INTRODUCTION
You should read the following discussion of our financial condition and results of operations together with our audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 . This discussion contains forward-looking statements and involves numerous risks, uncertainties, assumptions and other important factors that could cause the actual results, performance, or industry results, to differ materially from historical results, any future results, or performance, or industry results expressed or implied by such forward-looking statements. See "Cautionary Statement Regarding Forward-Looking Information." OVERVIEW We are a leading global sustainable producer of specialty polymers and high-value biobased products derived from pine wood pulping co-products. Our operations are managed through two operating segments: (i) Polymer segment; and (ii) Chemical segment. Polymer Segment SBCs are highly-engineered synthetic elastomers, which we invented and commercialized over 50 years ago. We developed the first unhydrogenated styrenic block copolymers ("USBC") in 1964 and the first hydrogenated styrenic block copolymers ("HSBC") in the late 1960s. Our SBCs enhance the performance of numerous products by imparting greater flexibility, resilience, strength, durability, and processability, and are used in a wide range of applications, including adhesives, coatings, consumer and personal care products, sealants, lubricants, medical, packaging, automotive, paving, roofing, and footwear products. Our polymers are typically formulated or compounded with other products to achieve improved, customer-specific performance characteristics in a variety of applications. We seek to maximize the value of our product portfolio by emphasizing complex or specialized polymers and innovations that yield higher margins than more commoditized products. We sometimes refer to these complex or specialized polymers or innovations as being more "differentiated." Our paving and roofing applications provide durability, extending road and roof life. Our products are also found in medical applications, personal care products such as disposable diapers, oil additives, gels, and various other consumer goods. Our products are also used to impart tack and shear properties in a wide variety of adhesive products and to impart characteristics such as flexibility and durability in sealants and corrosion resistance in coatings. Prior to the sale of our CariflexTM business, we produced Cariflex isoprene rubber and isoprene rubber latex. Our Cariflex products are based on synthetic polyisoprene polymer and do not contain natural rubber latex or other natural rubber products, making them an ideal substitute for natural rubber latex, particularly in applications with high purity requirements such as medical, healthcare, personal care, and food contact. Cariflex is included in the results of operations throughMarch 6, 2020 . OnMarch 6, 2020 , we completed the sale of our Cariflex business to Daelim Industrial Co, Ltd. ("Daelim"). As part of the sale, we entered into a multi-year Isoprene Rubber Supply Agreement ("IRSA") withDaelim . In accordance with the IRSA, we will supply Isoprene Rubber toDaelim for a period of five years, with an optional extension for an additional five years. See Note 4 Disposition and Exit of Business Activities for further discussion of the IRSA. Chemical Segment We manufacture and sell high value products primarily derived from pine wood pulping co-products. We refine and further upgrade two primary feedstocks, crude tall oil ("CTO") and crude sulfate turpentine ("CST"), both of which are co-products of the wood pulping process, into value-added specialty chemicals. We refine CTO through a distillation process into four primary constituent fractions: tall oil fatty acids ("TOFA"); tall oil rosin ("TOR"); distilled tall oil ("DTO"); and tall oil pitch. We further upgrade TOFA, TOR, and DTO into derivatives such as dimer acids, polyamide resins, rosin resins, dispersions, and disproportionated resins. We refine CST into terpene fractions, which can be further upgraded into terpene resins. The various fractions and derivatives resulting from our CTO and CST refining process provide for distinct functionalities and properties, determining their respective applications and end markets. We focus our resources on three product groups: Adhesives, Performance Chemicals, and Tires. Within our product groups, our products are sold into a diverse range of submarkets, including packaging, tapes and labels, pavement marking, high performance tires, fuel additives, oilfield and mining, coatings, metalworking fluids and lubricants, inks, and flavor and fragrances, among others. While this business is based predominantly on the refining and upgrading of CTO and CST, we have the capacity to use both hydrocarbon-based raw materials, such as alpha-methyl-styrene, rosins, and gum rosins where appropriate and, accordingly, are able to offer tailored solutions for our customers. 29 -------------------------------------------------------------------------------- Factors Affecting Our Results of Operations International Operations and Currency Fluctuations. We operate a geographically diverse business, serving customers in numerous countries from fourteen manufacturing facilities on four continents. Our sales and production costs are mainly denominated inU.S. dollars, Euro, Japanese Yen, and Swedish Krona. From time to time, we use hedging strategies to reduce our exposure to currency fluctuations. We generated our revenue from customers located in the following regions: Six Months Ended June Three Months Ended June 30, 30, 2020 2019 2020 2019 Revenue by Geography: (In thousands) Americas$ 160,557 $ 211,456 $ 346,715 $ 401,729 Europe, Middle East, and Africa 128,912 160,394 266,944 319,775 Asia Pacific 66,210 123,430 169,289 230,187 Total revenue$ 355,679 $ 495,280 $ 782,948 $ 951,691 Raw Materials. We use butadiene, styrene, and isoprene (collectively referred to as "monomers") as our primary raw materials in our Polymer segment and CTO and CST in our Chemical segment. The cost of these raw materials has generally correlated with changes