Stepan Reports First Quarter Earnings
First Quarter Highlights
- Reported net income was
$25.0 million , or$1.07 per diluted share versus$32.0 million , or$1.37 per diluted share, in the prior year. Adjusted net income* was$30.6 million , or$1.31 per diluted share versus$33.6 million , or$1.44 per diluted share, in the prior year. Global sales volume grew 3% quarter-over-quarter. Each of the three segments delivered sales volume growth during the first quarter of 2019. - Surfactant operating income was
$37.2 million versus$41.5 million in the prior year. This decrease was primarily attributable to a$2.3 million operating loss incurred at theEcatepec, Mexico facility as a result of a sulfonation equipment failure in January of 2019. The Company's insurance provider has acknowledged this incident is a covered event and the Company is pursuing insurance recovery for damaged equipment, incremental supply chain expenses and business interruption. The unfavorable impact of foreign currency translation negatively impacted results by$0.8 million . Global Surfactant sales volume increased 3% versus the prior year. Higher demand within the functional product and personal care end markets was partially offset by lower demand for products sold to the Company's distribution partners. - Polymer operating income was
$12.1 million versus$17.3 million in the prior year. This$5.2 million decrease was primarily attributable to the non-recurrence of a$2.1 million class action settlement received in 2018, lower margins and volumes for North American specialty polyols and phthalic anhydride, higher European costs associated with a planned maintenance shutdown inGermany to debottleneck capacity and lower North American rigid polyol margins. Global Polymer sales volume increased 3% versus the prior year. North American and European rigid polyol sales volume grew 10% and 7%, respectively. - Specialty Product operating income was
$3.1 million versus a$0.4 million operating loss in the prior year. This increase was primarily attributable to favorable order timing differences within our flavor business. - The effect of foreign currency translation negatively impacted net income by
$0.9 million , or$0.04 per diluted share, versus prior year. - During the first quarter of 2019 the Company elected to change its method of accounting for U.S. inventories from the last in, first out (LIFO) basis to the first in, first out (FIFO) basis. The Company believes this change is preferable as it provides a better matching of costs with the physical flow of inventory, better reflects the current value of inventories and improves comparability with the Company's industry peers. The Company has retrospectively applied this change to its prior year financial statement comparables and denoted impacted prior year columns "As Adjusted". The net effects on prior year results of changing from the LIFO method to the FIFO method are
$1.2 million of additional income in the first quarter of 2018 and$1.6 million of additional expense for full year 2018.
* Adjusted net income is a non-GAAP measure which excludes deferred compensation income/expense, cash-settled stock appreciation rights (SARs) as well as other significant and infrequent/non-recurring items. See Table II for reconciliations of non-GAAP adjusted net income and adjusted earnings per share.
"Excluding the impact of the sulfonation equipment failure in
Financial Summary
Three Months Ended March 31 |
||||||||||||
($ in thousands, except per share data) |
2019 |
2018 |
% |
|||||||||
Net Sales |
$ |
489,170 |
$ |
499,335 |
(2) |
% |
||||||
Operating Income |
$ |
29,738 |
$ |
41,283 |
(28) |
% |
||||||
Net Income |
$ |
24,984 |
$ |
31,952 |
(22) |
% |
||||||
Earnings per Diluted Share |
$ |
1.07 |
$ |
1.37 |
(22) |
% |
||||||
Adjusted Net Income * |
$ |
30,636 |
$ |
33,603 |
(9) |
% |
||||||
Adjusted Earnings per Diluted Share * |
$ |
1.31 |
$ |
1.44 |
(9) |
% |
||||||
* See Table II for reconciliations of non-GAAP Adjusted Net Income and Adjusted Earnings per Diluted Share. |
Summary of First Quarter Adjusted Net Income Items
Adjusted net income excludes non-operational deferred compensation income/expense, cash-settled SARs and other significant and infrequent or non-recurring items.
