Stepan Co: Form 10-Q for the period ended Sep 30, 2020

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 about Stepan 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 ended December 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 Stepan Company and one or more of its subsidiaries only.

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 73 percent of Company consolidated net sales for the first nine 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 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 include:

• 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. These operational issues negatively impacted the Company’s earnings during the first nine months of 2020. The Company’s insurance provider has acknowledged this incident is a covered event. During the third quarter of 2020 the Company recognized $5.0 million partial insurance recovery related to this incident. This insurance recovery was recognized as a reduction of expenses within cost of sales. Surfactant and Polymer segment operating income benefited $2.2 million and $2.8 million, respectively, in the third quarter of 2020. The Company continues to work with its insurance provider on the remainder of the claim.
• In September 2020 the Company, through its subsidiaries in Mexico, acquired Clariant (Mexico) S.A. de C.V.’s (Clariant) anionic surfactant business located in Santa Clara, Mexico. The acquisition did not include the purchase of a manufacturing site. The business acquired will be integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec). This acquisition supports the Company’s growth strategy in Latin America and the Company believes the acquisition will enhance its ability to support customer growth in the Mexican consumer and functional surfactant markets (see Note 17, Acquisitions, for additional details).
• In March 2020 the Company acquired certain assets of Logos 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 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. (see Note 17, Acquisitions, for additional details).
• 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).
• During the fourth quarter of 2018, the Company shut down Surfactant 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 nine 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). 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 the United States, polyurethane polyols and phthalic anhydride are manufactured at the Company’s Millsdale, Illinois, site and specialty polyols are manufactured at the Company’s Columbus, Georgia, site. In Europe, polyurethane polyols are manufactured by the Company’s subsidiary in Germany, and specialty polyols are manufactured by the Company’s Poland subsidiary. In China, polyurethane polyols and specialty polyols are manufactured at the Company’s Nanjing, China, plant. Recent significant events include:
• The operational issues at the Company’s Millsdale, Illinois facility, described in the Surfactants significant events paragraph above, negatively impacted Polymers earnings during the first nine months of 2020. During

the third quarter of 2020, the Polymer segment recognized $2.8 million partial insurance recovery related to the Millsdale incident (see above).

• Specialty Products – Specialty Products, which accounted for three percent of consolidated net sales for the first nine months 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:
• 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).

2020 Acquisitions

Logos Technologies

On March 13, 2020, the Company acquired certain assets of Logos 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).

Clariant (Mexico)

On September 17, 2020 the Company, through its subsidiaries in Mexico, acquired Clariant’s anionic surfactant business and select sulfonation equipment located in Santa Clara, Mexico. The acquisition did not include the purchase of a manufacturing site. The business acquired will be integrated into the Company’s two existing manufacturing sites in Mexico (Matamoros and Ecatepec). The Company believes the purchase of Clariant’s surfactants business will enhance its ability to support customer growth in consumer and functional products end markets within Mexico. The acquisition was accounted for as a business combination, and accordingly, the assets acquired were measured and recorded at their preliminary estimated fair values. The purchase price of the acquisition was $14,000,000 plus associated value-added taxes (VAT). As of September 30, 2020, $13,519,000, inclusive of $308,000 net VAT, had been paid with cash on hand. All assets acquired are included in the Company’s Surfactants segment. The assets acquired as of September 30, 2020 were intangibles, including trademarks and know-how ($2,802,000), customer lists ($4,814,000), a non-compete agreement ($1,000,000) and goodwill ($4,595,000). 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:

(In millions)

24

(In millions)

(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 into U.S. dollars at average foreign exchange rates appropriate for the reporting period. Because foreign exchange rates fluctuate against the U.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 different U.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 nine months ended September 30, 2020 and 2019:

(In millions)

(In millions)

RESULTS OF OPERATIONS

Three Months Ended September 30, 2020 and 2019

Summary

Net income attributable to the Company for the third quarter of 2020 increased 28 percent to $33.2 million, or $1.43 per diluted share, from $25.9 million, or $1.11 per diluted share, for the third quarter of 2019. Adjusted net income increased 30 percent to $36.4 million, or $1.56 per diluted share, from $27.9 million, or $1.20 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, expenses and income in the third quarter of 2020 compared to the third quarter of 2019. A detailed discussion of segment operating performance for the third quarter of 2020 compared to the third quarter of 2019 follows the summary.

