STEPAN COMPANY 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 aboutStepan 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 endedDecember 31, 2019 , including the risks and uncertainties related to the following: (a) the impact of the COVID-19 pandemic; (b) accidents, unplanned production shutdowns or disruptions in any of the Company's manufacturing facilities; (c) reduced demand for Company products due to customer product reformulations or new technologies; (d) the Company's inability to successfully develop or introduce new products; (e) compliance with anti-corruption, environmental, health and safety and product registration laws; (f) the Company's ability to make acquisitions of suitable candidates and successfully complete and integrate acquisitions; (g) global competition and the Company's ability to successfully compete; (h) volatility of raw material, natural gas and electricity costs as well as any disruption in their supply; (i) disruptions in transportation or significant changes in transportation costs; (j) downturns in certain industries and general economic downturns; (k) international business risks, including fluctuations in currency exchange rates, legal restrictions and taxes; (l) unfavorable resolution of litigation against the Company; (m) the Company's ability to keep and protect its intellectual property rights; (n) potentially adverse tax consequences due to the international scope of the Company's operations; (o) downgrades to the Company's credit ratings or disruptions to the Company's ability to access well-functioning capital markets; (p) conflicts, military actions, terrorist attacks and general instability, particularly in certain energy-producing nations, along with increased security regulations; (q) cost overruns, delays and miscalculations in capacity needs with respect to the Company's expansion or other capital projects; (r) interruption of, damage to or compromise of the Company's IT systems and failure to maintain the integrity of customer, colleague or Company data; (s) the Company's ability to retain its executive management and other key personnel, and; (t) the Company's ability to operate within the limitations of its debt covenants. 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 also could harm 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
Overview
The Company produces and sells intermediate chemicals that are used in a wide variety of applications worldwide. The overall business comprises three reportable segments:
• Surfactants - Surfactants, which accounted for 72 percent of Company
consolidated net sales for the first half of 2020, 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
23
--------------------------------------------------------------------------------
quaternary compounds, 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
American sites (one site in
and two Asian sites (Philippines and Singapore ). Recent significant events
include:
o On January 19, 2020 , the Company experienced a power disruption
that impacted its Millsdale, Illinois facility. This power outage
combined with below freezing temperatures led to significant
production and operational challenges that impacted both
Surfactants and Polymers produced at the site. The Millsdale
facility operated on a partial basis and used existing inventories
to serve its customers. However, on February 17, 2020 , power
outage-related operational issues impacted the Millsdale site's
waste water treatment plant (WWTP) and forced the Company to stop
production at the site. As a result, the Company declared force
majeure for the supply of phthalic anhydride (Polymers) and certain
surfactant product lines. All production lines were fully
operational prior to the end of the first quarter. The Company's
insurance provider has acknowledged this incident is a covered
event and the Company is pursuing insurance recovery for
incremental supply chain expenses and business interruption.
o In March 2020 the Company acquired certain assets of Logos
Technologies LLC's NatSurFact® business, arhamnolipid-based line
of bio-surfactants derived from renewable sources. These
bio-surfactants offer synergies in several strategic end use
markets including oilfield, agriculture, personal care and
household, industrial and institutional. The Company is focusing
efforts to further develop, integrate and commercialize these
unique surfactants moving forward. The Company believes the
rhamnolipid technology will further advance the growth and
sustainability aspirations of both the Company and itscustomers.
(See Note 17, Acquisitions, for additional details).
o In December 2019 the Company acquired an oilfield demulsifier
product line. The Company believes this acquisition will accelerate
its strategy to diversify into additional application segments
within the oilfield end markets. The acquired business did not
impact the Company's 2019 financial results nor is it expected to
be accretive to earnings in 2020 (see Note 17, Acquisitions, for
additional details).
o During the fourth quarter of 2018, the Company shut downSurfactant
operations at its plant site in Germany . The Company ceased
Surfactant production at this site to further reduce its fixed cost
base, refocus Surfactant resources on higher margin end markets and
allow for select assets to be repurposed to support future polyol
growth. Decommissioning costs associated with the shutdown were
incurred in 2019 and continued through the first quarter of 2020
(see Note 16, Business Restructuring, for additional details).
• Polymers - Polymers, which accounted for 24 percent of consolidated net sales
for the first half of 2020, 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). 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
are manufactured at the Company's Millsdale,
polyols are manufactured at the Company's
polyurethane polyols are manufactured by the Company's subsidiary in
and specialty polyols are manufactured by the Company's
Company's Nanjing , China , plant. Recent significant events include:
o The operational issues at the Company's Millsdale, Illinois
facility, described in the significant event paragraph above,
negatively impacted Polymers earnings during the first half of
2020.
• Specialty Products - Specialty Products, which accounted for four percent of
consolidated net sales for the first half of 2020, 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, at outside contractors. Recent significant events include:
o During 2019, the Company restructured its Specialty Products office
in the Netherlands and eliminated positions from the site's supply
chain, quality control and research and development areas. This
restructuring was undertaken to better align the number of
personnel with current business requirements and reduce costs at
the site (see Note 16, Business Restructuring, for additional
details).
24
--------------------------------------------------------------------------------
2020 Acquisition
OnMarch 13, 2020 , the Company acquired certain assets ofLogos Technologies LLC's NatSurFact® business, a rhamnolipid-based line of bio-surfactants derived from renewable sources. These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional. The acquisition was accounted for as an asset acquisition. The purchase price of the acquisition was$2,040,000 and was paid with cash on hand. All assets acquired are included in the Company's Surfactants segment. The assets acquired were primarily intangibles, including trademarks and know-how ($1,392,000 ) and patents ($464,000 ). Additionally,$184,000 of laboratory equipment was acquired (see Note 17, Acquisitions, for additional details). Deferred Compensation Plans The accounting for the Company's deferred compensation plans can cause period-to-period fluctuations in Company expenses and profits. Compensation expense results when the values of Company common stock and mutual fund investment assets held for the plans increase, and compensation income results when the values of Company common stock and mutual fund investment assets decline. The pretax effect of all deferred compensation-related activities (including realized and unrealized gains and losses on the mutual fund assets held to fund the deferred compensation obligations) and the income statement line items in which the effects of the activities were recorded are displayed in the following tables: Income (Expense) For the Three Months Increase Ended June 30 (Decrease) (In millions) 2020 2019 Change Deferred Compensation (Operating expenses)$ (6.5 ) $ (2.4) $ (4.1 ) (1) Realized/Unrealized Gains on Investments (Other, net) 3.8 0.7 3.1 Investment Income (Other, net) 0.1 - 0.1 Pretax Income Effect$ (2.6 ) $ (1.7) $ (0.9 ) Income (Expense) For the Six Months Increase Ended June 30 (Decrease) (In millions) 2020 2019 Change Deferred Compensation (Operating expenses)$ 0.8 $ (9.9 ) $ 10.7 Realized/Unrealized Gains on Investments (Other, net) 0.2 3.0 (2.8 ) Investment Income (Other, net) 0.2 0.2 - Pretax Income Effect$ 1.2 $ (6.7 ) $ 7.9 (1) See the Segment Results-Corporate Expenses sections of this MD&A for details regarding the period-over-period changes in deferred compensation expense.