- Deferred Compensation: The current year quarter includes
$3.9 million of after-tax expense versus$1.0 million of after-tax expense in the prior year. - Cash Settled SARs: These management incentive instruments provide cash to participants equal to the appreciation on the price of specified shares of Company stock over a specified period of time. Because income or expense is recognized merely on the movement in the price of Company stock it has been excluded, similar to deferred compensation, to arrive at adjusted net income. The current year quarter includes
$1.2 million of after-tax expense versus$0.3 million of after-tax expense in the prior year. - Business Restructuring: The current year quarter is primarily comprised of: (i)
$0.4 million of after-tax expense associated with management's plan to close its Specialty Product office inthe Netherlands and absorb the site's supply chain, quality assurance and research and development functions into other Stepan locations, and: (ii)$0.2 million of after-tax expense attributable to ongoing decommissioning costs related to the Canadian plant closure. The prior year quarter included$0.3 million of after-tax decommissioning expense related to our Canadian plant closure.
Percentage Change in Net Sales
Net sales decreased 2% quarter-over-quarter. Global volume growth of 3% was more than offset by the unfavorable impact of foreign currency translation, mostly related to weaker European and Latin American currencies versus the U.S. dollar, and lower selling prices, mainly attributable to the pass-through of lower raw material costs.
Three Months Ended March 31, 2019 |
||||
Volume |
3 |
% |
||
Selling Price & Mix |
(2) |
% |
||
Foreign Currency Translation |
(3) |
% |
||
Total |
(2) |
% |
Segment Results
Three Months Ended March 31 |
||||||||||||
($ in thousands) |
2019 |
2018 |
% Change |
|||||||||
Net Sales |
||||||||||||
Surfactants |
$ |
349,650 |
$ |
358,940 |
(3) |
% |
||||||
Polymers |
$ |
120,179 |
$ |
121,933 |
(1) |
% |
||||||
Specialty Products |
$ |
19,341 |
$ |
18,462 |
5 |
% |
||||||
Total Net Sales |
$ |
489,170 |
$ |
499,335 |
(2) |
% |
||||||
Three Months Ended March 31 |
||||||||||||
($ in thousands, all amounts pre-tax) |
2019 |
2018 |
% |
|||||||||
Operating Income |
||||||||||||
Surfactants |
$ |
37,167 |
$ |
41,468 |
(10) |
% |
||||||
Polymers |
$ |
12,105 |
$ |
17,305 |
(30) |
% |
||||||
Specialty Products |
$ |
3,131 |
$ |
(350) |
NM |
|||||||
Segment Operating Income |
$ |
52,403 |
$ |
58,423 |
(10) |
% |
||||||
Corporate Expenses |
$ |
(22,665) |
$ |
(17,140) |
32 |
% |
||||||
Consolidated Operating Income |
$ |
29,738 |
$ |
41,283 |
(28) |
% |
Total segment operating income decreased
- Surfactant net sales were
$349.7 million for the quarter, a 3% decrease versus prior year. Sales volume increased 3% mostly due to higher demand in the personal care and agricultural end markets. Lower demand for products sold to our distribution partners and the Company's exit from commercial sulfonation inGermany partially offset the above growth. Selling prices were down 3% primarily due to the pass-through of lower raw material costs. The translation impact of a stronger U.S. dollar decreased net sales by 3%. Surfactant operating income decreased$4.3 million versus the prior year, primarily due to the sulfonation equipment failure at the Company'sEcatepec, Mexico facility and the unfavorable impact of foreign currency translation resulting from a stronger U.S. dollar versus all currencies where the Company has operations. - Polymer net sales were
$120.2 million in the quarter, a 1% decrease versus prior year. Sales volume increased 3% in the quarter primarily due to higher North American and European polyol volumes used in rigid foam insulation and insulated metal panels. The translation impact of a stronger U.S. dollar negatively impacted net sales by 4% while selling prices were flat quarter over quarter. Polymer operating income decreased$5.2 million versus the prior year primarily due to the non-recurrence of a$2.1 million class action settlement received in 2018, lower volumes and margins within the North American specialty polyols and phthalic anhydride end markets, and higher European costs associated with a planned maintenance shutdown inGermany . The lower phthalic anhydride margins reflect the consumption of higher priced year-end inventories carried to guard against potential winter supply disruptions. - Specialty Products net sales were
$19.3 million for the quarter, a 5% increase versus prior year. Sales volume increased 15% for the quarter. Operating income increased$3.5 million versus the prior year primarily due to favorable order timing differences within our flavor businesses.