Consolidated net sales increased $12.9 million, or three percent, between quarters. Consolidated sales volume increased five percent, which had a $20.5 million favorable impact on the change in net sales. Sales volume in the Surfactant segment increased eight percent while sales volume in the Polymer segment decreased five percent. Specialty Products sales volume was flat between quarters. Foreign currency translation negatively impacted the change in net sales by $9.7 million primarily due to a stronger U.S.

dollar against the Latin America currencies where the Company has foreign operations. Higher average selling prices positively impacted the change in net sales by $2.1 million.

Operating income for the third quarter of 2020 increased $14.4 million, or 52 percent, compared to operating income for the third quarter of 2019. Surfactant operating income increased $21.5 million, or 109 percent, versus the third quarter of 2019. Polymer and Specialty Product operating income decreased $0.9 million and $0.7 million, respectively. Surfactant and Polymer operating income benefited $2.2 million and $2.8 million, respectively, from partial insurance recovery related to the first quarter 2020 Millsdale, IL power outage. Foreign currency translation had a $2.2 million unfavorable impact on segment operating income in the third quarter of 2020 versus the same period in 2019. Deferred compensation expenses increased $4.0 million in the third quarter of 2020 versus the third quarter of 2019. Business restructuring expenses decreased $0.3 million and corporate expenses (excluding deferred compensation and business restructuring expenses) increased $1.8 million between quarters. Most of the corporate expense increase reflects higher incentive-based compensation expenses and higher consulting fees partially related to acquisition activities. Operating expenses (including deferred compensation and business restructuring expenses) increased $5.2 million, or 11 percent, between quarters. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

• Selling expenses declined $0.9 million, or six percent, largely due to lower travel and entertainment expenses as a result of COVID-19 travel restrictions.
• Administrative expenses increased $1.6 million, or eight percent, primarily due to higher incentive-based compensation expenses and consulting fees. The higher consulting fees were partially related to acquisition activities.
• Research, development and technical service (R&D) expenses increased $0.8 million, or six percent primarily due to higher incentive-based compensation expenses.
• Deferred compensation expense increased $4.0 million primarily due to an $11.90 per share increase in the market price of Company common stock in the third quarter of 2020 compared to a $5.15 per share increase in the third quarter of 2019. See the Overview and Segment Results-Corporate Expenses sections of this MD&A for further details.
• Business restructuring charges totaled $0.1 million in the third 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. The 2019 restructuring charges included decommissioning costs associated with the 2016 Canadian plant closure ($0.3 million) and decommissioning expenses associated with the Company’s 2018 sulfonation shutdown in Germany ($0.2 million). See Note 16, Business Restructuring, for additional details.

Net interest expense for the third quarter of 2020 increased $0.2 million, or 16 percent, versus the prior year quarter. This increase was primarily attributable to lower interest income in the third quarter of 2020 as a result of lower global interest rates partially offset by lower interest expenses resulting from scheduled debt repayments.

Other, net was $2.6 million of income for the third quarter of 2020 compared to $0.9 million of income for the same period of 2019. The Company recognized $2.2 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 third quarter of 2020 compared to $0.2 million of losses in last year’s third quarter. In addition, the Company reported foreign exchange gains of $0.5 million in the third quarter of 2020 versus $0.4 million of foreign exchange gains in the third quarter of 2019. The Company also reported $0.2 million of higher net periodic pension cost expense in the third quarter of 2020 versus the prior year quarter. In addition, in the third quarter of 2019 the Company reported a $0.6 million gain on the sale of an asset that did not recur in the third quarter of 2020.

The Company’s effective tax rate was 23.2 percent for the third quarter of 2020 compared to 5.7 percent for the third quarter of 2019. The increase was primarily attributable to: (a) the non-recurrence of a favorable tax benefit recognized in the third quarter of 2019 on incremental U.S. tax credits identified as part of a research and development tax credit study, and; (b) a less favorable geographical mix of income in the third quarter of 2020 versus the third quarter of 2019.