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 intoU.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against theU.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 differentU.S. dollar results). The following tables present 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 and six months endedJune 30, 2020 and 2019: Three Months Ended June 30 (Decrease) Increase Due to Foreign (In millions) 2020 2019 (Decrease) Translation Net Sales$ 460.5 $ 473.0 $ (12.5 ) $ (20.2 ) Gross Profit 98.5 93.0 5.5 (4.4 ) Operating Income 44.6 41.1 3.5 (3.3 ) Pretax Income 47.8 39.5 8.3 (3.3 ) 25
--------------------------------------------------------------------------------
Six Months Ended
June 30
(Decrease)
Increase Due to Foreign
(In millions) 2020 2019 (Decrease) Translation
Net Sales $ 910.5 $ 962.2 $ (51.7 ) $ (28.5 )
Gross Profit 177.8 177.6 0.2 (5.8 )
Operating Income 84.6 70.8 13.8 (4.1 )
Pretax Income 83.3 70.6 12.7 (4.1 )
RESULTS OF OPERATIONS
Three Months Ended
Summary
Net income attributable to the Company for the second quarter of 2020 increased 18 percent to$35.7 million , or$1.54 per diluted share, from$30.2 million , or$1.30 per diluted share, for the second quarter of 2019. Adjusted net income increased nine percent to$38.3 million , or$1.65 per diluted share, from$35.1 million , or$1.50 per diluted share, in 2019 (see the "Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share" section of this MD&A for reconciliations between reported net income attributable to the Company 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, profits and expenses in the second quarter of 2020 compared to the second quarter of 2019. A detailed discussion of segment operating performance for the second quarter of 2020 compared to the second quarter of 2019 follows the summary. Consolidated net sales decreased$12.5 million , or three percent, between quarters. Consolidated sales volume increased four percent, which had an$18.9 million favorable impact on the change in net sales. Sales volume in the Surfactant segment increased 10 percent while sales volume in the Polymer segment decreased 13 percent. Specialty Products sales volume was flat between quarters. Foreign currency translation negatively impacted the change in net sales by$20.2 million due to a strongerU.S. dollar against the majority of currencies where the Company has foreign operations. Lower average selling prices negatively impacted the change in net sales by$11.2 million . The decrease in average selling prices was primarily due to the pass through of lower raw material costs. Operating income for the second quarter of 2020 increased$3.5 million , or nine percent, compared to operating income for the second quarter of 2019. Surfactant operating income increased$16.4 million or 51 percent versus the second quarter of 2019. Polymer and Specialty Product operating income decreased$7.2 million and$2.8 million , respectively. Foreign currency translation had a$3.3 million unfavorable impact on segments' operating income in the second quarter of 2020 versus same period in 2019. Deferred compensation expenses increased$4.1 million in the second quarter of 2020 versus the second quarter of 2019. Business restructuring expenses decreased$0.2 million and corporate expenses (excluding deferred compensation and business restructuring expenses) decreased$1.0 million between quarters. Most of the corporate decrease reflects lower environmental remediation expenses in 2020. Operating expenses (including deferred compensation and business restructuring expense) increased$2.0 million , or four percent, between quarters. Changes in the individual income statement line items that comprise the Company's operating expenses were as follows: • Selling expenses declined$1.2 million , or nine percent, due to lower travel and entertainment expenses as a result of COVID-19 travel restrictions.
• Administrative expenses decreased
due to lower environmental remediation expenses in 2020.
• Research, development and technical service (R&D) expenses increased
million, or one percent.
• Deferred compensation expense increased $4.1 million primarily due to a
second quarter of 2020 compared to a
quarter of 2019. See the Overview and Segment Results-Corporate Expenses
sections of this MD&A for further details.
• Business restructuring charges totaled $0.2 million in the second quarter
of 2020 versus
ongoing decommissioning costs associated with the Company's manufacturing
facility in
decommissioning costs associated with the 2016 Canadian plant closure (
million), decommissioning expenses associated with the 2018 sulfonation
shutdown in
Product restructuring (
for additional details.
26
-------------------------------------------------------------------------------- Net interest expense for the second quarter of 2020 decreased$0.5 million , or 29 percent, from net interest expense for the same quarter of last year. This decrease was primarily attributable to lower interest expenses resulting from scheduled debt repayments and the non-recurrence of two one-time events in the second quarter of 2019: (a) the recognition of make-whole interest expense associated with the Company's voluntary prepayment of its 5.88 percent Senior Notes, partially offset by (b) the recognition of interest income associated with a Brazilian VAT tax recovery. The Company also recognized lower interest income in the second quarter of 2020 as a result of lower global interest rates. Other, net was$4.4 million of income for the second quarter of 2020 compared to$0.2 million of income for the same period of 2019. The Company recognized$4.0 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 second quarter of 2020 compared to$0.8 million of income in last year's second quarter. In addition, the Company reported foreign exchange gains of$0.4 million in the second quarter of 2020 versus$0.6 million of foreign exchange losses in the second quarter of 2019. The Company also reported$0.1 million of higher net periodic pension cost expense in the second quarter of 2020 versus the prior year quarter. The Company's effective tax rate was 25.0 percent for the second quarter of 2020 compared to 23.6 percent for the second quarter of 2019. The increase was primarily attributable to: (a) a less favorable projected geographical mix of income in the second quarter of 2020 versus 2019, and (b) a higherU.S. tax impact on foreign earnings and profits in the second quarter of 2020 versus 2019. Segment Results For the Three Months Ended (Dollars in thousands) June 30 June 30 Increase Percent Net Sales 2020 2019 (Decrease) Change Surfactants$ 332,335 $ 313,380 $ 18,955 6 Polymers 112,409 140,636 (28,227 ) -20 Specialty Products 15,805 18,987 (3,182 ) -17 Total Net Sales$ 460,549 $ 473,003 $ (12,454 ) -3 For the Three Months Ended (Dollars in thousands) June 30, June 30, Increase Percent Operating Income 2020 2019 (Decrease) Change Surfactants$ 48,503 $ 32,086 $ 16,417 51 Polymers 15,527 22,760 (7,233 ) -32 Specialty Products 3,226 5,982 (2,756 ) -46 Segment Operating Income$ 67,256 $ 60,828 $ 6,428 11 Corporate Expenses, Excluding Deferred Compensation and Restructuring 15,944 16,918 (974 ) -6 Deferred Compensation Expense 6,464 2,395 4,069 170 Business Restructuring 225 450 (225 ) -50 Total Operating Income$ 44,623 $ 41,065 $ 3,558 9 Surfactants Surfactants net sales for the second quarter of 2020 increased$19.0 million , or six percent, versus net sales for the second quarter of 2019. A 10 percent increase in sales volume and higher average selling prices positively impacted the change in net sales by$30.2 million and$6.0 million , respectively. The unfavorable impact of foreign currency translation negatively impacted the change in net sales by$17.2 million . A comparison of net sales by region follows: 27 --------------------------------------------------------------------------------
For the Three Months Ended
(Dollars in thousands) June 30, June 30, Increase Percent
Net Sales 2020 2019 (Decrease) Change
North America $ 207,571 $ 191,720 $ 15,851 8
Europe 55,812 54,360 1,452 3
Latin America 56,194 53,957 2,237 4
Asia 12,758 13,343 (585 ) -4
Total Surfactants Segment $ 332,335 $ 313,380 $ 18,955 6
Net sales for North American operations increased $15.9 million , or eight
percent, between quarters. A seven percent increase in sales volume and higher
average selling prices positively impacted the change in net sales by $14.1
million and $2.1 million , respectively. The sales volume growth was primarily
due to higher demand for products sold into the consumer product end markets,
driven by increased demand for cleaning, disinfection and personal wash products
as a result of COVID-19, partially offset by lower demand in the functional
product end markets, principally agricultural and oilfield. Foreign currency
translation negatively impacted the change in net sales by $0.3 million .
