on Above Adjustment Items |
|
|
(0.2 |
) |
|
|
(0.01 |
) |
|
|
(0.1 |
) |
|
|
— |
|
Adjusted Net Income |
|
$ |
14.7 |
|
|
$ |
0.64 |
|
|
$ |
16.4 |
|
|
$ |
0.71 |
|
29
Reconciliation of Non-GAAP EBITDA and Adjusted EBITDA
Management uses the non-GAAP EBITDA and adjusted EBITDA metrics to evaluate the Company's operating performance. Management excludes the items listed in the table below to arrive at adjusted EBITDA because they are non-operational items.
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
($ in millions) |
|
Surfactants |
|
|
Polymers |
|
|
Specialty |
|
|
Unallocated |
|
|
Consolidated |
|
|||||
Operating Income |
|
$ |
26.1 |
|
|
$ |
8.4 |
|
|
$ |
4.3 |
|
|
$ |
(18.6 |
) |
|
$ |
20.2 |
|
Depreciation and Amortization |
|
|
17.7 |
|
|
|
8.0 |
|
|
|
1.5 |
|
|
|
0.4 |
|
|
|
27.6 |
|
Other, Net Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.4 |
|
|
|
2.4 |
|
EBITDA |
|
$ |
43.8 |
|
|
$ |
16.4 |
|
|
$ |
5.8 |
|
|
$ |
(15.8 |
) |
|
$ |
50.2 |
|
Deferred Compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.5 |
) |
|
|
(0.5 |
) |
Environmental Remediation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.5 |
|
|
|
1.5 |
|
Adjusted EBITDA |
|
$ |
43.8 |
|
|
$ |
16.4 |
|
|
$ |
5.8 |
|
|
$ |
(14.8 |
) |
|
$ |
51.2 |
|
|
|
Three Months Ended |
|
|||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
($ in millions) |
|
Surfactants |
|
|
Polymers |
|
|
Specialty |
|
|
Unallocated |
|
|
Consolidated |
|
|||||
Operating Income |
|
$ |
27.1 |
|
|
$ |
10.0 |
|
|
$ |
2.5 |
|
|
$ |
(18.5 |
) |
|
$ |
21.1 |
|
Depreciation and Amortization |
|
|
15.3 |
|
|
|
8.3 |
|
|
|
1.4 |
|
|
|
0.5 |
|
|
|
25.5 |
|
Other, Net Income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1.7 |
|
|
|
1.7 |
|
EBITDA |
|
$ |
42.4 |
|
|
$ |
18.3 |
|
|
$ |
3.9 |
|
|
$ |
(16.3 |
) |
|
$ |
48.3 |
|
Deferred Compensation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Cash Settled SARs |
|
|
(0.1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(0.1 |
) |
Business Restructuring |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.2 |
|
|
|
0.2 |
|
Environmental Remediation |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
0.4 |
|
|
|
0.4 |
|
Adjusted EBITDA |
|
$ |
42.3 |
|
|
$ |
18.3 |
|
|
$ |
3.9 |
|
|
$ |
(15.8 |
) |
|
$ |
48.7 |
|
Reconciliation of Non-GAAP Net Debt
Management uses the non-GAAP net debt metric to gain a more complete picture of the Company’s overall liquidity, financial flexibility and leverage level.
(In millions) |
|
March 31, |
|
|
December 31, |
|
||
Current Maturities of Long-Term Debt as Reported |
|
$ |
245.9 |
|
|
$ |
252.9 |
|
Long-Term Debt as Reported |
|
|
400.1 |
|
|
|
401.2 |
|
Total Debt as Reported |
|
|
646.0 |
|
|
|
654.1 |
|
Less Cash and Cash Equivalents as Reported |
|
|
(125.8 |
) |
|
|
(129.8 |
) |
Net Debt |
|
$ |
520.2 |
|
|
$ |
524.3 |
|
Equity |
|
$ |
1,214.5 |
|
|
$ |
1,216.5 |
|
Net Debt plus Equity |
|
$ |
1,734.7 |
|
|
$ |
1,740.8 |
|
Net Debt/Net Debt plus Equity |
|
|
30 |
% |
|
|
30 |
% |
30
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the market risks described in the Company’s 2023 Annual Report on Form 10-K.