Segment Results

(Dollars in thousands)

(Dollars in thousands)

Surfactants

Surfactant net sales for the third quarter of 2020 increased $34.1 million, or 11 percent, versus net sales for the third quarter of 2019. An eight percent increase in sales volume and higher average selling prices positively impacted the change in net sales by $23.7 million and $21.0 million, respectively. The unfavorable impact of foreign currency translation negatively impacted the change in net sales by $10.6 million. A comparison of net sales by region follows:

(Dollars in thousands)

Net sales for North American operations increased $23.3 million, or 13 percent, between quarters. An 11 percent increase in sales volume and higher average selling prices positively impacted the change in net sales by $18.9 million and $4.5 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. Higher customer demand in the agricultural market also contributed to this increase. This growth was partially offset by lower demand in the oilfield market. Foreign currency translation negatively impacted the change in net sales by $0.1 million.

Net sales for European operations decreased $0.7 million, or one percent, between quarters. A 10 percent decrease in sales volume negatively impacted the change in net sales by $5.6 million. The lower sales volume reflects lost business at one customer partially offset by increased demand for cleaning and disinfection products as a result of COVID-19. Higher average selling prices and the favorable impact of foreign currency translation positively impacted the change in net sales by $2.1 million and $2.8 million, respectively. A weaker 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 $8.5 million, or 16 percent, primarily due to higher average selling prices and a 13 percent increase in sales volume. These items positively impacted the change in net sales by $15.9 million and $6.6 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 products, and a fully operational Ecatepec, Mexico facility in 2020. Foreign currency translation negatively impacted the change in net sales by $14.0 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 increased $3.1 million, or 26 percent, primarily due to a 20 percent increase in sales volume and the favorable impact of foreign currency translation. These items favorably impacted the change in net sales by $2.4 million and $0.8 million, respectively. The sales volume growth was mostly due to higher demand for products sold into the commodity consumer product end markets, driven by increased demand for cleaning products. Lower average selling prices negatively impacted the change in net sales by $0.1 million.

Surfactant operating income for the third quarter of 2020 increased $21.5 million, or 109 percent, versus operating income for the third quarter of 2019. Gross profit increased $21.4 million in the third quarter of 2020 versus the third quarter of 2019 and operating expenses decreased $0.1 million, or one percent. The third quarter 2020 results were favorably impacted by a $2.2 million partial insurance recovery related to the first quarter 2020 Millsdale, IL plant power outage. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

(Dollars in thousands)

Gross profit for North American operations increased 56 percent, or $14.5 million, between quarters primarily due to higher unit margins and an 11 percent increase in sales volume. These items positively impacted the change in gross profit by $11.8 million and $2.7 million, respectively. The higher unit margins reflect a more favorable product and customer mix as well as a $2.2 million partial insurance recovery related to the first quarter 2020 Millsdale, IL plant power outage. 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 $0.3 million, or three percent, primarily due to higher unit margins and the favorable impact of foreign currency translation. These items positively impacted the change in gross profit by $0.7 million and $0.4 million, respectively. The higher unit margins were attributable to a more favorable product and customer mix in the third quarter of 2020 primarily resulting from higher demand for biocidal quaternaries and lower demand for commodity softeners. A 10 percent decline in sales volume negatively impacted the change in gross profit by $0.8 million.

Gross profit for Latin American operations increased $8.3 million, or 169 percent, between quarters primarily due to higher unit margins. Higher unit margins positively impacted the change in gross profit by $11.1 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 13 percent positively impacted the change in gross profit by $0.6 million. The unfavorable impact of foreign currency translation negatively impacted gross profit by $3.4 million.

Gross profit for Asian operations decreased $1.8 million or 38 percent, between quarters largely due to lower unit margins. The lower unit margins negatively impacted the change in gross profit by $2.8 million and were largely driven by higher demand for products sold into the commodity consumer product end markets. The lower unit margins were partially offset by a 20 percent increase in sales volume and the favorable impact of foreign currency translation. These items positively impacted the change in gross profit by $0.9 million and $0.1 million, respectively.

Operating expenses for the Surfactant segment decreased $0.1 million, or one percent, in the third quarter of 2020 versus the third quarter of 2019.