in energy prices and is generally influenced by supply and demand factors, and for our isoprene monomers, the prices of natural and synthetic rubber. Average purchase prices of our raw materials decreased for the Polymer and Chemical segments during the three and six months endedJune 30, 2020 compared to the three and six months endedJune 30, 2019 . Seasonality. Seasonal changes and weather conditions typically affect our sales of products in our paving, pavement marking, roofing, and construction applications, which generally results in higher sales volumes in the second and third quarters of the calendar year compared to the first and fourth quarters of the calendar year. Sales for our other product applications tend to show relatively little seasonality. Recent Developments and Certain Known Trends Our business is subject to a number of known risks and uncertainties, some of which are a result of recent developments. COVID-19 Pandemic. The continued global impact of COVID-19 has resulted in various emergency measures to combat the spread of the virus. We continue to monitor the progression of the COVID-19 pandemic on a daily basis and we have a dedicated COVID-19 management team that meets regularly. The safety and well-being of our employees, stakeholders, and the communities in which we operate remain our primary concern. While our essential manufacturing plant and research and development laboratory personnel remain on-site, many of our other employees around the world are working remotely. We are continuing to follow the orders and guidance of federal, regional, and local governmental agencies, as we maintain our own stringent protocols in an effort to mitigate the spread of the virus and protect the health of our employees, customers, and suppliers as well as the communities in which we operate. To date, our plants have continued to operate at normal capacities, and our supply chain has remained largely intact, with adequate availability of key raw materials. Importantly, under theU.S. Department of Homeland Security guidance issued onApril 17, 2020 , as well as many related regional and local governmental orders, chemical manufacturing sites are considered essential critical infrastructure, and as such, are not currently subject to closure in the locations where we operate. While the members of theEuropean Union issue critical infrastructure orders on a country-by-country basis, thus far they have taken a similar approach to theU.S. Department of Homeland Security guidance. Although there has been some disruption in global logistics channels, we have not experienced significant delays in fulfillment of customer orders. During the second quarter 2020, the COVID-19 pandemic began to materially affect sales volumes, particularly in our Chemical segment's market sectors such as tires, automotive, road markings, and oilfield. While we see positive trends for the Chemical segment inAsia andEurope , we may experience continued impacts to sales volumes in the Chemical segment during the second half of 2020, primarily inNorth America . The impact to COVID-19 was also noted within our Polymer segment during the second quarter 2020, particularly for the demand of consumer durables, oilfield, and automotive applications, and to a lesser extent, paving applications. These COVID-19 impacts were partially mitigated by demand withinEurope andAsia of medical and hygiene applications. We currently expect the Polymer specialty polymersNorth America market pressure to continue into the second half of the year. We are unable to accurately predict the impact that the pandemic will have on our business and results of operations for the remainder of 2020 and beyond (including how the impact of the pandemic on our business and results of operations may 30 -------------------------------------------------------------------------------- change from quarter to quarter) due to numerous uncertainties, including the severity of the disease, the duration of the pandemic, additional actions that may be taken by governmental authorities, and other unintended consequences. Furthermore, the pandemic has adversely impacted, and may further adversely impact, the national and global economy, particularly in less essential end markets. There can also be no assurance that demand for our products generally (regardless of end market) won't be adversely effected by the continued impact of the COVID-19 pandemic on the national and global economy. Moreover, we are unable to predict actions that may be taken by our competitors, some of which may be less diversified, that could negatively impact pricing or demand for our products. While the future remains uncertain, our geographic and end market diversification, such as medical, adhesives, and food packaging, may partially mitigate this financial exposure, as we serve many customers whose products remain vital in the current environment. We will continue to monitor the impacts of COVID-19 and implement operational, cost reductions, and logistics initiatives as needed. We do not currently anticipate any material impairments, with respect to goodwill, intangible assets, long-lived assets, or right of use assets, increases in allowances for credit losses from our customers, restructuring charges, other expenses, or changes in accounting judgments to have a material impact on our financial statements, however at this point we are continuing to assess the impact, if any. Market Conditions. Certain fundamental market conditions that affected our business and financial results prior to the COVID-19 pandemic continue to have an impact on us. Our Chemical segment has been impacted by the decline in oilfield demand and continues to see pressure on pricing from 2019 levels in the rosin market, driven by adverse market fundamentals and excess hydrocarbon supply. While rosin prices remain under pressure compared to historical levels, they have stabilized and are not expected to improve through the remainder of 2020. The CST refining product prices in our Chemical segment remain at a consistent level relative to the second half of 2019. 31
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