Net sales for European operations increased $1.5 million , or three percent,
between quarters. Higher average selling prices positively impacted the change
in net sales by $3.4 million . The unfavorable impact of foreign currency
translation and a one percent decline in sales volume negatively impacted the
change in net sales by $1.5 million and $0.4 million , respectively. The lower
sales volume reflects lost business at one customer mostly offset by increased
demand for cleaning and disinfection products as a result of COVID-19 and higher
demand for products sold into the agricultural end market. A stronger U.S.
dollar relative to the European euro and British pound sterling led to the
foreign currency translation effect.
Net sales for Latin American operations increased $2.2 million , or four percent,
primarily due to a 28 percent increase in sales volume and higher average
selling prices. These items positively impacted the change in net sales by $15.1
million and $2.8 million , respectively. The sales volume growth was mostly due
to higher demand for products sold into the consumer product end markets, driven
by increased demand for cleaning and disinfection products, and a fully
operational Ecatepec, Mexico facility in 2020. Foreign currency translation
negatively impacted the change in net sales by $15.7 million . The strengthening
of the U.S. dollar against the Brazilian real, Mexican peso and the Colombian
peso led to the foreign currency translation impact.
Net sales for Asian operations declined $0.6 million , or four percent, primarily
due to lower average selling prices and a one percent decline in sales volume.
These items unfavorably impacted the change in net sales by $0.8 million and
$0.1 million , respectively. The slightly lower sales volume was due to lower
demand for products sold to one consumer products customer partially offset by
higher demand for products sold into the agricultural end market. Foreign
currency translation favorably impacted the change in net sales by $0.3
million .
Surfactants operating income for the second quarter of 2020 increased $16.4
million , or 51 percent, versus operating income for the second quarter of
2019. Gross profit increased $15.8 million in the second quarter of 2020 versus
the second quarter of 2019 and operating expenses decreased $0.6 million , or
three percent. Comparisons of gross profit by region and total segment operating
expenses and operating income follow:
For the Three Months Ended
Increase Percent
(Dollars in thousands) June 30, 2020 June 30, 2019 (Decrease) Change
Gross Profit and Operating Income
North America $ 46,221 $ 39,145 $ 7,076 18
Europe 9,387 7,406 1,981 27
Latin America 12,315 6,289 6,026 96
Asia 4,118 3,404 714 21
Surfactants Segment Gross Profit $ 72,041 $ 56,244 $ 15,797 28
Operating Expenses 23,538 24,158 (620 ) -3
Surfactants Segment Operating Income
51
Gross profit for North American operations increased 18 percent, or $7.1
million , between quarters primarily due to higher unit margins and a seven
percent increase in sales volume. These items positively impacted the change in
gross profit by $4.2 million and $2.9 million , respectively. The higher unit
margins reflect a more favorable product and customer mix. Most of the sales
volume increase was attributable to increased demand for cleaning, disinfection
and personal wash products as a result of COVID-19.
28
--------------------------------------------------------------------------------
Gross profit for European operations increased $2.0 million , or 27 percent,
primarily due to higher unit margins. These higher unit margins positively
impacted the change in gross profit by $2.3 million . The higher unit margins
were attributable to a more favorable product and customer mix in the second
quarter of 2020 primarily resulting from higher demand in the agricultural end
market and lower demand for commodity softeners. The unfavorable impact of
foreign currency translation and a one percent decline in sales volume
negatively impacted the change in gross profit by $0.2 million and $0.1 million ,
respectively.
Gross profit for Latin American operations increased $6.0 million , or 96
percent, between quarters primarily due to higher unit margins. Higher unit
margins positively impacted the change in gross profit by $7.9 million . The
higher unit margins primarily reflect the Company's Mexican sites being fully
operational in 2020 versus the prior year when Mexico incurred higher freight
and supply chain expenses as a result of the 2019 sulfonation equipment failure
at the Company's Ecatepec, Mexico facility. Sales volume growth of 28 percent
positively impacted the change in gross profit by $1.7 million . The unfavorable
impact of foreign currency translation negatively impacted gross profit by $3.6
million .
Gross profit for Asia operations increased $0.7 million or 21 percent, between
quarters largely due to higher unit margins. The higher unit margins were driven
by an improved product and customer mix resulting from higher sales volume into
the agricultural end market and lower unit overhead costs in Singapore due to
favorable production timing differences.