Polymers

Polymer net sales for the third quarter of 2020 decreased $18.4 million, or 14 percent, versus net sales for the same period of 2019. A five percent decline in sales volume negatively impacted the change in net sales by $7.3 million. The sales volume decrease was primarily attributable to an eight percent decline in demand for North American rigid polyols and a 25 percent decline in phthalic anhydride volume. The lower North American rigid polyols demand continues to reflect COVID-19 related construction project delays and cancellations. European sales volume improved three percent during the quarter. The unfavorable impact of lower average selling prices negatively impacted the change in net sales by $11.9 million. Foreign currency translation positively impacted the change in net sales by $0.8 million. A comparison of net sales by region follows:

(Dollars in thousands)

Net sales for North American operations declined $15.8 million, or 19 percent, primarily due to a 10 percent decline in sales volume. The decline in sales volume negatively impacted the change in net sales by $8.5 million. Sales volume of polyols used in rigid foam applications decreased eight percent during the quarter due to COVID-19 related construction project delays and cancellations. Sales volume of phthalic anhydride decreased 25 percent due to share loss at one customer and soft market demand. Lower average selling prices negatively impacted the change in net sales by $7.3 million. The lower selling prices reflect lower raw material market prices.

Net sales for European operations declined $1.5 million or four percent. A three percent improvement in sales volume and the favorable impact of foreign currency translation positively impacted the change in net sales by $1.1 million and $0.9 million, respectively. Lower average selling prices negatively impacted the change in net sales by $3.5 million. The lower average selling prices reflect lower raw material costs that were passed through to customers.

Net sales for Asian and Other operations decreased $1.1 million, or 10 percent due to a five percent decline in sales volume, lower average selling prices and the unfavorable impact of foreign currency translation. The lower sales volume reflects unplanned production issues during the third quarter of 2020. These items negatively impacted the change in net sales by $0.6 million, $0.4 million and $0.1 million, respectively.

Polymers operating income for the third quarter of 2020 decreased $0.9 million, or four percent, from operating income for the third quarter of 2019. Gross profit decreased $0.8 million, or three percent mainly due to a five percent decline in sales volume. The third quarter 2020 results were favorably impacted by a $2.8 million partial insurance recovery related to the first quarter 2020 Millsdale, IL plant power outage and a $1.2 million partial government reimbursement related to the government-mandated China JV shutdown in 2012. Operating expenses increased $0.1 million, or two percent, during the third quarter of 2020. Comparisons of gross profit by region and total segment operating expenses and operating income follow:

(Dollars in thousands)

Gross profit for North American operations decreased $2.4 million, or 11 percent, primarily due to a 10 percent decline in sales volume and lower unit margins. These two items negatively impacted the change in gross profit by $2.1 million and $0.3 million respectively. The lower unit margins partially reflect incremental raw material sourcing costs due to the Illinois River lock closures that have disrupted normal barge activity. During the third quarter of 2020 the Company recognized $2.8 million partial insurance recovery related to the first quarter 2020 Millsdale, IL plant power outage which positively impacted unit margins in the quarter.

Gross profit for European operations increased $1.3 million, or 20 percent, due to improved unit margins, a three percent increase in sales volume and the favorable impact of foreign currency translation. These items positively impacted the change in gross profit by $0.9 million, $0.2 million and $0.2 million, respectively.

Gross profit for Asian and Other operations improved $0.4 million due to higher unit margins. Unit margins benefited from a partial government reimbursement related to the government-mandated China JV shutdown in 2012 ($1.2 million). Unit margins were negatively impacted by unplanned production issues which resulted in higher outsourcing costs. Sales volume decreased five percent which negatively impacted the change in gross profit by $0.1 million.

Operating expenses for the Polymers segment increased $0.1 million, or two percent, in the third quarter of 2020 versus the third quarter of 2019.

Specialty Products

Net sales for the third quarter of 2020 decreased $2.8 million, or 17 percent, versus net sales for the third quarter of 2019. This decrease reflects lower average selling prices as volume was flat. Gross profit decreased $0.6 million and operating income decreased $0.7 million primarily due to lower average margins within the Company’s medium chain triglycerides product line and customer order patterns within the Company’s 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 $5.5 million between quarters. Corporate expenses were $22.7 million in the third quarter of 2020 versus $17.2 million in 2019. This increase was primarily attributable to higher deferred compensation expense ($4.0 million), higher incentive-based compensation expenses and higher consulting fees in the third quarter of 2020 versus the third quarter of 2019. These items were partially offset by lower restructuring expenses in the third quarter of 2020.

