What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-07-30 compared with 2020-04-30 · 416 added, 196 removed, 218 unchanged (74% of the section changed)

16 unchanged sentences

(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 integrate acquisitions;

(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;

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The overall business comprises three reportable segments:

Surfactants – Surfactants, which accounted for 72 percent of Company consolidated net sales for the first three months 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 quaternary compounds, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites.

Surfactants are manufactured at five U.S.

sites, two European sites (United Kingdom

and France), five Latin American sites (one site in Colombia and two sites in each of Mexico and Brazil) and two Asian sites (Philippines an d Singapore).

Recent significant events include:

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

quaternary compounds, lubricating ingredients, emulsifiers for spreading agricultural products and industrial applications such as latex systems, plastics and composites.

Surfactants are manufac tured at five sites in the United States, two European sites (United Kingdom and France), five Latin American sites (one site in Colombia and two sites in both Brazil and Mexico) and two Asian sites (Philippines and Singapore).

Recent significant events in clude:

On January 19, 2020, the Company experienced a power disruption that impacted its Millsdale, Illinois facility.

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These bio-surfactants offer synergies in several strategic end use markets including oilfield, agriculture, personal care and household, industrial and institutional.

The Company will focus efforts to further develop, integrate and commercialize these unique surfactants moving forward.

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 its customers.

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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 with the oilfield markets.

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).

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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 will continue in 2020 (see Note 16, Business Restructuring , for additional details).

Polymers – Polymers, which accounted for 24 percent of consolidated net sales for the first three months 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 products).

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.

Powdered polyester resins are used in coating applications.

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Recent significant events include:

The operational issues at the Company’s Millsdale, Illinois facility, described in the significant event paragraph above, negatively impacted Polymers earnings during the first quarter of 2020.

Specialty Products – Specialty products, which accounted for four percent of consolidated net sales for the first three months of 2020, include flavors, emulsifiers and solubilizers used in food, flavoring, nutritional supplement and pharmaceutical applications.

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.

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The assets acquired were primarily intangibles, including trademarks and know-how ($1,392,000) and patents ($464,000).

Additionally, $612,000 of laboratory equipment was acquired.

Additionally, $184,000 of laboratory equipment was acquired (see Note 17, Acquisitions , for additional details).

Deferred Compensation Plans

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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 table:

Income (Expense)

For the Three Months

Ended March 31

Ended June 30

(In millions)

Deferred Compensation (Administrative expense)

Realized/Unrealized Gains (Losses) on Investments (Other, net)

Deferred Compensation (Operating expenses)

Realized/Unrealized Gains on Investments (Other, net)

Investment Income (Other, net)

Pretax Income Effect

Income (Expense)

For the Six Months

Ended June 30

(In millions)

Deferred Compensation (Operating expenses)

Realized/Unrealized Gains on Investments (Other, net)

Investment Income (Other, net)

Pretax Income Effect

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

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dollar results).

The following table presents the effects that foreign currency translation had on the period-over-period changes in consolidated net sales and various income statement line items for the three months ended March 31, 2020 and 2019:

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 ended June 30, 2020 and 2019:

Three Months Ended

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Pretax Income

Six Months Ended

(In millions)

Due to Foreign

Operating Income

Pretax Income

RESULTS OF OPERATIONS

Three Months Ended March 31, 2020 and 2019

Net income attributable to the Company for the first quarter of 2020 increased 10 percent to $27.5 million, or $1.18 per diluted share, from $25.0 million, or $1.07 per diluted share, for the first quarter of 2019.

Adjusted net income decreased 21 percent to $24.2 million, or $1.04 per diluted share, from $30.6 million, or $1.31 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 a reconciliation 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 quarter-over-quarter changes in net sales, profits and expenses.

A detailed discussion of segment operating performance for the first quarter of 2020 compared to the first quarter of 2019 follows the summary.

Consolidated net sales decreased $39.2 million, or eight percent, between quarters.

Lower average selling prices negatively impacted the quarter-over-quarter change in net sales by $18.0 million.

The decrease in average selling pric es was primarily due to the pass through of lower raw material costs.

Consolidated sales volume decreased three percent, which had a $13.0 million unfavorable impact on the quarter-over-quarter change in net sales.