Operating expenses for the Surfactants segment decreased
Polymers
Polymers net sales for the second quarter of 2020 decreased$28.2 million , or 20 percent, versus net sales for the same period of 2019. A 13 percent decline in sales volume negatively impacted the change in net sales by$18.2 million . The volume decrease is primarily attributable to an eight percent decline in global polyol volume, due to COVID-19 construction project delays and cancellations, and a 41 percent decline in phthalic anhydride volume. The unfavorable impact of lower average selling prices and foreign currency translation negatively impacted the change in net sales by$7.1 million and$2.9 million , respectively. A comparison of net sales by region follows: For the Three Months Ended (Dollars in thousands) June 30 June 30 Increase Percent Net Sales 2020 2019 (Decrease) change North America$ 68,780 $ 86,434 $ (17,654 ) -20 Europe 32,692 44,085 (11,393 ) -26 Asia and Other 10,937 10,117 820 8 Total Polymers Segment$ 112,409 $ 140,636 $ (28,227 ) -20 Net sales for North American operations declined$17.7 million , or 20 percent, primarily due to a 15 percent decline in sales volume. The decline in sales volume negatively impacted the change in net sales by$13.1 million . Sales volume of polyols used in rigid foam applications decreased five percent during the quarter due to COVID-19 construction project delays and cancellations. Sales volume of phthalic anhydride decreased 41 percent due to share loss at one customer and soft market demand. Lower average selling prices negatively impacted the change in net sales by$4.6 million . The lower selling prices reflect lower raw material market prices. Net sales for European operations declined$11.4 million or 26 percent. A 19 percent decrease in sales volume, the unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the change in net sales by$8.2 million ,$2.4 million and$0.8 million , respectively. The decline in sales volume principally reflects softer demand due to deferred or canceled construction projects as a result of COVID-19. The lower selling prices reflect lower raw material prices.
Net sales for
Polymers operating income for the second quarter of 2020 decreased$7.2 million , or 32 percent, from operating income for the second quarter of 2019. Gross profit decreased$7.4 million , or 25 percent, primarily due to the 13 percent decline in sales volume and lower unit margins. The lower unit margins reflect higher North American supply chain costs and the carryover of higher cost raw material inventory as a result of the first quarter 2020 incident at the Company's Millsdale, IL site. The second quarter of 2020 results were favorably impacted by a partial government reimbursement related to the government-mandated China JV shutdown in 29 -------------------------------------------------------------------------------- 2012 ($1.1 million ) and a European vendor claim settlement related to a prior year raw material contamination issue ($0.5 million ). Operating expenses declined$0.2 million . Comparisons of gross profit by region and total segment operating expenses and operating income follow: For the Three Months Ended Increase Percent (Dollars in thousands) June 30, 2020 June 30, 2019 (Decrease) Change Gross Profit and Operating Income North America$ 12,705 $ 21,678 $ (8,973 ) -41 Europe 6,195 6,377 (182 ) -3 Asia and Other 3,379 1,662 1,717 103 Polymers Segment Gross Profit$ 22,279 $ 29,717 $ (7,438 ) -25 Operating Expenses 6,752 6,957 (205 ) -3
Polymers Segment Operating Income
Gross profit for North American operations decreased$9.0 million , or 41 percent, primarily due to lower unit margins and the 15 percent decline in sales volume. These two items negatively impacted the change in gross profit by$5.7 million and$3.3 million , respectively. The lower unit margins primarily reflect higher supply chain costs and the carryover of higher cost raw material inventory as a result of the first quarter 2020 incident at the Company's Millsdale, IL facility. Gross profit for European operations decreased$0.2 million , or three percent, primarily due to a 19 percent decrease in sales volume and the unfavorable impact of foreign currency translation. These items negatively impacted the change in gross profit by$1.2 million and$0.4 million , respectively. The decline in sales volume primarily reflects lower demand for polyols used in rigid foam applications due to deferred or cancelled construction projects as a result of COVID-19. Higher unit margins positively impacted the change in gross profit by$1.4 million . The higher unit margins were partially attributable to a vendor claim settlement recognized in the second quarter of 2020 related to a prior year raw material contamination issue ($0.5 million ). Gross profit forAsia and Other operations improved$1.7 million due to higher unit margins and sales volume growth of 35 percent. Unit margins benefited from a partial government reimbursement related to the government-mandated China JV shutdown in 2012 ($1.1 million ).
Operating expenses for the Polymers segment decreased
Specialty Products
Net sales for the second quarter of 2020 decreased$3.2 million , or 17 percent, versus net sales for the second quarter of 2019. This decrease reflects lower average selling prices as volume was flat. Gross profit decreased$2.7 million and operating income decreased$2.8 million primarily due to lower average margins within the Company's medium chain triglycerides product line and order timing differences within the food and flavor business.
Corporate Expenses
Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, increased$2.9 million between quarters. Corporate expenses were$22.6 million in the second quarter of 2020 versus$19.8 million in 2019. This increase was primarily attributable to higher deferred compensation expense ($4.1 million ) that was partially offset by lower environmental remediation and business restructuring expenses in the second quarter of 2020. The$4.1 million increase in deferred compensation expense was primarily due to an$8.64 per share increase in the market price of Company common stock in the second quarter of 2020 compared to a$4.39 per share increase for the second quarter of 2019. The following table presents the quarter-end Company common stock market prices used in the computation of deferred compensation expenses for the three months endedJune 30, 2020 and 2019: 2020 2019 June 30 March 31 June 30 March 31 Company Common Stock Price$ 97.10 $ 88.46 $ 91.91 $ 87.52 30
--------------------------------------------------------------------------------
Six Months Ended
Summary
Net income attributable to the Company for the first half of 2020 increased 15 percent to$63.3 million , or$2.72 per diluted share, from$55.2 million , or$2.37 per diluted share, in the first half of 2019. Adjusted net income was$62.5 million , or 2.69 per diluted share, versus$65.8 million or$2.82 per diluted share, in the prior year. (see the "Reconciliation of Non-GAAP Adjusted Net Income and Diluted Earnings per Share" section of this MD&A for reconciliations between reported net income attributable to the Company 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 year-over-year changes in net sales, profits and expenses. A detailed discussion of segment operating performance for the first half of 2020 compared to the first half of 2019 follows the summary. Consolidated net sales decreased$51.6 million , or five percent, between years. Lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by$29.3 million and$28.5 million , respectively. Consolidated sales volume increased one percent which had a$6.2 million favorable impact on the year-over-year change in net sales. The decrease in average selling prices was primarily due to the pass through of lower raw material costs. The unfavorable foreign currency translation effect reflected a strongerU.S. dollar against most currencies where the Company has foreign operations. Sales volume in the Surfactant segment increased four percent while sales volume in the Polymer and Specialty Product segments decreased 11 percent and four percent, respectively. Operating income for the first half of 2020 increased$13.8 million , or 20 percent, versus operating income reported for the first half of 2019. Surfactant operating income increased$15.4 million or 22 percent versus the first half of 2019. Polymer and Specialty Products operating income decreased$11.8 million and$1.9 million , respectively. Deferred compensation expenses decreased$10.7 million year-over-year. Corporate expenses (excluding deferred compensation and business restructuring expenses) decreased$0.8 million between years largely due to lower environmental remediation expenses. Business restructuring expenses decreased$0.6 million between years. Foreign currency translation had a$4.1 million unfavorable impact on year-over-year consolidated operating income. Operating expenses (including deferred compensation and business restructuring expenses) decreased$13.6 million , or 13 percent, between years. Changes in the individual income statement line items that comprise the Company's operating expenses were as follows:
• Selling expenses decreased
partially due to lower travel and entertainment expenses as a result of
COVID-19 restrictions.
