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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☒ |
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Accelerated filer |
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☐ |
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Non-accelerated filer |
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☐ |
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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 27, 2023 |
Common Stock, $1 par value |
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Part I FINANCIAL INFORMATION
Item 1 - Financial Statements
STEPAN COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Unaudited
(In thousands, except per share amounts) |
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Three Months Ended |
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2023 |
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2022 |
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Net Sales |
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$ |
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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 (income) expense |
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( |
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Business restructuring expenses |
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( |
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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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( |
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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 |
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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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2023 |
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2022 |
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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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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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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, 2023 |
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December 31, 2022 |
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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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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 long-term 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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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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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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2023 |
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2022 |
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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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( |
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Realized and unrealized (gains) losses on long-term investments |
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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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( |
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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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( |
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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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Deferred revenues |
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( |
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Net Cash Used In By Operating Activities |
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( |
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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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Other debt borrowings (Note 14) |
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— |
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Dividends paid |
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( |
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( |
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Company stock repurchased |
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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 Financing Activities |
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Effect of Exchange Rate Changes on Cash |
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Net Increase (Decrease) in Cash and Cash Equivalents |
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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/payments |
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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, 2023
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, 2023, its results of operations for the three months ended March 31, 2023 and 2022 and cash flows for the three months ended March 31, 2023 and 2022, 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, 2022 (2022 Annual Report on Form 10-K).
Below are reconciliations of total equity for the three months ended March 31, 2023 and 2022:
(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 |
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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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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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(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, 2021 |
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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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Purchase of |
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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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Stock-based and deferred compensation |
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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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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, 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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6
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 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, 2023, and December 31, 2022, 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, 2023, and December 31, 2022, 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, 2023, and December 31, 2022, the Company had open forward foreign currency exchange contracts, all with durations of to
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, 2023, 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, 2023, and December 31, 2022, 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, 2023 and 2022, were
7
immaterial. For amounts reclassified out of AOCI into earnings for the three months ended March 31, 2023 and 2022, 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).
Compensation expense recorded for all stock options, performance shares, restricted stock units (RSUs) and stock appreciation rights (SARs) was as follows:
(In thousands) |
|
|||||
Three Months Ended |
|
|||||
2023 |
|
|
2022 |
|
||
$ |
|
|
$ |
|
||
The decrease in stock-based compensation expense for the first quarter of 2023 compared to the same period a year ago was attributable to the Company's management lowering the assessment of performance targets for certain grants. In addition, during the first quarter of 2022, the Company accelerated vesting of certain equity grants for the Company's former Chief Executive Officer, who retired on April 25, 2022.
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 primarily reflects the 2023 grants of:
|
|
Shares |
|
|
Stock options |
|
|
|
|
Performance shares (at target) and RSUs |
|
|
|
|
SARs |
|
|
|
|
The unrecognized compensation costs at March 31, 2023, are expected to be recognized over weighted-average periods of
The composition of inventories at March 31, 2023, and December 31, 2022, was as follows:
(In thousands) |
|
March 31, 2023 |
|
|
December 31, 2022 |
|
||
Finished goods |
|
$ |
|
|
$ |
|
||
Raw materials |
|
|
|
|
|
|
||
Total inventories |
|
$ |
|
|
$ |
|
||
8
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 |
|
|
Three Months Ended |
|
||
|
|
2023 |
|
|
2022 |
|
||
Lease Cost |
|
|
|
|
|
|
||
Operating lease cost |
|
$ |
|
|
$ |
|
||
Short-term lease cost |
|
|
|
|
|
|
||
Variable lease cost |
|
|
|
|
|
|
||
Total lease cost |
|
$ |
|
|
$ |
|
||
Other Information |
|
|
|
|
|
|
||
Cash paid for amounts included in the measurement of lease |
|
|
|
|
|
|
||
Operating cash flow from operating leases |
|
$ |
|
|
$ |
|
||
Right-of-use assets obtained in exchange for new operating lease |
|
|
|
|
|
|
||
The following table outlines the maturities of lease liabilities as of March 31, 2023.
(In thousands) |
|
|
|
|
Undiscounted Cash Flows: |
|
|
|
|
2023 (excluding the three months ended March 31, 2023) |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Subsequent to 2027 |
|
|
|
|
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, 2023 the Company had railcars 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 (PRP) 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, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites and claims.
9
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, 2023, the Company estimated a range of possible environmental losses and legal losses of $
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, 2023:
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 contamination. Pursuant to (i) a September 21, 1987 Administrative Order on Consent entered into between the USEPA and the Company for property formerly owned by the Company at the Maywood site and (ii) the issuance of an order on November 12, 2004 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 (RI/FS), and on September 24, 2014, USEPA issued its Record of Decision (ROD) for chemically-contaminated soil at the Maywood site, which requires the Company to perform remedial cleanup of the soil and buried waste. 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 PRPs are identified. The ultimate amount for which the Company is liable could differ materially from the Company’s current recorded liability.
In April 2015, the Company entered into an Administrative Settlement Agreement and Administrative Order on Consent with USEPA which requires payment of certain costs and performance of certain investigative and design work for chemically-contaminated soil.
In addition, under the terms of a settlement agreement reached on November 12, 2004, the U.S. Department of Justice and the Company agreed to fulfill the terms of a Cooperative Agreement reached in 1985. Under the Cooperative Agreement, the United States is responsible for the removal of radioactive waste at the Maywood site, including past and future remediation costs at the site. As such, the Company recorded no liability related to this settlement agreement.
10
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 PRP in an October 2, 1998, lawsuit in the U.S. District Court for the District of New Jersey that involved the D’Imperio Site. In 2022, the PRPs were provided with updated remediation cost estimates by the PRP group technical consultant and project manager, which the Company considered in its determination of its range of estimated possible losses and liability balance. The changes in range of possible losses and liability balance were immaterial. Remediation work continues at the D’Imperio site. 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
The Company is currently contractually obligated to contribute to the environmental response costs associated with the Company’s formerly-owned site in Wilmington, Massachusetts (the Wilmington site). Remediation at this site is being managed by its current owner to whom the Company sold the property in 1980. Under the Company’s October 1, 1993, agreement with the current owner of the Wilmington site, once total site remediation costs exceed certain levels, the Company is obligated to contribute up to
The Company and other prior owners of the Wilmington site also entered into an agreement in April 2004 waiving certain statute of limitations defenses for claims which may be filed by the Town of Wilmington, Massachusetts, in connection with this site. While the Company has denied any liability for any such claims, the Company agreed to this waiver while the parties continue to discuss the resolution of any potential claim which may be filed.