Corporate Expenses
Three Months Ended March 31 |
||||||||||||
($ in thousands) |
2019 |
2018 |
% Change |
|||||||||
Total - Corporate Expenses |
$ |
22,665 |
$ |
17,140 |
32 |
% |
||||||
Deferred Compensation Expense/(Income) * |
$ |
7,473 |
$ |
1,614 |
363 |
% |
||||||
Business Restructuring Expense |
$ |
733 |
$ |
358 |
105 |
% |
||||||
Adjusted Corporate Expenses |
$ |
14,459 |
$ |
15,168 |
(5) |
% |
||||||
* See Table III for a discussion of deferred compensation plan accounting. |
- Corporate expenses, excluding deferred compensation and business restructuring costs, decreased
$0.7 million , or 5%, for the quarter. This decrease was mostly attributable to the nonrecurrence of prior year costs associated with the Company's first quarter acquisition inEcatepec , Mexico.
Income Taxes
The Company's effective tax rate was 19.5% in the first quarter of 2019 versus 18.7% in the first quarter of 2018. The increase was primarily attributable to: (i) the non-recurrence of a favorable 2018 tax benefit from nontaxable foreign interest and (ii) a less favorable geographic mix of income in the first quarter of 2019 versus the first quarter of 2018.
Shareholder Return
The Company paid
Selected Balance Sheet Information
The Company's net debt level increased
($ in millions) |
March 31, 2019 |
December 31, 2018 |
||||||
Net Debt |
||||||||
Total Debt |
$ |
271.9 |
$ |
276.1 |
||||
Cash |
269.5 |
300.2 |
||||||
Net Debt |
$ |
2.4 |
$ |
(24.1) |
||||
Equity |
831.4 |
807.4 |
||||||
Net Debt + Equity |
$ |
833.8 |
$ |
783.3 |
||||
Net Debt / (Net Debt + Equity) |
0 |
% |
(3) |
% |
The major working capital components were:
($ in millions) |
March 31, 2019 |
December 31, 2018 |
||||||||
Net Receivables |
$ |
298.9 |
$ |
280.0 |
||||||
Inventories |
215.0 |
231.5 |
||||||||
Accounts Payable |
(175.6) |
(206.0) |
||||||||
Net Total |
$ |
338.3 |
$ |
305.5 |
Capital spending was
Outlook
"Looking forward, we believe our Surfactant business will continue to benefit from our diversification efforts into functional products, new technologies, improved internal efficiencies and expanded sales into our broad customer base globally. We believe our Polymer business will benefit from the growing market for insulation materials and we are optimistic the business will deliver both full year volume growth and incremental margin improvement versus 2018. We believe our Specialty Product segment will deliver better margins and combined with restructuring efforts this segment should provide second half benefits. Overall, we remain optimistic about the balance of the year," said
Conference Call
Supporting Slides
Slides supporting this press release will be made available at www.stepan.com through the Investor Relations page at approximately the same time as this press release is issued.