Most of the sales volume decline result ed from the production and operational issues at the Company’s Millsdale, IL facility in the first quarter of 2020.

Sales volume decreased for each of the three segments.

Foreign currency translation negatively impacted the quarter-over-quarter change in net sales by $8.2 million due to a stronger U.S.

dollar against most currencies where the Company has foreign operations.

Operating income for the first quarter of 2020 increased $10.3 million, or 35 percent, versus operating income for the first quarter of 2019.

Most of this increase reflects lower deferred compensation expenses in 2020.

Deferred compensation expenses declined $14.8 million quarter-over-quarter.

From a segment perspective, Polymer and Surfactant operating income declined $4.6 million and $1.0 million, respectively.

Specialty Products operating income improved $0.9 million.

Business restructuring expenses were $0.4 million lower in the current year quarter and corporate expenses (excluding deferred compensation and business restructuring expense) were relatively flat with prior year.

Foreign currency translation had a $0.8 million unfavorable impact on consolidated operating income quarter-over-quarter.

Operating expenses (including deferred compensation and business restructuring expense) decreased $15.6 million, or 28 percent, between quarters.

Three Months Ended June 30, 2020 and 2019

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 stronger U.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 decreased $0.4 million, or three percent, quarter-over-quarter.

Administrative expenses decreased $0.4 million, or two percent, quarter-over-quarter.

Research, development and technical service (R&D) expenses increased $0.4 million, or three percent, quarter-over-quarter.

Deferred compensation expense decreased $14.8 million, quarter-over-quarter, primarily due to a $13.98 per share decrease in the market price of Company common stock in the first quarter 2020 compared to a $13.52 per share increase in the first quarter of 2019.

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 $0.8 million, or four percent, primarily due to lower environmental remediation expenses in 2020.

Research, development and technical service (R&D) expenses increased $0.2 million, or one percent.

Deferred compensation expense increased $4.1 million primarily due to a $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 in the second quarter of 2019.

See the Overview and Segment Results-Corporate Expenses sections of this MD&A for further details.

Business restructuring expenses totaled $0.4 million in the first quarter of 2020 versus $0.7 million in 2019.

The 2020 restructuring expenses included ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada that ceased operations in the fourth quarter of 2016 ($0.3 million) and decommissioning costs associated with Company’s 2018 sulfonation shut down in Germany ($0.1 million).

The 2019 restructuring charges were primarily comprised of severance and office shutdown expenses related to restructuring efforts within Specialty Products ($0.5 million) and decommissioning costs associated with the Canadian plant closure ($0.3 million).

Net interest expense for the first quarter of 2020 decreased $0.6 million, or 34 percent, versus the first quarter of 2019.

This decrease was primarily attributable to lower interest expense resulting from scheduled debt repayments and the Company’s voluntary prepayment of its 5.88 percent Senior Notes in the second quarter of 2019.

Partially offsetting the above was lower interest income which reflects lower interest rates due to global market conditions.

Other, net was $3.3 million of expense in the first quarter of 2020 versus $3.1 million of income in the first quarter of 2019.

The Company recognized $3.8 million of investment losses (including realized and unrealized gains and losses) for the Company’s deferred compensation and supplemental defined contribution mutual fund assets in the first quarter of 2020 compared $2.5 million of investment income in last year’s first quarter.

In addition, the Company reported $0.6 million of foreign exchange gains in both the first quarter of 2020 and 2019.

The Company also reported $0.1 million of higher net periodic pension cost expense in the first quarter of 2020 versus the prior year.

The Company’s effective tax rate was 22.5 percent in the first quarter of 2020 versus 19.5 percent in the first quarter of 2019.

The quarter-over-quarter increase was primarily attributable to lower tax benefits derived from stock-based compensation awards exercised or distributed in the first quarter of 2020 versus the first quarter of 2019.

Business restructuring charges totaled $0.2 million in the second quarter of 2020 versus $0.5 million in 2019.

The 2020 restructuring charges reflect ongoing decommissioning costs associated with the Company’s manufacturing facility in Canada ($0.2 million).

The 2019 restructuring charges included decommissioning costs associated with the 2016 Canadian plant closure ($0.2 million), decommissioning expenses associated with the 2018 sulfonation shutdown in Germany ($0.2 million) and costs related to the 2019 Specialty Product restructuring ($0.1 million).