• Administrative expenses decreased $1.2 million , or three percent,year-over-year primarily due to lower environmental remediation expenses in
2020.
• R&D expenses increased $0.6 million , or two percent, year-over-year.
• Deferred compensation expense decreased
primarily due to a
common stock during the first six months of 2020 compared to a
share increase in the first half of 2019. See the Overview and Segment
Results-Corporate Expenses sections of this MD&A for further details.
• Business restructuring expenses were
compared to
charges were comprised of ongoing decommissioning costs associated with the
2016 Canadian plant closure ($0.5 million ) and decommissioning costs
associated with the Company's 2018 sulfonation shut down in Germany ($0.1
million ). The 2019 restructuring charges were primarily comprised ofseverance and office shutdown expenses related to the 2019 Netherlands
office restructuring (
the Company's Canadian plant closure (
expenses associated with the Company's sulfonation shutdown in
(
details).
Net interest expense for the first half of 2020 declined$1.1 million , or 31 percent, compared to net interest expense for the first half of 2019. This decrease was primarily attributable to lower interest expense resulting from scheduled debt repayments and the non-recurrence of two one-time events in the first half of 2019: (a) the recognition of make-whole interest expense associated with the Company's voluntary prepayment of its 5.88 percent Senior Notes, partially offset by (b) the recognition of interest income associated with a Brazilian VAT tax recovery. The Company also recognized lower interest income in the first half of 2020 as a result of lower global interest rates. Other, net was$1.2 million of income for the first half of 2020 compared to$3.4 million of income for the first half of 2019. The Company recognized$0.2 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 half of 2020 compared to$3.3 million of 31 -------------------------------------------------------------------------------- income in the first half of 2019. In addition, the Company reported foreign exchange gains of$1.0 million in the first half of 2020 versus a negligible foreign exchange loss in in the first half of 2019. The Company also reported$0.1 million of higher net periodic pension cost expense in the first half of 2020 versus the prior year. The Company's effective tax rate was 23.9 percent for the first half of 2020 compared to 21.8 percent for the first half of 2019. The year-over-year increase was primarily attributable to: (a) lower excess tax benefits derived from stock-based compensation awards exercised or distributed in the first half of 2020 versus 2019; (b) a higherU.S. tax impact on foreign earnings and profits in the first half of 2020, and (c) a less favorable geographical mix of income in the first half of 2020 versus 2019. For the Six Months Ended (In thousands) June 30, June 30, Percent Net Sales 2020 2019 (Decrease) Change Surfactants$ 659,406 $ 663,030 $ (3,624 ) -1 Polymers 218,900 260,815 (41,915 ) -16 Specialty Products 32,230 38,328 (6,098 ) -16 Total Net Sales$ 910,536 $ 962,173 $ (51,637 ) -5 For the Six Months Ended (In thousands) June 30, June 30, Increase Percent Operating Income 2020 2019 (Decrease) Change Surfactants$ 84,659 $ 69,253 $ 15,406 22 Polymers 23,043 34,865 (11,822 ) -34 Specialty Products 7,210 9,113 (1,903 ) -21 Segment Operating Income$ 114,912 $ 113,231 $ 1,681 1 Corporate Expenses, Excluding Deferred Compensation and Restructuring$ 30,562 $ 31,377 $ (815 ) -3 Deferred Compensation Expense (Income) (859 ) 9,868 (10,727 ) NM Business Restructuring 582 1,183 (601 ) -51 Total Corporate Expenses$ 30,285 $ 42,428 $ (12,143 ) -29 Total Operating Income$ 84,627 $ 70,803 $ 13,824 20 Segment Results Surfactants Surfactants net sales for the first half of 2019 decreased$3.6 million , or one percent, versus net sales for the first half of 2019. A four percent increase in sales volume positively impacted the year-over-year change in net sales by$27.5 million . The unfavorable impact of foreign currency translation and lower selling prices negatively impacted the year-over-year change in net sales by$23.7 million and$7.4 million , respectively. A year-over-year comparison of net sales by region follows: For the Six Months Ended Increase Percent (In thousands) June 30, 2020 June 30, 2019 (Decrease) Change North America$ 415,517 $ 406,017 $ 9,500 2 Europe 115,472 125,838 (10,366 ) -8 Latin America 102,704 104,769 (2,065 ) -2 Asia 25,713 26,406 (693 ) -3 Total Surfactants Segment$ 659,406 $ 663,030 $ (3,624 ) -1 Net sales for North American operations increased$9.5 million , or two percent, year-over-year. A four percent increase in sales volume positively impacted the year-over-year change in net sales by$16.9 million . The sales volume growth was primarily due to higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning, disinfection and personal wash products as a result of COVID-19, partially offset by lower demand in the functional product end markets, principally agricultural and oilfield. Lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by$7.0 million and$0.4 million , respectively. 32 -------------------------------------------------------------------------------- Net sales for European operations decreased$10.4 million , or eight percent, primarily due to an eight percent decrease in sales volume and the unfavorable effects of foreign currency translation. These items negatively impacted the year-over-year change in net sales by$9.8 million and$3.1 million , respectively. The lower sales volume reflects lost business at one customer that was partially offset by increased demand for cleaning and disinfection products as a result of COVID-19 and higher demand for products sold into the agricultural end market. A strongerU.S. dollar relative to the European euro and British pound sterling led to the foreign currency translation effect. Higher selling prices favorably impacted the year-over-year change in net sales by$2.5 million . Net sales for Latin American operations decreased$2.1 million , or two percent, primarily due to the unfavorable impact of foreign currency translation which negatively impacted the year-over-year change in net sales by$20.9 million . The year-over-year strengthening of theU.S. dollar against the Brazilian real, Mexican peso and the Colombian peso led to the foreign currency effect. Largely offsetting the foreign currency translation impact was sales volume growth of 17 percent and slightly higher average selling prices. These items positively impacted the change in net sales by$17.4 million and$1.4 million , respectively. The sales volume growth was driven by higher demand for products sold into the consumer products end markets, driven by increased demand for cleaning and disinfection products, and a fully operationalEcatepec, Mexico facility in 2020. Net sales for Asian operations decreased$0.7 million , or three percent, primarily due to lower average selling prices and a two percent decline in sales volume. These items unfavorably impacted the year-over-year change in net sales by$0.8 million and$0.5 million , respectively. The lower sales volume was largely due to lower demand for products sold to our distribution partners partially offset by higher demand for products sold to the agricultural end market. The favorable impact of foreign currency translation positively