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 Elwood, Illinois (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 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Interest cost |
|
$ |
|
|
$ |
|
||
Expected return on plan assets |
|
|
( |
) |
|
|
( |
) |
Amortization of net actuarial (gain) loss |
|
|
( |
) |
|
|
|
|
Net periodic benefit cost |
|
$ |
( |
) |
|
$ |
( |
) |
11
|
|
UNITED KINGDOM |
|
|||||
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
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 expects to contribute approximately $
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, 2023 and 2022, 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. In all Company locations, approximately
Defined contribution plan expenses for the Company’s qualified contribution plans were as follows:
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
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, 2023, 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, 2023 and 2022:
(In thousands, except per share amounts) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
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, 2023 and 2022:
(In thousands) |
|
Foreign |
|
|
Defined |
|
|
Cash Flow |
|
|
Total |
|
||||
Balance at December 31, 2021 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive income before |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Amounts reclassified from AOCI |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
||
Net current-period other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at March 31, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Balance at December 31, 2022 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
Other comprehensive income before |
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
|
||
Amounts reclassified from AOCI |
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
|
||
Net current-period other comprehensive income |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Balance at March 31, 2023 |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
13
Information regarding the reclassifications out of AOCI for the three months ended March 31, 2023 and 2022, is displayed below:
(In thousands) |
|
Amount Reclassified from AOCI (1) |
|
|
|
|||||
AOCI Components |
|
Three Months Ended |
|
|
Affected Line Item in |
|||||
|
|
2023 |
|
|
2022 |
|
|
|
||
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 |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
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, 2023 and 2022, are summarized below:
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
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, 2023, the Company had $
The tables below provide a geographic disaggregation of net sales for the three months ended March 31, 2023 and 2022. The Company’s business segmentation 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, 2023 |
|
|||||||||||||
Geographic Market |
|
Surfactants |
|
|
Polymers |
|
|
Specialty |
|
|
Total |
|
||||
North America |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
(In thousands) |
|
For the Three Months Ended March 31, 2022 |
|
|||||||||||||
Geographic Market |
|
Surfactants |
|
|
Polymers |
|
|
Specialty |
|
|
Total |
|
||||
North America |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Europe |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Latin America |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Asia |
|
|
|
|
|
|
|
|
— |
|
|
|
|
|||
Total |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
15
At March 31, 2023 and December 31, 2022, 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 currently comprised of certain senior unsecured notes issued to insurance companies in private placement transactions, totaling $
The Company's 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 $
16
Other, net in the condensed consolidated statements of income included the following:
(In thousands) |
|
Three Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Foreign exchange gains (losses) |
|
$ |
( |
) |
|
$ |
|
|
Investment income |
|
|
|
|
|
|
||
Realized and unrealized gains (losses) on investments |
|
|
|
|
|
( |
) |
|
Net periodic benefit cost |
|
|
|
|
|
|
||
Other, net |
|
$ |
|
|
$ |
( |
) |
|
|
|
|
|
|
|
|
||
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.
17
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, 2022, including the risks and uncertainties related to the following:
18
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 72 percent of consolidated net sales for the first three months of 2023, 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 25 percent of consolidated net sales for the first three months of 2023, 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 2023, 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.
19
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 Company common stock and mutual fund investment assets held for the plans increase, and compensation income is recognized when the value of Company 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) |
|
2023 |
|
|
2022 |
|
|
Change |
|
|
|||
Deferred Compensation (Administrative expenses) |
|
$ |
(1.5 |
) |
|
$ |
7.5 |
|
|
$ |
(9.0 |
) |
(1) |
Realized/Unrealized Gains (Losses) on Investments (Other, net) |
|
|
1.5 |
|
|
|
(2.5 |
) |
|
|
4.0 |
|
|
Investment Income (Other, net) |
|
|
0.1 |
|
|
|
0.2 |
|
|
|
(0.1 |
) |
|
Pretax Income Effect |
|
$ |
0.1 |
|
|
$ |
5.2 |
|
|
$ |
(5.1 |
) |
|
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, 2023 and 2022:
|
|
For the Three Months |
|
|
|
|
|
|
|
|||||||
(In millions) |
|
2023 |
|
|
2022 |
|
|
Decrease |
|
|
(Decrease) |
|
||||
Net Sales |
|
$ |
651.4 |
|
|
$ |
675.3 |
|
|
$ |
(23.9 |
) |
|
$ |
(12.5 |
) |
Gross Profit |
|
|
73.6 |
|
|
|
109.2 |
|
|
|
(35.6 |
) |
|
|
(1.5 |
) |
Operating Income |
|
|
21.1 |
|
|
|
63.3 |
|
|
|
(42.2 |
) |
|
|
(1.1 |
) |
Pretax Income |
|
|
19.9 |
|
|
|
59.4 |
|
|
|
(39.5 |
) |
|
|
(1.1 |
) |
RESULTS OF OPERATIONS
Three Months Ended March 31, 2023 and 2022
Summary
Net income in the first quarter of 2023 decreased 64 percent to $16.1 million, or $0.70 per diluted share, from $44.8 million, or $1.93 per diluted share, in the first quarter of 2022. Adjusted net income decreased 60 percent to $16.4 million, or $0.71 per diluted share, from $40.7 million, or $1.76 per diluted share in the first quarter of 2022 (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). Below is a summary discussion of the major factors leading to the changes in net sales, expenses and income in the first quarter of 2023 compared to the first quarter of 2022. A detailed discussion of segment operating performance for the first quarter of 2023 compared to the first quarter of 2022 follows the summary.