See Note 16, Business Restructuring , for additional details.

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 C ompany 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 higher U.S.

tax impact on foreign earnings and profits in the second quarter of 2020 versus 2019.

Segment Results

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Total Operating Income

Surfactants net sales for the first quarter of 2020 decreased $22.6 million, or six percent, versus net sales for the first quarter of 2019.

The unfavorable impact of lower selling prices, foreign currency translation and lower selling prices negatively impacted the quarter-over-quarter change in net sales by $12.7 million, $6.5 million and $3.4 million, respectively.

A quarter-over-quarter comparison of net sales by region follows:

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:

For the Three Months Ended

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Total Surfactants Segment

Net sales for North American operations decreased $6.4 million, or three percent, between quarters.

Lower average selling prices negatively impacted the quarter-over-quarter change in net sales by $8.8 million.

Selling prices decreased four percent mostly due to the pass through of lower raw material costs to customers.

Sales volume growth of one percent positively impacted the change in net sales by $2.5 million.

The sales volume increase was mostly due to higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning and disinfection products as a result of COVID-19, partially offset by lower demand in the functional products end market, principally agricultural and oilfield.

Sales volume was also negatively impacted by plant operational issues at the Millsdale, IL site during the first quarter of 2020.

Foreign currency translation negatively impacted the quarter-over-quarter change in net sales by $0.1 million.

Net sales for European operations decreased $11.8 million, or 17 percent, between quarters.

A 14 percent decline in sales volume, the unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the quarter-over-quarter change in net sales by $9.8 million, $1.5 million and $0.5 million, respectively.

The lower sales volume primarily reflects lost business at one customer 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 markets.

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 declined $4.3 million, or eight percent, primarily due to the unfavorable impact of foreign currency translation and lower selling prices.

These items negatively impacted the quarter-over quarter change in nets sales by $5.1 million and $2.0 million, respectively.

The quarter-over-quarter strengthening of the U.S.

dollar against the Brazilian real,

Mexican peso and the Colombian peso generated the unfavorable foreign currency effect.

Sales volume grew six percent in the quarter and positively impacted the change in net sales by $2.8 million.

This sales volume growth primarily reflects higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning and disinfection products.

In addition, prior year sales volume was negatively impacted by a sulfonation equipment failure at the Company’s Ecatepec, Mexico facility.

Net sales for Asian operations were flat quarter-over-quarter.

A three percent decline in sales volume was largely offset by the favorable impact of foreign currency translation.

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 markets.

Surfactants operating income for the first quarter of 2020 decreased $1.0 million, or three percent, over operating income for the first quarter of 2019.

Gross profit declined $1.1 million and operating expenses were slightly lower versus prior year.

Quarter-over-quarter comparisons of gross profit by region and total segment operating expenses and operating income follow:

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

(Dollars in thousands)

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Gross Profit and Operating Income

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Surfactants Segment Operating Income

Gross profit for North American operations decreased $1.9 million, or four percent, between quarters primarily due to lower unit margins.

The lower unit margins negatively impacted the change in gross profit by $2.4 million.

The lower unit margins principally reflect higher maintenance and supply chain expenses incurred as a result of the incident at the Company’s Millsdale, IL site.

Sales volume grew one percent and positively impacted the change in gross profit by $0.5 million.

Sales volume was negatively impacted by the first quarter operational issues at the Company’s Millsdale, IL facility.

Gross profit for European operations decreased $0.9 million, or nine percent, primarily due a 14 percent decline in sales volume and the unfavorable impact of foreign currency translation.

These items negatively impacted the quarter-over-quarter change in gross profit by $1.4 million and $0.3 million, respectively.

Higher unit margins positively impacted the quarter-over-quarter change in gross profit by $0.8 million.

The higher unit margins were attributable to a more favorable product mix in the first quarter of 2020 primarily resulting from higher demand in the agricultural end markets and lower demand for commodity softeners.

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.

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 mor e 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 dec line 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 quarter-over-quarter change in gross profit by $4.2 million.

The higher unit margins primarily reflect the Company’s Mexican sites being fully operational in 2020 versus 2019 when Mexico incurred higher freight and supply chain expenses as a result of the sulfonation equipment failure at the Company’s Ecatepec, Mexico facility.