The $4.0 million increase in deferred compensation expense was primarily due to an $11.9 per share increase in the market price of Company common stock in the third quarter of 2020 compared to a $5.15 per share increase in the third 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 September 30, 2020 and 2019:

Nine Months Ended September 30, 2020 and 2019

Summary

Net income attributable to the Company for the first nine months of 2020 increased 19 percent to $96.4 million, or $4.15 per diluted share, from $81.1 million, or $3.48 per diluted share, in the first nine months of 2019. Adjusted net income was $98.9 million, or $4.25 per diluted share, versus $93.7 million or $4.02 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, expenses and income. A detailed discussion of segment operating performance for the first nine months of 2020 compared to the first nine months of 2019 follows the summary.

Consolidated net sales decreased $38.7 million, or three percent, between years. The unfavorable impact of foreign currency translation and lower average selling prices negatively impacted the change in net sales by $38.2 million and $27.8 million, respectively. Consolidated sales volume increased two percent which had a $27.3 million favorable impact on the year-over-year change in net sales. The unfavorable foreign currency translation effect reflected a stronger U.S. dollar against most currencies where the Company has foreign operations. The decrease in average selling prices was primarily due to the pass through of lower raw material costs. Sales volume in the Surfactant segment increased five percent while sales volume in the Polymer and Specialty Product segments decreased nine percent and three percent, respectively.

Operating income for the first nine months of 2020 increased $28.3 million, or 29 percent, versus operating income reported for the first nine months of 2019. Surfactant operating income increased $36.9 million or 41 percent versus the first nine months of 2019. Polymer and Specialty Products operating income decreased $12.7 million and $2.6 million, respectively. Deferred compensation expenses and business restructuring expenses decreased $6.7 million and $0.9 million, respectively. Corporate expenses (excluding deferred compensation and business restructuring expenses) increased $1.0 million between years. Foreign currency translation had a $6.3 million unfavorable impact on year-over-year consolidated operating income.

Operating expenses (including deferred compensation and business restructuring expenses) decreased $8.4 million, or five percent, between years. Changes in the individual income statement line items that comprise the Company’s operating expenses were as follows:

• Selling expenses decreased $2.6 million, or six percent, year-over-year largely due to lower travel and entertainment expenses as a result of COVID-19 restrictions.
• Administrative expenses increased $0.4 million, or one percent, year-over-year primarily due to higher incentive-based compensation expenses and consulting fees in 2020 that were mostly offset by non-recurring environmental remediation expenses recognized in 2019.
• R&D expenses increased $1.4 million, or four percent, year-over-year mainly due to higher salaries and incentive-based compensation expenses.
• Deferred compensation expense decreased $6.7 million year-over-year primarily due to a $6.56 per share increase in the market price of Company common stock during the first nine months of 2020 compared to a $23.06 per share increase in the first nine months of 2019. See the Overview and Segment Results-Corporate Expenses sections of this MD&A for further details.
• Business restructuring expenses were $0.7 million in the first nine months of 2020 compared to $1.6 million in the first nine months of 2019. The 2020 restructuring charges were comprised of ongoing decommissioning costs associated with the 2016 Canadian plant closure ($0.6 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 ($0.8 million) and decommissioning expenses associated with the Company’s sulfonation shutdown in Germany ($0.6 million). (see Note 16, Business Restructuring, for additional details).

Net interest expense for the first nine months of 2020 declined $0.9 million, or 18 percent, compared to net interest expense for the first nine months of 2019. This decrease was primarily attributable to lower interest expense resulting from scheduled debt repayments and also the non-recurrence of two one-time events in the first nine months 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 nine months of 2020 as a result of lower global interest rates.

Other, net was $3.8 million of income for the first nine months of 2020 compared to $4.3 million of income for the first nine months of 2019. The Company recognized $2.5 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 nine months of 2020 compared to $3.1 million of income in the first nine months of 2019. In addition, the Company reported foreign exchange gains of $1.5 million in the first nine months of 2020 versus $0.3 million of foreign exchange gains in in the first nine months of 2019. The Company also reported $0.4 million of higher net periodic pension cost expense in the first nine months of 2020 versus the prior year. In 2019, the Company recognized a $0.6 million gain on the sale of an asset that did not recur in 2020.

The Company’s effective tax rate was 23.7 percent for the first nine months of 2020 compared to 17.3 percent for the first nine months of 2019. The year-over-year increase was primarily attributable to: (a) the non-recurrence of a favorable tax benefit recognized in the third quarter of 2019 on incremental U.S. tax credits identified as part of a research and development tax credit study; (b) a less favorable geographical mix of income in the first nine months of 2020 versus the first nine months of 2019, and; (c) lower excess tax benefits derived from stock-based compensation awards exercised or distributed in the first nine months of 2020 versus the first nine months of 2019.