Consolidated net sales decreased $23.8 million, or four percent, versus the prior year quarter. Consolidated sales volume declined 14 percent, which negatively impacted the change in net sales by $97.6 million. Sales volume in the Surfactant, Polymer and Specialty Products segments decreased 13 percent, 18 percent and seven percent, respectively. The decline in sales volume was primarily due to lower market demand and continued customer and channel inventory destocking. Foreign currency translation negatively impacted the
20
year-over-year change in net sales by $12.5 million due to a stronger U.S. dollar against most currencies in foreign locations where the Company has operations. Higher average selling prices positively impacted the year-over-year change in net sales by $86.3 million. The increase in average selling prices was mainly attributable to the pass-through of higher raw material and input costs as well as more favorable product and customer mix.
Operating income in the first quarter of 2023 decreased $42.3 million, or 67 percent, versus operating income in the first quarter of 2022. Surfactant, Polymer and Specialty Products operating income decreased $26.7 million, $4.1 million, and $1.2 million, respectively, versus the first quarter of 2022. Corporate expenses, including business restructuring and deferred compensation expenses, increased $10.3 million year-over-year. Most of this increase was attributable to $9.0 million of higher deferred compensation expense in the current year quarter. Foreign currency translation had a $1.1 million unfavorable impact on operating income in the first quarter of 2023 versus the prior year.
Operating expenses (including deferred compensation and business restructuring) increased $6.6 million, or 14 percent, versus the prior year quarter. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:
Net interest expense for the first quarter of 2023 increased $0.5 million, or 22 percent, versus the first quarter of 2022. This increase was primarily attributable to higher outstanding debt balances and higher interest rates in 2023 versus 2022.
Other, net was $1.7 million of income in the first quarter of 2023 versus $1.7 million of expense in the first quarter of 2022. The Company recognized $1.7 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 2023 compared to $2.3 million of investment losses in the first quarter of 2022. In addition, the Company reported $0.3 million of foreign exchange losses in the first quarter of 2023 versus $0.3 million of foreign exchange gains in the first quarter of 2022. The Company's net periodic pension income was flat between years.
The Company’s effective tax rate was 18.9 percent in the first quarter of 2023 versus 24.6 percent in the first quarter of 2022. The decrease was primarily attributable to more favorable tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2023 versus the first quarter of 2022.
Segment Results
(Dollars in thousands) |
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
|||||||
Net Sales |
|
2023 |
|
|
2022 |
|
|
Increase |
|
|
Percent |
|
||||
Surfactants |
|
$ |
467,828 |
|
|
$ |
468,266 |
|
|
$ |
(438 |
) |
|
|
0 |
|
Polymers |
|
|
161,127 |
|
|
|
187,079 |
|
|
|
(25,952 |
) |
|
|
-14 |
|
Specialty Products |
|
|
22,481 |
|
|
|
19,931 |
|
|
|
2,550 |
|
|
|
13 |
|
Total Net Sales |
|
$ |
651,436 |
|
|
$ |
675,276 |
|
|
$ |
(23,840 |
) |
|
|
-4 |
|
21
(Dollars in thousands) |
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
|||||||
Operating Income |
|
2023 |
|
|
2022 |
|
|
Increase |
|
|
Percent |
|
||||
Surfactants |
|
$ |
27,056 |
|
|
$ |
53,769 |
|
|
$ |
(26,713 |
) |
|
|
-50 |
|
Polymers |
|
|
10,004 |
|
|
|
14,129 |
|
|
|
(4,125 |
) |
|
|
-29 |
|
Specialty Products |
|
|
2,530 |
|
|
|
3,695 |
|
|
|
(1,165 |
) |
|
|
-32 |
|
Segment Operating Income |
|
$ |
39,590 |
|
|
$ |
71,593 |
|
|
$ |
(32,003 |
) |
|
|
-45 |
|
Corporate Expenses, Excluding Deferred Compensation |
|
$ |
16,874 |
|
|
$ |
15,696 |
|
|
$ |
1,178 |
|
|
|
8 |
|
Deferred Compensation Expense (Income) |
|
|
1,502 |
|
|
|
(7,501 |
) |
|
|
9,003 |
|
|
|
-120 |
|
Business Restructuring |
|
|
157 |
|
|
|
52 |
|
|
|
105 |
|
|
|
202 |
|
Total Operating Income |
|
$ |
21,057 |
|
|
$ |
63,346 |
|
|
$ |
(42,289 |
) |
|
|
-67 |
|
Surfactants
Surfactant net sales for the first quarter of 2023 decreased $0.4 million versus net sales for the first quarter of 2022. Higher average selling prices positively impacted the change in net sales by $67.5 million. The higher average selling prices were mainly attributable to the pass-through of higher raw material and input costs as well as improved product and customer mix. Sales volume declined 13 percent and negatively impacted the change in net sales by $62.0 million. Foreign currency translation had a $5.9 million unfavorable 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 Ended March 31, |
|
|
|
|
|
|
|
|||||||
Net Sales |
|
2023 |
|
|
2022 |
|
|
Increase |
|
|
Percent |
|
||||
North America |
|
$ |
277,139 |
|
|
$ |
273,228 |
|
|
$ |
3,911 |
|
|
|
1 |
|
Europe |
|
|
91,120 |
|
|
|
91,017 |
|
|
|
103 |
|
|
|
0 |
|
Latin America |
|
|
81,099 |
|
|
|
85,434 |
|
|
|
(4,335 |
) |
|
|
-5 |
|
Asia |
|
|
18,470 |
|
|
|
18,587 |
|
|
|
(117 |
) |
|
|
-1 |
|
Total Surfactants Segment |
|
$ |
467,828 |
|
|
$ |
468,266 |
|
|
$ |
(438 |
) |
|
|
0 |
|
Net sales for North American operations increased $3.9 million, or one percent, year-over-year. Higher average selling prices positively impacted the change in net sales by $52.7 million. The higher average selling prices were mainly attributable to the pass-through of higher raw material and input costs along with more favorable product and customer mix. Sales volume declined 18 percent between years and negatively impacted the change in net sales by $47.9 million. The lower sales volume was primarily due to lower commodity laundry demand, startup delays associated with our low 1,4 dioxane transition and the previously disclosed backward integration by one customer in the third quarter of 2022, lower demand in the personal care end market and continued customer and channel inventory destocking. Higher demand for products sold into the agricultural end market partially offset the above. Foreign currency translation negatively impacted the change in net sales by $0.9 million.