Sales volume growth of six percent positively impacted the quarter-over-quarter change in gross profit by $0.2 million.

The unfavorable impact of foreign currency translation negatively impacted the current year quarter by $0.9 million.

Gross profit for Asia operations decreased $1.8 million, or 45 percent, between quarters largely due to lower unit margins and lower sales volumes.

These items negatively impacted gross profit by $1.7 million and $0.1 million, respectively.

The lower unit margins are primarily due to higher unit overhead costs in Singapore due to unfavorable production timing differences.

Operating expenses for the Surfactants segment decreased $0.1 million quarter-over-quarter.

Polymers net sales for the first quarter of 2020 decreased $13.7 million, or 11 percent, versus net sales for the same period of 2019.

A nine percent decrease in sales volume negatively impacted the quarter-over-quarter change in net sales by $10.5 million.

The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the quarter-over-quarter change in net sales by $1.7 million and $1.5 million, respectively.

A quarter-over-quarter comparison of net sales by region follows:

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 $0.6 million, or three percent, in the second quarter of 2020 versus the second quarter of 2019.

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

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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 quarter-over-quarter change in net sales by $10.2 million.

Sales volume of polyols used in rigid foam applications increased four percent during the quarter but was outweighed by a 61 percent decline in phthalic anhydride volume.

The phthalic anhydride decrease was largely related to the first quarter 2020 incident at the Company’s Millsdale, IL facility which forced the Company to temporarily halt phthalic anhydride production and declare force majeure for this product line.

The Millsdale, IL facility was fully operational prior to the end of the first quarter.

Higher average selling prices positively impacted the change in net sales by $0.7 million.

Net sales for European operations declined $5.5 million or 13 percent, quarter-over-quarter.

A five percent decrease in sales volume, lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $2.2 million, $2.0 million and $1.3 million, respectively.

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.

Net sales for Asia and Other operations increased $1.3 million, or 20 percent, primarily due to an 18 percent increase in sales volume and higher average selling prices.

These two items positively impacted the quarter-over-quarter change in net sales by $1.2 million and $0.5 million, respectively.

The higher sales volume was primarily due to higher demand in livestock and cold storage markets.

The unfavorable impact of foreign currency translation negatively impacted the quarter-over-quarter change in net sales by $0.4 million.

Polymers operating income for the first quarter of 2020 declined $4.6 million, or 38 percent, versus operating income for the first quarter of 2019.

Gross profit decreased $4.7 million, or 24 percent, primarily due to the nine percent decline in sales volume and lower unit margins.

The lower unit margins principally reflect higher maintenance, supply chain costs and unit overhead rates incurred as a result of the first quarter 2020 incident at the Company’s Millsdale, IL site.

Operating expenses declined two percent quarter-over-quarter.

Quarter-over-quarter comparisons of gross profit by region and total segment operating expenses and operating income follow:

The lower selling prices reflect lower raw material prices.

Net sales for Asia and Other operations increased $0.8 million, or eight percent, primarily due to a 35 percent increase in sales volume.

The sales volume growth, which positively impacted the change in net sales by $3.5 million, was primarily attributable to higher demand in livestock and cold storage markets.

Lower selling prices and the unfavorable impact of foreign currency translation negatively impacted the change in net sales by $2.1 million and $0.6 million, respectively.

The lower selling prices reflect lower raw material prices.

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

2012 ($1.1 million) and a European vendor claim settlement related to a prior year raw material contamin ation 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

(Dollars in thousands)

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Gross Profit and Operating Income

4 unchanged sentences

Polymers Segment Operating Income

Gross profit for North American operations declined $5.2 million, or 40 percent, primarily due to lower unit margins and the 14 percent decline in sales volume.

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.

Both the decline in margins and volume resulted from 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.

Gross profit for European operations was flat between quarters.

Higher unit margins positively impacted the quarter-over-quarter change in gross profit by $0.5 million.

These higher unit margins reflect lower overhead in the current year due to the non-recurrence of a maintenance shutdown in Germany in the first quarter of 2019.

These higher unit margins were offset by a five percent decline in sales volume and the unfavorable impact of foreign currency translation.

These items negatively impacted the

change in gross profit by $0.3 million and $0.2 million respectively.