impacted the change in net sales by$0.6 million . Surfactant operating income for the first half of 2020 increased$15.4 million , or 22 percent, versus operating income for the first half of 2019. Gross profit increased$14.7 million , or 13 percent, year-over-year. Operating expenses decreased$0.7 million , or two percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow: For the Six Months Ended Increase Percent (In thousands) June 30, 2020 June 30, 2019 (Decrease) Change Gross Profit North America$ 87,384 $ 82,229 $ 5,155 6 Europe 18,885 17,844 1,041 6 Latin America 19,351 9,803 9,548 97 Asia 6,275 7,346 (1,071 ) -15 Surfactants Segment Gross Profit$ 131,895 $ 117,222 $ 14,673 13 Operating Expenses 47,236 47,969 (733 ) -2 Operating Income$ 84,659 $ 69,253 $ 15,406 22 Gross profit for North American operations increased$5.2 million , or six percent, year-over-year primarily due to the four percent increase in sales volume and higher unit margins. These items positively impacted the change in gross profit by$3.4 million and$1.8 million , respectively. Most of the sales volume increase was attributable to increased demand for cleaning, disinfection and personal wash products as a result of COVID-19. The higher unit margins reflect a more favorable product and customer mix. Gross profit for European operations increased$1.0 million , or six percent, primarily due to higher unit margins. These higher unit margins positively impacted the year-over-year change in gross profit by$3.0 million . The higher unit margins were attributable to a more favorable product and customer mix in the first half of 2020 primarily resulting from higher demand in the agricultural end market and lower demand for commodity softeners. An eight percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in gross profit by$1.4 million and$0.6 million , respectively. The decline in sales volume primarily reflects lost business at one customer. Gross profit for Latin American operations increased$9.5 million , or 97 percent, primarily due to higher unit margins and sales volume growth of 17 percent. These items positively impacted the change in gross profit by$12.4 million and$1.6 million , respectively. The higher unit margins primarily reflect the Company's Mexican sites being fully operational in 2020 versus the prior year whenMexico incurred higher freight and supply chain expenses as a result of the 2019 sulfonation equipment failure at theEcatepec, Mexico site. The sales volume growth was driven by higher demand for products sold into the consumer products end markets, driven by increased demand for cleaning and disinfection products, and a fully operationalEcatepec, Mexico facility in 2020. The unfavorable impact of foreign currency translation negatively impacted gross profit by$4.5 million . 33
--------------------------------------------------------------------------------
Gross profit for Asian operations decreased
Operating expenses for the Surfactant segment decreased
Polymers Polymers net sales for the first half of 2020 decreased$41.9 million , or 16 percent, versus net sales for the same period of 2019. An 11 percent decrease in sales volume negatively impacted the year over year change in net sales by$28.2 million . The unfavorable impact of lower average selling prices and foreign currency translation negatively impacted the year-over-year change in net sales by$9.1 million and$4.6 million , respectively. A year-over-year comparison of net sales by region follows: For the Six Months Ended (Dollars in thousands) June 30 June 30 Increase Percent Net Sales 2020 2019 (decrease) change North America$ 130,621 $ 157,757 $ (27,136 ) -17 Europe 69,252 86,190 (16,938 ) -20 Asia and Other 19,027 16,868 2,159 13 Total Polymers Segment$ 218,900 $ 260,815 $ (41,915 ) -16 Net sales for North American operations declined$27.1 million , or 17 percent, primarily due to a 15 percent decline in sales volume. The decline in sales volume negatively impacted the year-over-year change in net sales by$23.3 million . Sales volume of polyols used in rigid foam applications decreased one percent during the first half of 2020 due to COVID-19 related construction project delays and cancellations. Sales volume of phthalic anhydride decreased 51 percent due to share loss at one customer and soft market demand. Lower average selling prices negatively impacted the change in net sales by$3.8 million . The lower average selling prices reflect lower raw material market prices. Net sales for European operations decreased$16.9 million , or 20 percent. A 12 percent decrease in sales volume, the unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the year-over-year change in net sales by$10.5 million ,$3.6 million and$2.8 million , respectively. The decline in sales volume principally reflects softer demand due to deferred and canceled construction projects as a result of COVID-19. A strongerU.S. dollar relative to the Polish zloty led to the foreign currency translation impact. The lower average selling prices reflect lower raw material prices. Net sales forAsia and Other operations increased$2.2 million , or 13 percent, primarily due a 28 percent increase in sales volume. The sales volume growth, which positively impacted the change in net sales by$4.7 million , was primarily attributable to higher demand in livestock and cold storage markets. Lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by$1.5 million and$1.0 million , respectively. The lower average selling prices reflect lower raw material prices. Polymer operating income for the first half of 2020 declined$11.8 million , or 34 percent, from operating income for the first half of 2019. Gross profit decreased$12.1 million , or 25 percent, primarily due to the 11 percent decline in sales volume. The first half 2020 results were favorably impacted by a partial government reimbursement related to the government-mandated China JV shutdown in 2012 ($1.1 million ) and a European vendor claim settlement related to a prior year raw material contamination issue ($0.5 million ). Operating expenses decreased two percent year-over-year. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow: For the Six Months Ended Increase Percent (In thousands) June 30, 2020 June 30, 2019 (Decrease) Change Gross Profit and Operating Income North America$ 20,437 $ 34,644 $ (14,207 ) -41 Europe 11,847 11,986 (139 ) -1 Asia and Other 4,510 2,310 2,200 95 Polymers Segment Gross Profit$ 36,794 $ 48,940 $ (12,146 ) -25 Operating Expenses 13,751 14,075 (324 ) -2
Polymers Segment Operating Income
34
--------------------------------------------------------------------------------
Gross profit for North American operations declined $14.2 million , or 41
percent, primarily due to lower unit margins and the 15 percent decline in sales
volume. These two items negatively impacted the year-over-year change in gross
profit by $9.1 million and $5.1 million , respectively. The decline in margins
was primarily attributable to the first quarter 2020 incident at the Company's
Millsdale, IL facility which forced a temporary production shutdown and resulted
in higher maintenance, supply chain costs and unit overhead rates. In addition,
higher cost raw material inventory carried over from the first quarter due to
the Millsdale incident. The decrease in sales volume primarily reflects COVID
-19 construction project delays and cancellations and soft phthalic anhydride
market demand.
