Stepan Reports Record Second Quarter and First Half Earnings

NORTHFIELD, Ill., July 20, 2016 /PRNewswire/ -- Stepan Company (NYSE: SCL) today reported:

Second Quarter Highlights

• Reported net income was a record $27.9 million, or $1.21 per diluted share, a 65% increase versus $16.9 million, or $0.74 per diluted share, in the prior year.
• Adjusted net income* was a record $30.1 million, or $1.31 per diluted share, a 44% increase versus $20.9 million, or $0.91 per diluted share, in the prior year. Total sales volume increased 12% for the quarter.
• Surfactant operating income was $27.2 million, a 12% increase versus prior year benefiting from our internal efficiency program, lower raw material costs and an 11% increase in volume.
• Polymer operating income was a record $31.0 million, a 32% increase versus prior year. Volumes were 14% higher and margins improved partially due to lower raw material costs.
• The effect of foreign currency translation negatively impacted net income by $0.7 million, or $0.03 per diluted share, versus prior year.

First Half Highlights

• Reported net income was a record $55.5 million, or $2.42 per diluted share, a 45% increase versus $38.2 million, or $1.67 per diluted share, in the prior year.
• Adjusted net income* was a record $59.6 million, or $2.60 per diluted share, a 44% increase versus $41.3 million, or $1.80 per diluted share, in the prior year. Total sales volume increased 12% during the first half of the year.
• The effect of foreign currency translation negatively impacted net income by $2.2 million or $0.10 per diluted share versus prior year.

*  Adjusted net income is a non-GAAP measure which excludes Deferred Compensation income/ expense as well as other significant and infrequent/non-recurring items. See Table II for this non-GAAP reconciliation.

"The Company had a strong second quarter and delivered record quarterly and year to date results," said F. Quinn Stepan, Jr., President and Chief Executive Officer. "The quarter benefited from higher Surfactant and Polymer volumes, increased asset utilization, reduced raw material costs and enhanced internal efficiencies. 

Surfactant operating income was up 12% on strong volume growth, improved asset utilization and a better product mix.  Polymers delivered a record quarter with a 32% increase in operating income on higher volumes and margins.  Our polymer business continues to benefit from global energy conservation efforts and the advantages our technologies provide over competitive insulation materials."

Summary of Second Quarter Adjusted Net Income Items

Adjusted net income excludes non-operational deferred compensation income/expense as well as certain other significant and infrequent or non-recurring items.

• Deferred Compensation: The current year quarter includes $2.3 million of pre-tax expense versus $6.4 million of pre-tax expense in the prior year. These amounts were $1.4 million and $4.0 million, respectively, on an after-tax basis.
• Business Restructuring: The current year quarter includes $1.1 million of pre-tax severance expense related to our Canadian plant closure, or $0.8 million on an after-tax basis. This plant closure was previously announced in our May 20, 2016 press release. Also related to the plant closure, accelerated depreciation of $0.8 million pre-tax was recorded within the Surfactant segment operating income. The accelerated depreciation is not presented as an adjustment to reported net income. We expect accelerated depreciation expense of $4.5 million pre-tax for the full year of 2016, of which $2.6 million is expected for the second half of 2016.

Percentage Change in Net Sales

Quarterly net sales increased slightly versus prior year.  Higher sales volume offset lower selling prices and the negative impact of foreign currency translation resulting from the stronger U.S. dollar.  Sales volumes were up 12% with particularly strong growth in North America Surfactants and all regions in Polymers. The lower selling prices were primarily related to lower raw material costs.

Total segment operating income increased $10.8 million, or 22%, versus the prior year quarter. Total segment operating income in the first half increased $21.8 million, or 22% versus the prior year.

• Surfactant net sales were $298.6 million for the quarter, $1.2 million less than prior year. Sales volume grew by 11% primarily due to new North American laundry business earned in July 2015. Excluding this, volumes were up slightly. Selling prices were lower by $26.1 million primarily due to lower raw material costs. The translation impact of a stronger U.S. dollar decreased net sales by $8.1 million. Surfactant operating income increased $3.0 million, or 12%, versus the prior year, primarily driven by favorable mix on higher sales volume into the distribution channel, lower raw material costs, contributions from our internal efficiency program (DRIVE) and the new Laundry supply contract.
• Polymer net sales were $134.5 million in the second quarter, a $0.9 million increase versus prior year. Sales volume increased 14% in the quarter primarily due to continued growth in polyols used in rigid foam insulation and insulated metal panels. Net sales increased $18.8 million as a result of this volume growth. Selling prices were lower which decreased net sales by $15.4 million. The translation impact of a stronger U.S. dollar decreased net sales by $2.5 million. Operating income increased $7.6 million, or 32%, versus the prior year. The improvement was primarily attributable to volume growth within the global Rigid Polyol business, improved performance in Phthalic Anhydride, and lower raw material costs.
• Specialty Products net sales were $21.5 million, $2.5 million higher than prior year. Operating income increased $0.3 million, or 17%, versus the prior year. The Lipid Nutrition business improved due to volume growth and lower costs resulting from actions taken in 2015. This improvement was slightly offset by the timing of orders in our food and flavoring business.