The decline in sales volume principally reflects softer demand due to deferred or canceled construction projects as a result of COVID-19.

Gross profit for Asia and Other operations improved $0.5 million primarily due higher unit margins and sales volume growth of 18 percent.

Operating expenses for the Polymers segment decreased $0.1 million, or two percent, quarter-over-quarter.

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 for Asia 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 $0.2 million, or three percent, in the second quarter of 2020 versus the second quarter of 2019.

Specialty Products

Specialty Products net sales decreased $2.9 million, or 15 percent, versus net sales in the first quarter of 2019 due to an eight percent decrease in sales volume and lower average selling prices.

Gross profit and operating income each increased by $0.9 million.

These increases primarily reflect improved margins and volume within the Company’s medium chain triglycerides product line driven by strong demand in the infant nutrition market.

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, decreased $15.0 million between quarters.

Corporate expenses were $7.7 million in the first quarter of 2020 versus $22.7 million in 2019.

This decrease was primarily attributable to lower deferred compensation ($14.8 million) and business restructuring ($0.4 million) expenses in 2020.

The $14.8 million decrease in deferred compensation expense was primarily due to a $13.98 per share decline in the market price of Company common stock in the first quarter of 2020 compared to a $13.52 per share increase in the first 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 ended March 31, 2020 and 2019:

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 ended June 30, 2020 and 2019:

Company Common Stock Price

Six Months Ended June 30, 2020 and 2019

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 stronger U.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 $1.7 million, or six percent, year-over-year 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 $10.7 million year-over-year primarily due to a $5.34 per share decrease in the market price of Company common stock during the first six months of 2020 compared to a $17.91 per 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 $0.6 million in the first half of 2020 compared to $1.2 million in the first half of 2019.

The 2020 restructuring 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 of severance and office shutdown expenses related to the 2019 Netherlands office restructuring ($0.5 million), decommissioning costs associated with the Company’s Canadian plant closure ($0.5 million) and decommissioning expenses associated with the Company’s sulfonation shutdown in Germany ($0.4 million).

(see Note 16, Business Restructuring , for additional 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:

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

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 h alf 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 higher U.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)

Specialty Products

Total Net Sales

For the Six Months Ended

(In thousands)

Operating Income

Specialty Products

Segment Operating Income

Corporate Expenses, Excluding Deferred Compensation and Restructuring

Deferred Compensation Expense (Income)

Business Restructuring

Total Corporate Expenses

Total Operating Income

Segment Results

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

(In thousands)

June 30, 2020

June 30, 2019

North America

Latin America

Total Surfactants Segment

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.

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.

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 p roducts 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.

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 the U.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 operational Ecatepec, 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

(In thousands)

June 30, 2020

June 30, 2019

North America

Latin America

Surfactants Segment Gross Profit

Operating Expenses

Operating Income

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 unfavorable impact of foreign currency translation negatively impacted gross profit by $4.5 million.

Gross profit for Asian operations decreased $1.1 million, or 15 percent, largely due to lower unit margins and lower sales volume.

These items negatively impacted f irst half gross profit by $1.0 million and $0.2 million, respectively.

The lower unit margins partially reflect higher unit overhead costs in Singapore due to unfavorable production timing differences.

The favorable impact of foreign currency translation positively impacted gross profit by $0.1 million.

Operating expenses for the Surfactant segment decreased $0.7 million, or two percent, year-over-year.

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)

North America

Asia and Other

Total Polymers Segment

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 stronger U.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 for Asia 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

(In thousands)

June 30, 2020

June 30, 2019

Gross Profit and Operating Income

North America

Asia and Other

Polymers Segment Gross Profit

Operating Expenses

Polymers Segment Operating Income

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 ite ms 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 te mporary 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 prim arily 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 $0.3 million, or two percent, year-over-year.

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 ended June 30, 2020 and 2019:

Company Common Stock Price

LIQUIDITY AND CAPITAL RESOURCES

For the three months ended March 31, 2020, operating activities were a cash outflow of $6.5 million versus a cash source of $4.4 million for the comparable period in 2019.

For the six months ended June 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 $61.0 million compared to December 31, 2019, inclusive of a $7.2 million unfavorable exchange rate impact.