Gross profit for European operations declined $0.1 million , or one percent,
primarily due to 12 percent decrease in sales volume ant the unfavorable impact
of foreign currency translation. These items negatively impacted the change in
gross profit by $1.4 million and $0.6 million , respectively. The decline in
sales volume primarily reflects lower demand for polyols used in rigid foam
applications due to deferred or cancelled construction projects as a result of
COVID-19. Largely offsetting the above were higher unit margins, which
positively impacted the year-over-year change in gross profit by $1.9 million .
The higher unit margins partially reflect a vendor claim settlement during the
second quarter of 2020 and the non-recurrence of a maintenance shutdown in
Germany during the first quarter of 2019.
Gross profit for Asia and Other operations improved $2.2 million , or 95 percent,
due to higher unit margins and 28 percent sales volume growth during the first
half of 2020. These items positively impacted the year-over-year change in gross
profit by $1.7 million and $0.6 million , respectively. Unit margins benefited
from a partial government reimbursement related to the government-mandated China
JV shutdown in 2012 ($1.1 million ). Foreign currency translation negatively
impacted the change in gross profit by $0.1 million .
Operating expenses for the Polymers segment decreased
Specialty Products
Net sales for the first half of 2020 declined$6.1 million , or 16 percent, versus net sales for the same period of 2019. This decrease was primarily due to a four percent decrease in sales volume and lower average selling prices. Gross profit and operating income both decreased$1.9 million year-over-year primarily due to order timing differences within the food and flavor business.
Corporate Expenses
Corporate expenses, which include deferred compensation, business restructuring and other operating expenses that are not allocated to the reportable segments, decreased$12.1 million between years. Corporate expenses were$30.3 million in the first half of 2020 versus$42.4 million in the first half of 2019. This decrease was primarily attributable to lower deferred compensation expense ($10.7 million ), lower business restructuring expenses ($0.6 million ) and lower environmental remediation expenses. Deferred compensation expense decreased$10.7 million between years. This decrease was primarily due to a$5.34 per share decrease in the market price of the Company's common stock in the first half of 2020 compared to a$17.91 per share increase in the first half of 2019. The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expenses for the six months endedJune 30, 2020 and 2019: 2020 2019 2018 June 30 December 31 June 30 December 31 Company Common Stock Price$ 97.10 $ 102.44 $ 91.91 $ 74.00
LIQUIDITY AND CAPITAL RESOURCES
Overview
For the six months endedJune 30, 2020 , operating activities were a cash source of$58.5 million versus a source of$78.8 million for the comparable period in 2019. For the current year period, investing cash outflows totaled$54.4 million versus a cash outflow of$43.1 million in the prior year period. Financing activities were a use of$40.4 million versus a use of$61.4 million in the prior year period. Cash and cash equivalents decreased by$42.5 million compared toDecember 31, 2019 , inclusive of a$6.2 million unfavorable foreign exchange rate impact. AtJune 30, 2020 , the Company's cash and cash equivalents totaled$272.9 million . Cash inU.S. money market funds, deposit accounts and a certificate of deposit totaled$93.2 million ,$29.5 million and$45.0 million , respectively. The Company's non-U.S. subsidiaries held$105.2 million of cash outsidethe United States as ofJune 30, 2020 . 35
--------------------------------------------------------------------------------
Operating Activity
Net income increased by
Year-to-date accounts receivable were a use of$23.3 million compared to a use of$6.9 million for the comparable period in 2019. Inventories were a use of$9.7 million in 2020 versus a source of$15.5 million in 2019. Accounts payable and accrued liabilities were a use of$8.3 million in 2020 compared to a use of$33.9 million for the same period in 2019. Working capital requirements were higher in the first half of 2020 compared to 2019 primarily due to the changes noted above. The higher accounts receivables cash usage in 2020 was primarily due to higher sales volume within the consumer product end markets to support increased demand for cleaning, disinfection and personal wssh products as a result of COVID-19. The current year's increase in inventories cash usage versus 2019 reflects a build-up of raw material inventories in 2020 versus a reduction of raw material inventories in 2019. Most of the 2020 raw material inventory build was undertaken to support the higher finished goods demand within the consumer product end markets and to provide Polymer-related safety stock in advance of theIllinois River lock closures. It is management's opinion that the Company's liquidity is sufficient to provide for potential increases in working capital requirements during 2020.
Investing Activity
Cash used for investing activities increased by$11.3 million year-over-year. In the first quarter of 2020, the Company acquired certain assets ofLogos Technologies LLC's NatSurFact® rhamnolipid-based line of bio-surfactants for$2.0 million . Cash used for capital expenditures was$54.7 million in the first half of 2020 versus$45.1 million in the comparable prior year period.
For 2020, the Company estimates that total capital expenditures will range from
Financing Activity
Cash used for financing activities was$40.4 million in 2020 versus$61.4 million in 2019. Most of this decrease is attributable to the non-recurrence of the voluntary repayment of outstanding principal balance of the Company's 5.88 percent Senior Notes in the second quarter of 2019. 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 benefit plans. The Company may, from time to time, seek to retire or purchase additional amounts of its outstanding equity and/or 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 theSEC . 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. In the six months endedJune 30, 2020 , the Company purchased 160,780 shares of its common stock on the open market at a total cost of$13.8 million . As ofJune 30, 2020 , there were 189,050 shares remaining under the current share repurchase authorization.
Debt and Credit Facilities
Consolidated balance sheet debt decreased to$207.9 million as ofJune 30, 2020 from$222.1 million atDecember 31, 2019 . Net debt (which is defined as total debt minus cash - see the Reconciliation of Non-GAAP Net Debt section of this MD&A) increased by$28.3 million in the first half of 2020, from a negative$93.3 million to a negative$65.0 million . This net debt change was due to cash and debt reductions of$42.5 million and$14.2 million , respectively. The lower cash was partially due to higher working capital requirements in the first half of 2020. As ofJune 30, 2020 , the ratio of total debt to total debt plus shareholders' equity was 18.8 percent compared to 19.9 percent atDecember 31, 2019 . As ofJune 30, 2020 , the ratio of net debt to net debt plus shareholders' equity was negative 7.8 percent versus negative 11.7 percent as ofDecember 31, 2019 . See the "Reconciliation of Non-GAAP Net Debt" section in this MD&A. AtJune 30, 2020 , the Company's debt included$207.9 million of unsecured private placement loans with maturities ranging from 2020 through 2027, which were issued to insurance companies pursuant to note purchase agreements (the Note Purchase Agreements). These notes are the Company's primary source of long-term debt financing and are supplemented by bank credit facilities to meet short and medium-term needs. 36 -------------------------------------------------------------------------------- OnJanuary 30, 2018 , the Company entered a five-year committed$350 million multi-currency revolving credit facility with a syndicate of banks that matures onJanuary 30, 2023 . This credit agreement allows the Company to make unsecured borrowings, as requested from time to time, to finance working capital needs, permitted acquisitions, capital expenditures and for general corporate purposes. This unsecured facility is the Company's primary source of short-term borrowings. As ofJune 30, 2020 , the Company had outstanding letters of credit totaling$5.5 million under the revolving credit agreement and no borrowings, with$344.5 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 expenditure programs and acquisitions. AtJune 30, 2020 , the Company's foreign subsidiaries had no outstanding debt. The Company has 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 treasury shares. As ofJune 30, 2020 , testing for these agreements was based on the Company's consolidated financial statements. 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
4. The Company is permitted to pay dividends and purchase treasury shares after
income and cash proceeds of stock option exercises, measured cumulatively
beginning
been paid within this limitation is disclosed as unrestricted retained
earnings in Note 14 to the condensed consolidated financial statements.