Item 4 – Controls and Procedures
We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of March 31, 2024. Based on this evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2024, such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Part II OTHER INFORMATION
Item 1 – Legal Proceedings
SEC regulations require the Company to disclose certain information about administrative or judicial proceedings involving certain environmental matters to which a governmental authority is a party if the Company reasonably believes that such proceedings may result in monetary sanctions above a specified threshold. Pursuant to SEC regulations, the Company has adopted a threshold of $1.0 million for purposes of determining whether disclosure of any such proceedings is required. The Company believes that this threshold is reasonably designed to result in disclosure of any such proceedings that are material to its business or financial condition.
Developments in the Company’s legal proceedings are described below:
Maywood, New Jersey Site
The Company’s property in Maywood, New Jersey, property formerly owned by the Company adjacent to its current site and other nearby properties (collectively, the Maywood site) were listed on the National Priorities List in September 1993 pursuant to the provisions of CERCLA because of alleged chemical and radiological contamination. On September 24, 2014, the USEPA issued its Record of Decision (ROD) for chemically-contaminated soil at the Maywood site. The ROD was amended pursuant to an Explanation of Significant Differences in January 2021. On February 29, 2024, the U.S. District Court for the District of New Jersey entered a consent decree among the Company, the United States, the New Jersey Department of Environmental Protection (NJDEP) and the New Jersey Spill Compensation Fund Administrator that requires the Company to take certain actions and to pay certain past costs of the United States and NJDEP.
Millsdale Site
On March 26, 2024, the Company received a Notice and Finding of Violation from the USEPA alleging violations of air regulations at the Company’s Millsdale facility. The notice alleges violations related to operating parameters and air emission requirements. The notice does not state whether the USEPA intends to pursue financial penalties or operational remedies. The alleged violations may result in a range of possible penalties; however, at this stage of the matter, the Company is unable to predict the ultimate outcome or what impact, if any, the outcome might have on the Company’s results of operations or cash flows.
There have been no other material changes to the legal proceedings disclosed in the Company’s 2023 Annual Report on Form 10-K.
Item 1A – Risk Factors
There have been no material changes to the risk factors disclosed in the Company’s 2023 Annual Report on Form 10-K.
31
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
Below is a summary by month of share purchase by the Company during the first quarter of 2024:
Month |
|
Total Number |
|
|
|
Average Price |
|
|
Total Number of |
|
|
Approximate Dollar Value of Shares That May Yet be Purchased Under the Plans or Programs (1) |
|
||||
January 2024 |
|
|
1,614 |
|
(2) |
|
$ |
94.43 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
February 2024 |
|
|
34,904 |
|
(3) |
|
$ |
89.99 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
March 2024 |
|
|
9,484 |
|
(4) |
|
$ |
87.52 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
46,002 |
|
|
|
$ |
89.64 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
Item 3 – Defaults Upon Senior Securities
None
Item 4 – Mine Safety Disclosures
Not applicable
Item 5 – Other Information
During the three months ended March 31, 2024, no director or officer of the Company
Item 6 – Exhibits
Exhibit No. |
|
Description |
||
|
|
|
||
31.1 |
– |
|||
|
|
|
||
31.2 |
– |
|||
|
|
|
||
32 |
– |
|||
|
|
|
||
101.INS |
– |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
||
|
|
|
||
101.SCH |
– |
Inline XBRL Taxonomy Extension Schema with Embedded Linkbases Document |
||
|
|
|
||
104 |
– |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
||
|
|
|
||
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STEPAN COMPANY |
Date: May 8, 2024
/s/ Luis E. Rojo |
Luis E. Rojo |
Vice President and Chief Financial Officer |
33