Net sales for European operations increased $0.1 million versus the prior year quarter. Higher average selling prices positively impacted the year-over-year change in net sales by $13.3 million. The higher average selling prices were primarily due to the pass-through of higher raw material costs. Sales volume declined eight percent and negatively impacted the change in net sales by $7.5 million. Lower sales volume into the laundry and cleaning end market, mostly commodity laundry products, the personal care end market and to our distribution partners was partially offset by higher demand for products sold into the agriculture end market. Foreign currency translation negatively impacted the change in net sales by $5.7 million. A stronger U.S. dollar relative to the European euro and British pound sterling led to the unfavorable foreign currency translation effect.
Net sales for Latin American operations decreased $4.3 million, or five percent, primarily due to a five percent decrease in sales volume and lower average selling prices. These items negatively impacted the change in net sales by $4.1 million and $1.9 million, respectively. The lower sales volume was primarily due to lower demand for commodity laundry products sold within the consumer products business and lower demand for products sold into the functional product end markets. Foreign currency translation positively impacted the change in net sales by $1.7 million.
Net sales for Asian operations decreased $0.1 million, or one percent, versus the prior year quarter. Higher average selling prices positively impacted the change in net sales by $4.1 million. The higher average selling prices primarily reflect the pass-through of higher raw material costs and improved product and customer mix. A 17 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $3.1 million and $1.1 million, respectively. The decline in
22
sales volume was primarily due to lower demand for products sold into the personal care end market that was partially offset by higher sales into the functional product end markets and higher demand from our distribution partners.
Surfactant operating income for the first quarter of 2023 decreased $26.7 million, or 50 percent, versus operating income for the first quarter of 2022. Gross profit decreased $29.2 million, or 36 percent, and operating expenses decreased $2.5 million, or nine percent. Comparisons of gross profit by region and total segment operating expenses and operating income follow:
(Dollars in thousands) |
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
|||||||
Gross Profit and Operating Income |
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
|
Percent |
|
||||
North America |
|
$ |
35,213 |
|
|
$ |
53,168 |
|
|
$ |
(17,955 |
) |
|
|
-34 |
|
Europe |
|
|
10,220 |
|
|
|
13,159 |
|
|
|
(2,939 |
) |
|
|
-22 |
|
Latin America |
|
|
7,172 |
|
|
|
13,139 |
|
|
|
(5,967 |
) |
|
|
-45 |
|
Asia |
|
|
283 |
|
|
|
2,641 |
|
|
|
(2,358 |
) |
|
|
-89 |
|
Surfactants Segment Gross Profit |
|
$ |
52,888 |
|
|
$ |
82,107 |
|
|
$ |
(29,219 |
) |
|
|
-36 |
|
Operating Expenses |
|
|
25,832 |
|
|
|
28,338 |
|
|
|
(2,506 |
) |
|
|
-9 |
|
Surfactants Segment Operating Income |
|
$ |
27,056 |
|
|
$ |
53,769 |
|
|
$ |
(26,713 |
) |
|
|
-50 |
|
Gross profit for North American operations decreased $18.0 million, or 34 percent, versus the prior year primarily due to an 18 percent decline in sales volume and lower average unit margins. These items negatively impacted the year-over-year change in gross profit by $9.3 million and $8.6 million, respectively. Gross profit was negatively impacted by higher costs due to inflation, higher pre-commissioning expenses related to the new alkoxylation production facility in Pasadena, Texas and startup expenses related to the Company's new low 1,4 dioxane capacity in the United States. Foreign currency translation negatively impacted the change in gross profit by $0.1 million.
Gross profit for European operations decreased $2.9 million, or 22 percent, due to lower average unit margins, an eight percent decrease in sales volume and the unfavorable impact of foreign currency translation. These items negatively impacted the year-over-year change in gross profit by $1.2 million, $1.1 million and $0.6 million, respectively. The lower average unit margins were mostly due to less favorable product and customer mix along with higher costs due to inflation.
Gross profit for Latin American operations decreased $6.0 million, or 45 percent, primarily due to lower average unit margins. The lower average unit margins negatively impacted the change in gross profit by $5.3 million and primarily reflect a less favorable product and customer mix, mostly due to lower demand for products sold into the agricultural end market, and higher costs due to inflation. A five percent decline in sales volume negatively impacted the year-over-year change in gross profit by $0.7 million.
Gross profit for Asia operations decreased $2.4 million, or 89 percent, primarily due to lower average unit margins. The lower average unit margins negatively impacted the change in gross profit by $1.9 million and were mostly attributable to higher unit overhead costs due to the timing of production runs. A 17 percent decline in sales volume negatively impacted the change in gross profit by $0.4 million. The unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $0.1 million.
Operating expenses for the Surfactant segment decreased $2.5 million, or nine percent, in the first quarter of 2023 versus the first quarter of 2022. This decrease was mainly attributable to lower incentive-based compensation expenses.
Polymers
Polymer net sales for the first quarter of 2023 decreased $26.0 million, or 14 percent, versus net sales for the same period of 2022. An 18 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $34.1 and $6.3 million, respectively. Higher average selling prices positively impacted the change in net sales by $14.4 million. The higher average selling prices were mainly due to the pass through of higher raw material and input costs along with margin recovery. A comparison of net sales by region follows:
(Dollars in thousands) |
|
For the Three Months Ended March 31, |
|
|
|
|
|
|
|
|||||||
Net Sales |
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
|
Percent |
|
||||
North America |
|
$ |
81,169 |
|
|
$ |
94,856 |
|
|
$ |
(13,687 |
) |
|
|
-14 |
|
Europe |
|
|
69,057 |
|
|
|
80,783 |
|
|
|
(11,726 |
) |
|
|
-15 |
|
Asia and Other |
|
|
10,901 |
|
|
|
11,440 |
|
|
|
(539 |
) |
|
|
-5 |
|
Total Polymers Segment |
|
$ |
161,127 |
|
|
$ |
187,079 |
|
|
$ |
(25,952 |
) |
|
|
-14 |
|
Net sales for North American operations decreased $13.7 million, or 14 percent, primarily due to a 25 percent decrease in sales volume. The decline in sales volume negatively impacted the change in net sales by $23.5 million. Sales volume of polyols used in
23
rigid foam applications decreased 30 percent year-over-year. Sales volume within the phthalic anhydride and specialty polyols businesses decreased 13 percent and 12 percent, respectively. The year-over-year decline in sales volume reflects customer inventory destocking and lower construction-related activity. Higher average selling prices positively impacted the change in net sales by $9.8 million. The higher average selling prices were mainly due to the pass-through of higher raw material and input costs.