The Company believes it was in compliance with all of its loan agreements as of
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 six months of 2020 and 2019, the Company's expenditures for capital projects related to the environment were$2.1 million and$0.7 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$17.6 million and$15.2 million for the six months endedJune 30, 2020 and 2019, respectively. Over the years, the Company has received requests for information related to or has been named by the government as a PRP 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 the 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 required 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$22.7 million to$41.7 million atJune 30, 2020 , compared to$25.9 million to$43.7 million atDecember 31, 2019 . Within the range of possible environmental losses, management currently concluded that no single amount is more likely to occur than any other 37 -------------------------------------------------------------------------------- amounts in the range and, thus, has accrued at the lower end of the range; that accrual totaled$22.7 million atJune 30, 2020 and$25.9 million atDecember 31, 2019 . Because the liabilities accrued are estimates, actual amounts could differ materially from the amounts reported. Cash expenditures related to legal and environmental matters were$3.1 million for the six months endedJune 30, 2020 , compared to$2.5 million for the same period in 2019. 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 upon 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 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 withSEC , which are available upon request from the Company. See also Note 8, Contingencies, to the condensed consolidated financial statements for a summary of the environmental proceedings related to certain environmental sites. 38
--------------------------------------------------------------------------------
OUTLOOK
Management believes 2020 will be a challenging year as a result of the global pandemic but believes the Company is better positioned to perform than many others. Management believes the Company's Surfactant segment should benefit from higher demand in the consumer product end market, driven by increased demand for cleaning, disinfection and personal wash products. With lower oil prices management believes demand for surfactants in the oilfield market will remain down for the balance of 2020. Management believes its Polymer segment will be challenged for the remainder of the year as construction projects are deferred or canceled as a result of COVID-19. Management continues to anticipate higher North American costs due to theIllinois River lock closures occurring during the second half of 2020. Management believes the long-term prospects for the Polymer segment remain attractive because of ongoing energy conservation efforts and more stringent building codes. Management believes full year Specialty Products results will approximate 2019 results.
CRITICAL ACCOUNTING POLICIES
There have been no changes to the critical accounting policies disclosed in the Company's 2019 Annual Report on Form 10-K.
RECONCILIATION OF NON-GAAP ADJUSTED NET INCOME AND EARNINGS PER SHARE
Three Months Ended June 30
(In millions, except per share amounts) 2020 2019
Net Income Diluted EPS Net Income Diluted EPS
Net Income Attributable to the Company
as Reported $ 35.7 $ 1.54 Deferred Compensation Expense (including
related investment activity) 2.5 0.10 1.6 0.07 Business Restructuring Expense 0.2 0.01 0.5 0.02 Cash-settled SARs Expense 0.7 0.03 0.3 0.01 Environmental Remediation Expense - - 2.9 0.12 Early Debt Repayment Expense - - 1.2 0.05 Cumulative Tax Effect on Above Adjustment Items (0.8 ) (0.03 ) (1.6 ) (0.07 ) Adjusted Net Income$ 38.3 $ 1.65 $ 35.1 $ 1.50 Six Months Ended June 30 (In millions, except per share amounts) 2020 2019 Net Income Diluted EPS Net Income Diluted EPS Net Income Attributable to the Company as Reported$ 63.3 $ 2.72
Deferred Compensation (Income) Expense (including related investment activity) (1.2 ) (0.05 ) 6.7 0.29 Business Restructuring Expense 0.6 0.03 1.2 0.05 Cash-settled SARs (Income) Expense (0.4 ) (0.02 ) 1.9 0.08 Environmental Remediation Expense - - 2.9 0.12 Early Debt Repayment Expense - - 1.3 0.06 Cumulative Tax Effect on Above Adjustment Items 0.2 0.01 (3.4 ) (0.15 ) Adjusted Net Income$ 62.5 $ 2.69 $ 65.8 $ 2.82 The Company believes that certain non-GAAP measures, when presented in conjunction with comparable GAAP measures, are useful for evaluating the Company's operating performance and provide better clarity on the impact of non-operational items. Internally, the Company uses this non-GAAP information as an indicator of business performance and evaluates management's effectiveness with specific reference to these indicators. These measures should be considered in addition to, not a substitute for or superior to, measures of financial performance prepared in accordance with GAAP. The Company's definitions of these adjusted measures may differ from similarly titled measures used by other entities. The cumulative tax effect was calculated using the statutory tax rates for the jurisdictions in which the noted transactions occurred. 39
--------------------------------------------------------------------------------
RECONCILIATION OF NON-GAAP NET DEBT
The Company uses the non-GAAP net debt metric to gain a more complete picture of the Company's overall liquidity, financial flexibility and leverage level. This adjusted measure should be considered supplemental to and not a substitute for financial information prepared in accordance with GAAP. The Company's definition of this adjusted measure may differ from similarly titled measures used by other entities. The Company had negative net debt onJune 30, 2020 as cash balances of$272.9 million exceeded total debt of$207.9 million . June 30, December 31, (In millions) 2020 2019 Current Maturities of Long-Term Debt as Reported$ 23.6 $ 23.6 Long-Term Debt as Reported 184.3 198.5 Total Debt as Reported 207.9 222.1 Less Cash and Cash Equivalents as Reported (272.9 ) (315.4 ) Net Debt$ (65.0 ) $ (93.3 ) Equity$ 897.4 $ 891.8 Net Debt plus Equity$ 832.4 $ 798.5 Net Debt/Net Debt plus Equity -8 % -12 % 40
--------------------------------------------------------------------------------
© Edgar Online, source