At March 31, 2020, the Company’s cash and cash equivalents totaled $254.3 million, of which $155.4 million was held within the United States.

money market funds which were rated AAAm by Standard and Poor’s, Aaa-mf by Moody’s and AAAmmf by Fitch totaled $71.8 million.

demand deposit accounts and a certificate of deposit totaled $83.6 million.

Cash and cash equivalents decreased by $42.5 million compared to December 31, 2019, inclusive of a $6.2 million unfavorable foreign exchange rate impact.

At June 30, 2020, the Company’s cash and cash equivalents totaled $272.9 million.

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 $98.9 million of cash outside the United States as of March 31, 2020.

subsidiaries held $105.2 million of cash outside the United States as of June 30, 2020.

Operating Activity

Net income increased by $8.2 million versus the comparable period in 2019.

Working capital was a cash use of $51.0 million in 2020 versus a use of $46.7 million in 2019.

Accounts receivable were a use of $30.8 million in 2020 compared to a use of $17.4 million for the comparable period of 2019.

Working capital was a cash use of $47.4 million during the first half of 2020 versus a use of $29.2 million for the comparable period in 2019.

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 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 during the latter portion of the first quarter to support increased demand for cleaning and disinfection products as a result of COVID-19.

The current year’s lower accounts payable and accrued liabilities cash usage reflect a build-up of raw material inventories in the first quarter of 2020 versus a reduction of raw material inventories in 2019.

A portion of the 2020 raw material inventory build was undertaken to support the higher finished goods demand within the consumer product end markets.

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 the Illinois 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 $9.2 million year-over-year.

Cash used for investing activities increased by $11.3 million year-over-year.

In the first quarter of 2020, the Company acquired certain assets of Logos Technologies LLC's NatSurFact® rhamnolipid-based line of bio-surfactants for $2.0 million.

Cash used for capital expenditures was $33.2 million in the first quarter of 2020 versus $25.7 million in the comparable prior year period.

For 2020, the Company estimates that total capital expenditures will range from $100 million to $120 million including infrastructure and optimization spending in the United States, Germany and Mexico.

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 $100 million to $120 million, inclusive of infrastructure and optimization spending in the United States, Germany and Mexico.

Financing Activity

Cash used for financing activities was $40.4 million in 2020 versus $61.4 million in 2019.

Most of this increase reflects a higher level of share repurchases during the first quarter of 2020 compared to 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.

2 unchanged sentences

The amounts involved may be material.

In the three months ended March 31, 2020, the Company purchased 89,225 shares on the open market at a total cost of $7.2 million.

At March 31, 2020, there were 260,605 shares remaining under the current share repurchase authorization.

In the six months ended June 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 of June 30, 2020, there were 189,050 shares remaining under the current share repurchase authorization.

Debt and Credit Facilities

Consolidated balance sheet debt of $222.1 million was unchanged during the first quarter of 2020 compared to December 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 $61.1 million in the first quarter of 2020, from a negative $93.3 million to a negative $32.2 million, due to a $61.1 million cash reduction.

The first quarter 2020 cash reduction primarily reflects higher working capital requirements which are typical for the Company in the first quarter.

As of March 31, 2020, the ratio of total debt to total debt plus shareholders’ equity was 20.4 percent compared to 19.9 percent at December 31, 2019.

As of March 31, 2020, the ratio of net debt to net debt plus shareholders’ equity was negative 3.9 percent, compared to negative 11.7 percent at December 31, 2019.

Consolidated balance sheet debt decreased to $207.9 million as of June 30, 2020 from $222.1 million at December 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 of June 30, 2020, the ratio of total debt to total debt plus shareholders’ equity was 18.8 percent compared to 19.9 percent at December 31, 2019.

As of June 30, 2020, the ratio of net debt to net debt plus shareholders’ equity was negative 7.8 percent versus negative 11.7 percent as of December 31, 2019.

See the “Reconciliation of Non-GAAP Net Debt” section in this MD&A.

At March 31, 2020, the Company’s debt included $222.1 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).

At June 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.

On January 30, 2018, the Company entered a five-year committed $350 million multi-currency revolving credit facility with a syndicate of banks that matures on January 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 credit agreement allows the Company to make unsecured borrowings, as requ ested 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 of March 31, 2020, the Company had outstanding letters of credit totaling $4.9 million under the revolving credit agreement and no borrowings, with $345.1 million remaining available.