Corporate Profile
Headquartered in
The Company's common stock is traded on the
Tables follow
Certain information in this news release consists of 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. These statements include statements about
There are a number of risks, uncertainties and other important factors, many of which are beyond
These forward-looking statements are made only as of the date hereof, and
Table I |
||||||||
STEPAN COMPANY |
||||||||
For the Three Months Ended March 31, 2019 and 2018 |
||||||||
(Unaudited – '000s Omitted) |
||||||||
Three Months Ended March 31 |
||||||||
2019 |
2018 |
|||||||
Net Sales |
$ |
489,170 |
$ |
499,335 |
||||
Cost of Sales * |
404,561 |
408,137 |
||||||
Gross Profit * |
84,609 |
91,198 |
||||||
Operating Expenses: |
||||||||
Selling |
13,969 |
14,890 |
||||||
Administrative |
19,306 |
19,439 |
||||||
Research, Development and Technical Services |
13,390 |
13,614 |
||||||
Deferred Compensation Expense |
7,473 |
1,614 |
||||||
54,138 |
49,557 |
|||||||
Business Restructuring |
733 |
358 |
||||||
Operating Income * |
29,738 |
41,283 |
||||||
Other Income (Expense): |
||||||||
Interest, Net |
(1,853) |
(3,151) |
||||||
Other, Net |
3,145 |
1,160 |
||||||
1,292 |
(1,991) |
|||||||
Income Before Income Taxes * |
31,030 |
39,292 |
||||||
Provision for Income Taxes * |
6,052 |
7,347 |
||||||
Net Income * |
24,978 |
31,945 |
||||||
Net Loss Attributable to Noncontrolling Interests |
6 |
7 |
||||||
Net Income Attributable to Stepan Company |
$ |
24,984 |
$ |
31,952 |
||||
Net Income Per Common Share Attributable to Stepan Company * |
||||||||
Basic * |
$ |
1.08 |
$ |
1.38 |
||||
Diluted * |
$ |
1.07 |
$ |
1.37 |
||||
Shares Used to Compute Net Income Per Common Share Attributable to Stepan Company |
||||||||
Basic |
23,099 |
23,082 |
||||||
Diluted |
23,332 |
23,389 |
||||||
* The 2018 amounts for the noted line items have been changed from the amounts originally reported as a result of the Company's first quarter 2019 change in method of accounting for U.S. inventory valuation from LIFO to FIFO. |
Table II |
|||||||||||||||||
Reconciliations of Non-GAAP Net Income and Earnings per Diluted Share* |
|||||||||||||||||
Three Months Ended March 31 |
|||||||||||||||||
($ in thousands, except per share amounts) |
2019 |
EPS |
2018 |
EPS |
|||||||||||||
Net Income Reported |
$ |
24,984 |
$ |
1.07 |
$ |
31,952 |
$ |
1.37 |
|||||||||
Deferred Compensation Expense |
$ |
3,881 |
$ |
0.17 |
$ |
1,038 |
$ |
0.05 |
|||||||||
Business Restructuring |
540 |
$ |
0.02 |
269 |
$ |
0.01 |
|||||||||||
Cash Settled Stock Appreciation Rights |
1,231 |
$ |
0.05 |
344 |
$ |
0.01 |
|||||||||||
Adjusted Net Income |
$ |
30,636 |
$ |
1.31 |
$ |
33,603 |
$ |
1.44 |
|||||||||
* All amounts in this table are presented after-tax |
|||||||||||||||||
The Company believes that certain measures that are not in accordance with generally accepted accounting principles (GAAP), when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company's operating performance and provide better clarity on the impact of non-operational items. 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. These measures should be considered in addition to, and are neither a substitute for, nor superior to, measures of financial performance prepared in accordance with GAAP. |
|||||||||||||||||
Reconciliations of Pre-Tax to After-Tax Adjustments |
|||||||||||||||||
Three Months Ended March 31 |
|||||||||||||||||
($ in thousands, except per share amounts) |
2019 |
EPS |
2018 |
EPS |
|||||||||||||
Pre-Tax Adjustments |
|||||||||||||||||
Deferred Compensation Expense |
$ |
5,106 |
$ |
1,365 |
|||||||||||||
Business Restructuring |
733 |
358 |
|||||||||||||||
Cash Settled Stock Appreciation Rights |
1,620 |
453 |
|||||||||||||||
Total Pre-Tax Adjustments |
$ |
7,459 |
$ |
2,176 |
|||||||||||||
Cumulative Tax Effect on Adjustments |
$ |
(1,807) |
$ |
(525) |
|||||||||||||
After-Tax Adjustments |
$ |
5,652 |
$ |
0.24 |
$ |
1,651 |
$ |
0.07 |
Table III |
||||||||||||||||||||
Deferred Compensation Plan |
||||||||||||||||||||
The full effect of the deferred compensation plan on quarterly pre-tax income was $5.1 million of expense versus $1.4 million of expense in the prior year. The accounting for the deferred compensation plan results in operating income when the prices of Company common stock or mutual fund shares held in the plan fall and expense when they rise. The Company also recognizes the change in value of mutual fund shares as investment income or loss. The quarter end market prices of Company common stock are as follows: |
||||||||||||||||||||
2019 |
2018 |
|||||||||||||||||||
3/31 |
12/31 |
9/30 |
6/30 |
3/31 |
||||||||||||||||
Stepan Company |
$ |
87.52 |
$ |
74.00 |
$ |
87.01 |
$ |
78.01 |
$ |
83.18 |
||||||||||
The deferred compensation income statement impact is summarized below: |
||||||||
Three Months Ended March 31 |
||||||||
($ in thousands) |
2019 |
2018 |
||||||
Deferred Compensation |
||||||||
Operating Expense |
$ |
(7,473) |
$ |
(1,614) |
||||
Other, net – Mutual Fund Gain (Loss) |
2,367 |
249 |
||||||
Total Pre-Tax |
$ |
(5,106) |
$ |
(1,365) |
||||
Total After Tax |
$ |
(3,881) |
$ |
(1,038) |
Table IV |
||||||||||||||||
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). Below is a table that presents the impact that foreign currency translation had on the changes in consolidated net sales and various income line items for the three-month period ending March 31, 2019 as compared to 2018: |
||||||||||||||||
($ in millions) |
Three Months Ended March 31 |
(Decrease) |
Decrease Due to Foreign Currency Translation |
|||||||||||||
2019 |
2018 |
|||||||||||||||
Net Sales |
$ |
489.2 |
$ |
499.3 |
$ |
(10.1) |
$ |
(16.2) |
||||||||
Gross Profit |
84.6 |
91.2 |
(6.6) |
(2.2) |
||||||||||||
Operating Income |
29.7 |
41.3 |
(11.6) |
(1.1) |
||||||||||||
Pretax Income |
31.0 |
39.3 |
(8.3) |
(1.1) |
Table V |
||||||||
Stepan Company |
||||||||
Consolidated Balance Sheets |
||||||||
March 31, 2019 and December 31, 2018 |
||||||||
March 31, 2019 |
December 31, 2018 |
|||||||
ASSETS |
||||||||
Current Assets * |
$ |
808,136 |
833,893 |
|||||
Property, Plant & Equipment, Net |
605,360 |
608,892 |
||||||
Other Assets * |
112,504 |
71,829 |
||||||
Total Assets * |
$ |
1,526,000 |
$ |
1,514,614 |
||||
LIABILITIES AND STOCKHOLDERS' EQUITY |
||||||||
Current Liabilities |
$ |
295,448 |
338,582 |
|||||
Deferred Income Taxes * |
24,158 |
24,961 |
||||||
Long-term Debt |
239,063 |
239,022 |
||||||
Other Non-current Liabilities |
135,110 |
103,864 |
||||||
Total Stepan Company Stockholders' Equity * |
831,447 |
807,425 |
||||||
Noncontrolling Interest |
774 |
760 |
||||||
Total Liabilities and Stockholders' Equity * |
$ |
1,526,000 |
$ |
1,514,614 |
||||
* The 2018 amounts for the noted line items have been changed from the amounts originally reported as a result of the Company's first quarter 2019 change in method of accounting for U.S. inventory valuation from LIFO to FIFO. |
View original content:http://www.prnewswire.com/news-releases/stepan-reports-first-quarter-earnings-300840261.html
SOURCE
Luis E. Rojo, (847) 446-7500