Net sales for European operations decreased $11.7 million, or 15 percent, year-over-year. A 17 percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $13.3 million and $5.5 million, respectively. The decline in sales volume reflects customer inventory destocking, lower construction-related activity and customer share loss. A stronger U.S. dollar relative to the Polish zloty and British pound sterling led to the unfavorable foreign currency translation effect. Higher average selling prices positively impacted the change in net sales by $7.1 million. The higher average selling prices were primarily due to the pass-through of higher raw material costs and margin recovery.
Net sales for Asia and Other operations decreased $0.5 million, or five percent, primarily due to a decline in average selling prices and the unfavorable impact of foreign currency translation. These items negatively impacted the year-over-year change in net sales by $1.5 million and $0.8 million, respectively. Sales volume increased 16 percent and positively impacted the change in net sales by $1.8 million. The higher sales volume reflects the loosening of COVID lockdowns and restrictions in China.
Polymer operating income in the first quarter of 2023 decreased $4.1 million, or 29 percent, versus operating income in the first quarter of 2022. Gross profit decreased $5.0 million, or 22 percent and operating expenses decreased $0.9 million or 11 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 Ended March 31, |
|
|
|
|
|
|
|
|||||||
Gross Profit and Operating Income |
|
2023 |
|
|
2022 |
|
|
(Decrease) |
|
|
Percent |
|
||||
North America |
|
$ |
6,144 |
|
|
$ |
8,280 |
|
|
$ |
(2,136 |
) |
|
|
-26 |
|
Europe |
|
|
10,312 |
|
|
|
12,861 |
|
|
|
(2,549 |
) |
|
|
-20 |
|
Asia and Other |
|
|
867 |
|
|
|
1,171 |
|
|
|
(304 |
) |
|
|
-26 |
|
Polymers Segment Gross Profit |
|
$ |
17,323 |
|
|
$ |
22,312 |
|
|
$ |
(4,989 |
) |
|
|
-22 |
|
Operating Expenses |
|
|
7,319 |
|
|
|
8,183 |
|
|
|
(864 |
) |
|
|
-11 |
|
Polymers Segment Operating Income |
|
$ |
10,004 |
|
|
$ |
14,129 |
|
|
$ |
(4,125 |
) |
|
|
-29 |
|
Gross profit for North American operations decreased $2.1 million, or 26 percent. This decrease was entirely related to the 25 percent decline in sales volume as average unit margins were flat year-over-year.
Gross profit for European operations decreased $2.5 million, or 20 percent, versus the first quarter of 2022. The decrease was primarily due to a 17 percent decline in sales volume and the unfavorable impact of foreign currency translation. These items negatively impacted the year-over-year change in gross profit by $2.1 million and $0.8 million, respectively. Higher average unit margins positively impacted the change in gross profit by $0.4 million.
Gross profit for Asia and Other operations decreased $0.3 million, or 26 percent, primarily to lower average unit margins and the unfavorable impact of foreign currency translation. These items negatively impacted the change in gross profit by $0.4 million and $0.1 million, respectively. Sales volume increased 16 percent and positively impacted the change in gross profit by $0.2 million.
Operating expenses for the Polymers segment declined $0.9 million, or 11 percent, in the first quarter of 2023 versus the first quarter of 2022. This decrease was mainly attributable to lower incentive-based compensation expenses.
Specialty Products
Specialty Products net sales for the first quarter of 2023 increased $2.6 million, or 13 percent, versus net sales for the first quarter of 2022. This increase reflects higher average selling prices which more than offset a seven percent decline in sales volume. Gross profit and operating income decreased $1.5 million and $1.2 million, respectively, year-over-year. The year-over-year declines in gross profit and operating income were mostly attributable to lower sales volume and unit margins within the medium chain triglycerides (MCTs) product line.
24
Corporate Expenses
Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased $10.3 million between quarters. Corporate expenses were $18.5 million in the first quarter of 2023 versus $8.2 million in the first quarter of 2022. This year-over-year increase was primarily attributable to $9.0 million of higher deferred compensation expenses.
The $9.0 million increase in deferred compensation expense was primarily due to a $25.48 per share decrease in the market price of Company common stock in the first quarter of 2022 compared to a $3.43 per share decrease in the first quarter of 2023. A year-over-year increase in the market value of mutual fund investment assets held for the plans in the first quarter of 2023, versus a decrease in the first quarter of 2022, also contributed to the higher expense 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, 2023 and 2022:
|
|
2023 |
|
|
2022 |
|
|
2021 |
|
|||||||
|
|
March 31 |
|
|
December 31 |
|
|
March 31 |
|
|
December 31 |
|
||||
Company Common Stock Price |
|
$ |
103.03 |
|
|
$ |
106.46 |
|
|
$ |
98.81 |
|
|
$ |
124.29 |
|
LIQUIDITY AND CAPITAL RESOURCES
Overview
For the three months ended March 31, 2023, operating activities were a cash use of $72.1 million versus a cash use of $20.9 million for the comparable period in 2022. For the first three months of 2023, investing cash outflows totaled $90.3 million versus cash outflows of $57.1 million in the prior year period. Financing activities were a cash source of $113.5 million versus a cash source of $154.8 million in the prior year period.
Cash and cash equivalents decreased $46.8 million compared to December 31, 2022, inclusive of a $2.1 million favorable foreign exchange rate impact. On March 31, 2023, the Company’s cash and cash equivalents totaled $127.0 million. Cash in U.S. demand deposit accounts and certificates of deposit totaled $8.2 million and cash in U.S. money market funds totaled $9.1 million. The Company’s non-U.S. subsidiaries held $109.7 million of cash as of March 31, 2023.
Operating Activities
Net income during the first three months of 2023 decreased $28.7 million versus the comparable period in 2022. Working capital was a cash use of $109.9 million during the first three months of 2023 versus a use of $85.0 million in the comparable period in 2022.
Accounts receivable were a cash use of $40.4 million during the first three months of 2023 compared to a cash use of $80.3 million for the comparable period of 2022. Inventories were a cash source of $38.3 million in 2023 versus a cash source of $0.5 million in 2022. Accounts payable and accrued liabilities were a cash use of $98.5 million in 2023 compared to a cash use of $1.2 million for the same period in 2022.
Working capital requirements were higher in the first three months of 2023 compared to 2022 primarily due to the changes noted above. The lower accounts receivable cash usage reflects lower sales volume principally due to a slow down in customer demand across most end use markets and customer inventory and channel destocking. The higher cash source from inventories was due to lower quantities and prices in 2023. The higher accounts payable cash usage reflects lower quantities of raw materials purchased during the first quarter of 2023 and the payment of higher 2022 year-end accruals during the first quarter of 2023. It is management’s opinion that the Company’s liquidity is sufficient to provide for potential increases in working capital requirements during 2023.
Investing Activities
Cash used for investing activities increased $33.2 million year-over-year. Cash used for capital expenditures was $92.2 million in the first three months of 2023 versus $60.3 million in 2022. The higher capital spending in 2023 is largely attributable to the alkoxylation plant the Company is building at its Pasadena, Texas site.
For 2023, the Company estimates that total capital expenditures will be in the range of $220.0 million to $240.0 million. This projected spending includes the new alkoxylation plant that is being built in Pasadena, Texas, equipment upgrades to meet new regulatory limits in 1,4 Dioxane in the United States, growth initiatives, infrastructure and optimization spending in the United States and Mexico. The equipment upgrades to meet the new regulatory limits in 1,4 Dioxane are expected to be completed by the end of the second quarter of 2023 and the new alkoxylation plant is expected to start up in the first half of 2024.
25
Financing Activities
Cash flow from financing activities was a source of $113.5 million in 2023 versus a source of $154.8 million in 2022. The year-over-year change was primarily due to a lower level of borrowings.
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. For the three months ended March 31, 2023, the Company did not purchase any shares of its common stock on the open market. At March 31, 2023, 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 increased from $587.1 million on December 31, 2022 to $711.0 million on March 31, 2023, primarily due to higher domestic borrowings from the Company’s revolving credit facility. Net debt (which is defined as total debt minus cash – see the “Reconciliation of Non-GAAP Net Debt” section of this MD&A) increased $170.7 million, from $413.3 million at December 31, 2022 to $584.0 million at March 31, 2023. This change was due to a debt increase of $123.9 million and a cash decrease of $46.8 million.
As of March 31, 2023, the ratio of net debt to net debt plus shareholders’ equity was 32.9 percent versus 26.2 percent at December 31, 2022 (see the “Reconciliation of Non-GAAP Net Debt” section in this MD&A for further details). On March 31, 2023, the Company’s debt included $397.8 million of unsecured notes, with maturities ranging from 2023 through 2032, that were issued to insurance companies in private placement transactions pursuant to note purchase agreements, a $98.1 million delayed draw term loan borrowed pursuant to the Company's credit agreement, $209.0 million of short term loans borrowed under its revolving credit facility and $6.1 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, 2023, the Company had outstanding loans totaling $307.1 million, inclusive of a $98.1 million delayed draw term loan, and letters of credit totaling $11.5 million under the credit agreement, with $129.5 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, 2023, the Company’s foreign subsidiaries had $6.1 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 agreements 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 a maximum net leverage ratio, as defined within the agreements, not to exceed 3.50 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). |
26
The Company believes it was in compliance with all of its debt covenants as of March 31, 2023.
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 2023 and 2022, the Company’s expenditures for capital projects related to environmental matters were $1.5 million and $2.5 million, respectively. 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 $8.9 million and $8.2 million for the three months ended March 31, 2023 and 2022, 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, damages are being claimed against the Company in general liability actions for alleged personal injury or property damage in the case of some disposal and plant sites. The Company believes that it has made adequate provisions for the costs it is likely to incur with respect to these sites. It is the Company’s accounting policy to record liabilities when environmental assessments and/or remedial efforts 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 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 $29.2 million to $52.9 million at March 31, 2023 and $32.6 million to $56.4 million at December 31, 2022. Within the range of possible environmental 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; these accruals totaled $29.2 million at March 31, 2023 and $32.6 million at December 31, 2022. Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to environmental remediation and certain legal matters were $3.5 million for the three months ended March 31, 2023, compared to $0.4 million for the same period in 2022.
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.
OUTLOOK
Management believes the Company's second quarter 2023 sales volume will remain depressed versus the prior year as markets continue to reconcile future demand with current inventory levels. Management expects year-over-year volume growth during the second half of the year driven by modest recovery in demand for Rigid polyols, growth in Surfactant sales volume associated with new contracted business and a low comparable base. The Company remains committed to advancing its strategic and innovation initiatives that are instrumental to long-term growth and will continue to actively control costs and execute its productivity programs.
CRITICAL ACCOUNTING POLICIES
There have been no material changes to the critical accounting policies disclosed in the Company’s 2022 Annual Report on Form 10-K.
27
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. These measures should be considered in addition to, not as substitutes for or superior to, measures of financial performance prepared in accordance with GAAP. The Company’s definitions of these measures may differ from similarly titled measures used by other entities.
Reconciliation of Non-GAAP Adjusted Net Income and Earnings Per Share
Management uses the non-GAAP adjusted net income metric 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, 2023 |
|
|
March 31, 2022 |
|
||||||||||
|
|
Net Income |
|
|
Diluted EPS |
|
|
Net Income |
|
|
Diluted EPS |
|
||||
Net Income Attributable to the Company as Reported |
|
$ |
16.1 |
|
|
$ |
0.70 |
|
|
$ |
44.8 |
|
|
$ |
1.93 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred Compensation (Income) Expense (including |
|
|
(0.1 |
) |
|
|
— |
|
|
|
(5.2 |
) |
|
|
(0.22 |
) |
Business Restructuring |
|
|
0.1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Cash Settled Stock Appreciation Rights |
|
|
— |
|
|
|
— |
|
|
|
(0.5 |
) |
|
|
(0.02 |
) |
Remediation Expenses |
|
|
0.4 |
|
|
|
0.01 |
|
|
|
0.3 |
|
|
|
0.01 |
|
Cumulative Tax Effect on Above Adjustment Items |
|
|
(0.1 |
) |
|
|
— |
|
|
|
1.3 |
|
|
|
0.06 |
|
Adjusted Net Income |
|
$ |
16.4 |
|
|
$ |
0.71 |
|
|
$ |
40.7 |
|
|
$ |
1.76 |
|
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 |
|
$ |
257.3 |
|
|
$ |
132.1 |
|
Long-Term Debt as Reported |
|
|
453.7 |
|
|
|
455.0 |
|
Total Debt as Reported |
|
|
711.0 |
|
|
|
587.1 |
|
Less Cash and Cash Equivalents as Reported |
|
|
(127.0 |
) |
|
|
(173.8 |
) |
Net Debt |
|
$ |
584.0 |
|
|
$ |
413.3 |
|
Equity |
|
$ |
1,189.9 |
|
|
$ |
1,166.1 |
|
Net Debt plus Equity |
|
$ |
1,773.9 |
|
|
$ |
1,579.4 |
|
Net Debt/Net Debt plus Equity |
|
|
33 |
% |
|
|
26 |
% |
28
Item 3 – Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes to the market risks described in the Company’s 2022 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, 2023. 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, 2023, 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, 2023 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. Applying this threshold, there are no new environmental proceedings for the period covered by this report to disclose.
In addition, there have been no material changes to the legal proceedings disclosed in the Company’s 2022 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 2022 Annual Report on Form 10-K.
29
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 2023:
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 2023 |
|
|
1,798 |
|
(2) |
|
$ |
106.11 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
February 2023 |
|
|
26,858 |
|
(3) |
|
$ |
110.83 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
March 2023 |
|
|
11,745 |
|
(4) |
|
$ |
104.97 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total |
|
|
40,401 |
|
|
|
$ |
108.92 |
|
|
|
— |
|
|
$ |
125,050,905 |
|
Item 3 – Defaults Upon Senior Securities
None
Item 4 – Mine Safety Disclosures
Not applicable
Item 5 – Other Information
None
Item 6 – Exhibits
Exhibit No. |
|
Description |
10.1+ |
– |
|
|
|
|
10.2+ |
– |
|
|
|
|
10.3+ |
– |
|
|
|
|
10.4+ |
– |
30
|
|
|
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 Document |
|
|
|
101.CAL |
– |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
– |
Inline XBRL Taxonomy Extension Definition Document |
|
|
|
101.LAB |
– |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
– |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104 |
– |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
+ Management contract or compensatory plan |
31
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 4, 2023
/s/ Luis E. Rojo |
Luis E. Rojo |
Vice President and Chief Financial Officer |
32
Exhibit 10.1
STEPAN COMPANY
2022 EQUITY INCENTIVE COMPENSATION PLAN
NOTICE OF GRANT OF APPRECIATION RIGHTS
Stepan Company (the “Company”) hereby grants to the Participant Appreciation Rights under the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”). The Appreciation Rights are subject to all of the terms and conditions in this Notice of Grant of Appreciation Rights (this “Grant Notice”), in the Appreciation Rights Agreement attached hereto (the “Agreement”) and in the Plan. Capitalized terms used, but not otherwise defined, in this Grant Notice will have the meanings given to such terms in the Plan or Agreement, as applicable, and the Plan and Agreement are hereby incorporated by reference into this Grant Notice. If there are any inconsistences between this Grant Notice or the Agreement and the Plan, the terms of the Plan shall govern.
Participant: |
[___] |
Type of Grant: |
Appreciation Rights |
Date of Grant: |
[____] |
Number of Stock Appreciation Rights: |
[____] |
Base Price: |
[____] |
SAR Expiration Date: |
[____] |
Vesting Schedule: |
Subject to the conditions set forth in the Agreement, including but not limited to the Participant’s continuous employment with the Company or a Subsidiary until the applicable vesting date, the Appreciation Rights shall vest and become exercisable [in three substantially equal installments on the first three anniversaries of the Date of Grant].
|
STEPAN COMPANY
2022 EQUITY incentive compensation plan
APPRECIATION RIGHTS AGREEMENT
Stepan Company (the “Company”) has granted, pursuant to the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”), to the Participant named in the Notice of Grant of Appreciation Rights (the “Grant Notice”) to which this Appreciation Rights Agreement is attached (together with the Grant Notice, this “Agreement”) the number of Appreciation Rights set forth in the Grant Notice, subject to the terms and conditions set forth in this Agreement.
For the avoidance of doubt, any portion of the SARs that remains outstanding, whether or not Vested, will terminate immediately on the tenth anniversary of the Date of Grant.
[Signature Page Follows]
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day and year indicated below.
STEPAN COMPANY
By:
Name:
Title:
Date:
Participant Acknowledgment and Acceptance
By:
Name:
Date:
Exhibit 10.2
STEPAN COMPANY
2022 EQUITY INCENTIVE COMPENSATION PLAN
NOTICE OF GRANT OF NONQUALIFIED STOCK OPTION
Stepan Company (the “Company”) hereby grants to the Participant an Option Right (the “Option”) to purchase the number of Common Shares set forth below under the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”). The Option is subject to all of the terms and conditions in this Notice of Grant of Nonqualified Stock Option (this “Grant Notice”), in the Nonqualified Stock Option Agreement attached hereto (the “Agreement”) and in the Plan. Capitalized terms used, but not otherwise defined, in this Grant Notice will have the meanings given to such terms in the Plan or Agreement, as applicable, and the Plan and Agreement are hereby incorporated by reference into this Grant Notice. If there are any inconsistences between this Grant Notice or the Agreement and the Plan, the terms of the Plan shall govern.
Participant: |
[___] |
Type of Grant: |
Nonqualified Option Right |
Date of Grant: |
[____] |
Number of Common Shares Subject to the Option: |
[____] |
Option Price: |
[____] |
Option Expiration Date: |
[____] |
Vesting Schedule: |
Subject to the conditions set forth in the Agreement, including but not limited to the Participant’s continuous employment with the Company or a Subsidiary until the applicable vesting date, Option shall vest and become exercisable [in three substantially equal installments on the first three anniversaries of the Date of Grant].