As of June 30, 2020, the Company h ad 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 expenditures and acquisitions.

At March 31, 2020, the Company’s foreign subsidiaries had no outstanding debt.

At June 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 of March 31, 2020, testing for these agreements was based on the Company’s consolidated financial statements.

As of June 30, 2020, testing for these agreements was based on the Company’s consolidated financial statements.

Under the most restrictive of these debt covenants:

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The maximum amount of dividends that could have 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 March 31, 2020.

The Company believes it was in compliance with all of its loan agreements as of June 30, 2020.

ENVIRONMENTAL AND LEGAL MATTERS

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The Company will continue to invest in the equipment and facilities necessary to comply with existing and future regulations.

During the first three months of 2020 and 2019, the Company’s expenditures for capital projects related to the environment were $0.7 million and $0.3 million, respectively.

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 $10.0 million and $7.4 million for the three months ended March 31, 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 potentially responsible party at a number of waste disposal sites where cleanup costs have been or may be incurred under CERCLA and similar state or foreign statutes.

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 ended June 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.

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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 $24.9 million to $43.0 million at March 31, 2020 versus $25.9 million to $43.7 million at December 31, 2019.

Within the range of possible environmental losses, management has currently concluded that no single amount is more likely to occur than any other amounts in the range and, thus, has accrued at the lower end of the range;

these accruals totaled $24.9 million at March 31, 2020 and $25.9 million at December 31, 2019.

Because the liabilities accrued are estimates, actual amounts could differ from the amounts reported.

Cash expenditures related to legal and environmental matters were $0.9 million for the three-month period ended March 31, 2020 compared to $0.2 million for the same period in 2019.

The majority of the 2020 cash expenditures relate to the Company’s Maywood, New Jersey site.

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 at June 30, 2020, compared to $25.9 million to $43.7 million at December 31, 2019.

Within the range of possible environmental losses, management currently concluded that no single amount is more likely to occur than any other

amounts in the range and, thus, has accrued at the lower end of the range;

that accrual totaled $22.7 million at June 30, 2020 and $25.9 million at Decembe r 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 ended June 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.

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See also Note 8, Contingencies , to the condensed consolidated financial statements for a summary of the environmental proceedings related to certain environmental sites.

Management believes 2020 will be a challenging year as a result of the global pandemic and other factors.

However, management also believes that within the current environment the Company is positioned better than many others.

Management believes the Company’s Surfactants segment should benefit from higher demand in the consumer product end markets, driven by increased demand for cleaning and disinfection products.

With dramatically lower oil prices management believes demand for surfactants in the oilfield end market will be down.

Management believes its Polymers segment will be challenged as construction projects are canceled or deferred as a result of COVID-19.

The North American business is also expected to incur higher raw material costs due to the Illinois River lock closures scheduled during the second half of 2020.

Management believes the long-term prospects for Polymers segment remain attractive because of ongoing energy conservation efforts and more stringent building codes.

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 the Illinois 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.

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RECONCILIATION OF NON-GAAP ADJUSTED NET INCOME AND EARNINGS PER SHARE

Three Months Ended March 31

Three Months Ended June 30

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported

Deferred Compensation Expense (including related investment activity)

Business Restructuring

Cash Settled Stock Appreciation Rights

Deferred Compensation Expense (including

related investment activity)

Business Restructuring Expense

Cash-settled SARs Expense

Environmental Remediation Expense

Early Debt Repayment Expense

Cumulative Tax Effect on Above Adjustment Items

Adjusted Net Income

Six Months Ended June 30

(In millions, except per share amounts)

Net Income Attributable to the Company as Reported

Deferred Compensation (Income) Expense (including

related investment activity)

Business Restructuring Expense

Cash-settled SARs (Income) Expense

Environmental Remediation Expense

Early Debt Repayment Expense

Cumulative Tax Effect on Above Adjustment Items

Adjusted Net Income

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.

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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.

RECONCILIATION OF NON-GAAP NET DEBT

Management uses the non-GAAP net debt metric to gain a more complete picture of the Company’s overall liquidity, financial flexibility and leverage level.

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 on June 30, 2020 as cash balances of $272.9 million exceeded total debt of $207.9 million.

(In millions)

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis