On July 31, 2024, Stepan Co (SCL, Financial) released its 8-K filing reporting its second quarter 2024 financial results. Stepan Co manufactures and sells a variety of chemicals and chemical-based products, organized into three segments: surfactants, polymers, and specialty products. The majority of Stepan's revenue comes from the United States.
Performance Overview
Stepan Co reported a net income of $9.5 million for Q2 2024, a 25% decrease compared to the prior year. Adjusted net income was $9.4 million, down 22% year-over-year, primarily due to a higher effective tax rate. The company's pre-tax earnings were negatively impacted by $18.9 million due to higher operating costs at the Millsdale site, pre-commissioning expenses at the new Alkoxylation investment in Pasadena, Texas, and expenses related to a criminal fraud event at a subsidiary in Asia.
Financial Highlights
Despite the challenges, Stepan Co's EBITDA was $47.9 million, and Adjusted EBITDA was $47.7 million, reflecting a 3% and 4% decrease, respectively, year-over-year. Global sales volume increased by 4%, with surfactant and polymer sales volumes up by 5% and 2%, respectively. However, the company experienced a 4% decrease in net sales, primarily due to lower selling prices attributable to the pass-through of lower raw material costs and less favorable product mix.
Segment Performance
| Segment | Net Sales (Q2 2024) | Net Sales (Q2 2023) | % Change |
|---|---|---|---|
| Surfactants | $379.8 million | $391.7 million | -3% |
| Polymers | $159.8 million | $164.5 million | -3% |
| Specialty Products | $16.9 million | $23.8 million | -29% |
Income Statement and Balance Sheet Insights
Stepan Co's operating income for Q2 2024 was $18.7 million, a 5% decrease from the previous year. However, net income decreased by 25% to $9.5 million. Earnings per diluted share were $0.42, down 24% from $0.55 in Q2 2023. Adjusted earnings per diluted share were $0.41, a 23% decrease from $0.53 in the prior year.
The company's total debt increased by $11.1 million, and cash decreased by $1.1 million compared to March 31, 2024. The net debt level increased by $12.2 million, raising the net debt ratio from 30% to 31% for the quarter.
Operational Challenges and Fraud Event
Stepan Co faced significant operational challenges, including a flood event at the Millsdale site and pre-commissioning expenses at the Pasadena facility. Additionally, a criminal social engineering scheme targeted a subsidiary in Asia, resulting in a $3.5 million pre-tax charge for the quarter. The company is actively investigating this fraud event with the assistance of outside counsel.
“Second quarter earnings were significantly impacted by higher operational expenses at our Millsdale site, start up costs related to our new Pasadena investment and a criminal social engineering event that targeted one of our Asia subsidiaries, leading to unexpected expense in the quarter. We are actively investigating this fraud event with the assistance of outside counsel, and to date, we have not found any evidence of additional fraudulent activity,” said Scott Behrens, President and Chief Executive Officer.
Outlook
Looking ahead, Stepan Co expects improved EBITDA in the second half of the year, driven by continued volume growth and a reduction in operational expenses at the Millsdale site. The company anticipates a recovery in the Rigid Polyols and Agricultural Chemicals businesses, which should drive improved earnings and positive free cash flow.
For more detailed insights and analysis, visit GuruFocus.com.
Explore the complete 8-K earnings release (here) from Stepan Co for further details.