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STEPAN COMPANY
2022 EQUITY incentive compensation plan
NONQUALIFIED STOCK OPTION AGREEMENT
Stepan Company (the “Company”) has granted, pursuant to the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”), to the Participant named in the Notice of Grant of Nonqualified Stock Option (the “Grant Notice”) to which this Nonqualified Stock Option Agreement is attached (together with the Grant Notice, this “Agreement”) an Option to purchase the number of Common Shares set forth in the Grant Notice, subject to the terms and conditions set forth in this Agreement.
For the avoidance of doubt, any portion of the Option that remains outstanding, whether or not Vested, will terminate immediately on the tenth anniversary of the Date of Grant.
[Signature Page Follows]
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day and year indicated below.
STEPAN COMPANY
By:
Name:
Title:
Date:
Participant Acknowledgment and Acceptance
By:
Name:
Date:
Exhibit 10.3
STEPAN COMPANY
2022 EQUITY incentive compensation plan
NOTICE OF GRANT OF PERFORMANCE SHARES
Stepan Company (the “Company”) hereby grants to the Participant the target number of Performance Shares set forth below under the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”). The Performance Shares are subject to all of the terms and conditions in this Notice of Grant of Performance Shares (this “Grant Notice”), in the Performance Shares Agreement attached hereto (the “Agreement”) and in the Plan. Capitalized terms used, but not otherwise defined, in this Grant Notice will have the meanings given to such terms in the Plan or Agreement, as applicable, and the Plan and Agreement are hereby incorporated by reference into this Grant Notice. If there are any inconsistences between this Grant Notice or the Agreement and the Plan, the terms of the Plan shall govern.
Participant: |
[___] |
Type of Grant: |
Performance Shares |
Date of Grant: |
[___] |
Total Target Number of Performance Shares: |
[___] |
One-Year Performance Period: |
January 1, 20__ through December 31, 20__ |
Three-Year Performance Period: |
January 1, 20__ through December 31, 20__ |
Potential Payout %: |
From 0% to 195% |
Vesting Schedule: |
Subject to the terms and conditions set forth in the Agreement and in the Statement of Performance Goals, the Performance Shares shall become earned (“Earned Performance Shares”) to the extent that the performance goals for the Performance Shares are achieved, as set forth or contemplated in the Statement of Performance Goals, provided (except as otherwise provided in the Agreement) that the Participant has remained in continuous employment with the Company or a Subsidiary through the last day of the Three-Year Performance Period. |
STEPAN COMPANY
2022 EQUITY incentive compensation plan
PERFORMANCE SHARES AGREEMENT
Stepan Company (the “Company”) has granted, pursuant to the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”), to the Participant named in the Notice of Grant of Performance Shares (the “Grant Notice”) to which this Performance Shares Agreement is attached (together with the Grant Notice, this “Agreement”) an award of Performance Shares as set forth in such Grant Notice, subject to the terms and conditions set forth in this Agreement.
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[SIGNATURES ON FOLLOWING PAGE]
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STEPAN COMPANY
By:
Name:
Title:
Participant Acknowledgment and Acceptance
By:
Name:
Date: _________________________
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STATEMENT OF PERFORMANCE GOALS
FOR PERFORMANCE SHARES
This Statement of Performance Goals applies to the Performance Shares granted to the Participant on the Date of Grant and applies with respect to the Performance Shares Agreement between the Company and the Participant (the “Agreement”).
Threshold (50% payout) |
Target (100% payout) |
Maximum and above (150% payout) |
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Threshold and below |
Target |
Maximum and above |
(70% payout) |
(100% payout) |
(130% payout) |
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Exhibit 10.4
STEPAN COMPANY
2022 EQUITY incentive compensation plan
NOTICE OF GRANT OF RESTRICTED STOCK UNITS
Stepan Company (the “Company”) hereby grants to the Participant Restricted Stock Units under the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”). The Restricted Stock Units are subject to all of the terms and conditions in this Notice of Grant of Restricted Stock Units (this “Grant Notice”), in the Restricted Stock Units Agreement attached hereto (the “Agreement”) and in the Plan. Capitalized terms used, but not otherwise defined, in this Grant Notice will have the meanings given to such terms in the Plan or Agreement, as applicable, and the Plan and Agreement are hereby incorporated by reference into this Grant Notice. If there are any inconsistences between this Grant Notice or the Agreement and the Plan, the terms of the Plan shall govern.
Participant: |
[___] |
Type of Grant: |
Restricted Stock Units |
Date of Grant: |
[____] |
Number of Restricted Stock Units: |
[____] |
Vesting Schedule: |
Subject to the conditions set forth in the Agreement, including but not limited to the Participant’s continuous employment with the Company or a Subsidiary until the applicable vesting date, the Restricted Stock Units shall vest [in three substantially equal installments on the first three anniversaries of the Date of Grant]. |
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STEPAN COMPANY
2022 EQUITY incentive compensation plan
RESTRICTED STOCK UNITS AGREEMENT
Stepan Company (the “Company”) has granted, pursuant to the Stepan Company 2022 Equity Incentive Compensation Plan (the “Plan”), to the Participant named in the Notice of Grant of Restricted Stock Units (the “Grant Notice”) to which this Restricted Stock Units Agreement is attached (together with the Grant Notice, this “Agreement”) Restricted Stock Units (the “RSUs”) as set forth in such Grant Notice, subject to the terms and conditions set forth in this Agreement.
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[SIGNATURES ON FOLLOWING PAGE]
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STEPAN COMPANY
By:
Name:
Title:
Participant Acknowledgment and Acceptance
By:
Name:
Date: _________________________
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Exhibit 31.1
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
I, Scott R. Behrens, certify that:
Date: May 4, 2023
/s/ Scott R. Behrens |
Scott R. Behrens |
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATION OF VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
PURSUANT TO EXCHANGE ACT RULE 13a-14(a)/15d-14(a)
I, Luis E. Rojo, certify that:
Date: May 4, 2023
/s/ Luis E. Rojo |
Luis E. Rojo |
Vice President and Chief Financial Officer |
Exhibit 32
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
In connection with the Quarterly Report of Stepan Company (the “Company”) on Form 10-Q for the period ended March 31, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer’s knowledge:
Date: May 4, 2023
/s/ Scott R. Behrens |
Name: Scott R. Behrens |
Title: President and Chief Executive Officer |
/s/ Luis E. Rojo |
Name: Luis E. Rojo |
Title: Vice President and Chief Financial Officer |
The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.