• Corporate expenses, excluding deferred compensation, increased $0.6 million, or 5%, for the quarter. This increase was mostly attributable to the severance expense associated with our Canadian plant closure and higher incentive-based compensation expenses. These expenses were partially offset by lower consulting expenses, as external resources related to our efficiency efforts were not used in the current year.

Income Taxes

The effective tax rate was 30% for the first half of 2016, which was equivalent to the 30% rate for the first half of 2015. 

Selected Balance Sheet Information

The Company's net debt level decreased $51 million for the quarter while the net debt ratio dropped from 23% to 17%.  The decrease in net debt was mostly attributable to a $45 million increase in cash.  The cash increase in the current quarter was primarily attributable to lower working capital requirements and strong second quarter earnings.    

The major working capital components were:

The Company had capital expenditures of $22 million during the quarter and $41 million during the first half of 2016.  This compares to $26 million and $54 million, respectively, in the prior year.  For the full year, we expect capital expenditures to be between $110 million and $120 million.

Outlook

"After a record first half, we remain optimistic about our core business for the balance of the year.  Our business should continue to benefit from higher laundry volumes within our Surfactant business and rigid polyol volumes within Polymers.  We expect higher raw material costs to slightly reduce margins.  Our internal efficiency program should continue to deliver meaningful results.  However, costs associated with a planned 30 day shutdown of our plant in Germany, accelerated depreciation and plant shutdown costs related to the closure of our Canadian plant, and lower construction activity in China should negatively impact the balance of 2016.  Overall, we continue to believe earnings for the year should grow," said F. Quinn Stepan, Jr., President and Chief Executive Officer.

Conference Call

Stepan Company will host a conference call to discuss the first quarter results at 10:00 a.m. ET (9:00 a.m. CT) on July 20, 2016. The call can be accessed by phone and webcast. Telephone access will be available by dialing +1 (800) 708-6791, and the webcast can be accessed through the Investor Relations/Conference Calls page at www.stepan.com. A webcast replay of the conference call will be available at the same location shortly after the call.

Supporting Slides

Slides supporting this press release will be made available at www.stepan.com under the Investor Relations center at approximately the same time as this press release is issued.

Corporate Profile

Stepan Company is a major manufacturer of specialty and intermediate chemicals used in a broad range of industries.  Stepan is a leading merchant producer of surfactants, which are the key ingredients in consumer and industrial cleaning compounds.  The Company is also a leading supplier of Polyurethane polyols used in the expanding thermal insulation market, and CASE (Coatings, Adhesives, Sealants, Elastomers) industries.

Headquartered in Northfield, Illinois, Stepan utilizes a network of modern production facilities located in North and South America, Europe and Asia.

The common stock is traded on the New York Stock Exchange (NYSE) under the symbol SCL.  For more information about Stepan Company please visit the Company online at www.stepan.com

Contact: Scott D. Beamer                                                                     (847) 446-7500

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Tables follow

Except for historical information, all other information in this news release consists of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected, anticipated or implied. Significant risks and uncertainties are described in Stepan Company's Form 10-K, Form 8-K and Form 10-Q reports and exhibits to those reports, and include (but are not limited to) risks related to our foreign operations, foreign currency fluctuations, certain global and regional economic conditions, costs related to expansion or other capital projects, the probability of future acquisitions and the uncertainties related to the integration of acquired businesses, the effect of customer product reformulations or new technologies, the loss of one or more key customer or supplier relationships, the costs and other effects of governmental regulation and legal and administrative proceedings, including the expenditures necessary to address and resolve environmental claims and proceedings, disruptions in production at manufacturing facilities, volatility of raw material, natural gas and energy costs, maintaining and protecting intellectual property rights, interruption or breaches of information technology systems, disruptions in transportation or significant changes in transportation costs, our level of indebtedness and general economic conditions.  These forward-looking statements are made only as of the date hereof, and Stepan Company undertakes no obligation to update or revise these forward-looking statements, whether as a result of new information, future events or otherwise.

The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP (Generally Accepted Accounting Principles) measures, are useful for evaluating the Company's operating performance.  Internally, the Company uses this non-GAAP information as an indicator of business performance, and evaluates management's effectiveness with specific reference to these indicators.  These measures should be considered in addition to, and are neither a substitute for, nor superior to, measures of financial performance prepared in accordance with GAAP.

SOURCE Stepan Company

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