(In thousands)

31

(In thousands)

Segment Results

Surfactants

Surfactant net sales for the first nine months of 2020 increased $30.5 million, or three percent, versus net sales for the first nine months of 2019. A five percent increase in sales volume and higher selling prices positively impacted the year-over-year change in net sales by $51.8 million and $13.0 million, respectively. The unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $34.3 million. A year-over-year comparison of net sales by region follows:

(In thousands)

Net sales for North American operations increased $32.8 million, or six percent, year-over-year. A six percent increase in sales volume positively impacted the year-over-year change in net sales by $36.3 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 $3.0 million and $0.5 million, respectively.

Net sales for European operations decreased $11.1 million, or six 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 $15.5 million and $0.3 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 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 $4.7 million.

Net sales for Latin American operations increased $6.4 million, or four percent, primarily due to a 15 percent increase in sales volume and higher selling prices. These items positively impact the change in net sales by $23.9 million and $17.4 million, respectively. The sales volume growth was driven by higher demand for products sold into the consumer product end markets, driven by increased demand for cleaning products, and a fully operational Ecatepec, Mexico facility in 2020. Partially offsetting the above was the unfavorable impact of foreign currency translation which negatively impact the change in net sales by $34.9 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.

Net sales for Asian operations increased $2.4 million, or six percent, primarily due to a five percent increase in sales volume and the favorable impact of foreign currency translation. These items favorably impacted the year-over-year change in net sales by $1.9 million and $1.4 million, respectively. The sales volume growth was mostly due to higher demand for products sold into the commodity consumer product end markets, driven by increased demand for cleaning products, and higher demand for products sold to the agricultural end market. A weaker U.S. dollar relative to the Philippine peso led to the foreign currency translation effect. Lower average selling prices negatively impacted the change in net sales by $0.9 million.

Surfactant operating income for the first nine months of 2020 increased $36.9 million, or 41 percent, versus operating income for the first nine months of 2019. Gross profit increased $36.0 million, or 22 percent, year-over-year. Operating expenses decreased $0.9 million, or one percent. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

(In thousands)

Gross profit for North American operations increased $19.7 million, or 18 percent, year-over-year primarily due to higher unit margins and a six percent increase in sales volume. These items positively impacted the change in gross profit by $13.0 million and $6.7 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 primarily reflect a more favorable product and customer mix. Partially offsetting the above, unit margins were negatively impacted by higher maintenance, supply chain costs and unit overhead rates incurred as a result of the first quarter 2020 power outage at the Company’s Millsdale, IL site. North American operations benefited from a $2.2 million partial insurance recovery received in the third quarter of 2020 related to the Millsdale incident.

Gross profit for European operations increased $1.3 million, or five percent, primarily due to higher unit margins. These higher unit margins positively impacted the year-over-year change in gross profit by $3.6 million. The higher unit margins were attributable to a more favorable product and customer mix in the first nine months of 2020 primarily resulting from higher demand for biocidal quaternaries and products sold into the agricultural end market combined with 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 $2.2 million and $0.1 million, respectively. The decline in sales volume primarily reflects lost business at one customer.

Gross profit for Latin American operations increased $17.9 million, or 121 percent, primarily due to higher unit margins and a 15 percent increase in sales volume. These items positively impacted the change in gross profit by $23.6 million and $2.2 million, respectively. 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 Ecatepec, 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 operational Ecatepec, Mexico facility in 2020. The unfavorable impact of foreign currency translation negatively impacted gross profit by $7.9 million.

Gross profit for Asian operations decreased $2.8 million, or 24 percent, largely due to lower unit margins which negatively impacted the change in gross profit by $3.6 million. These lower unit margins partially reflect higher unit overhead costs in Singapore due to unfavorable production timing differences. A five percent increase in sales volume and the favorable impact of foreign currency translation positively impacted gross profit by $0.6 million and $0.2 million, respectively.

Operating expenses for the Surfactant segment decreased $0.9 million, or one percent, year-over-year.

Polymers

Polymer net sales for the first nine months of 2020 decreased $60.3 million, or 15 percent, versus net sales for the same period of 2019. A nine percent decrease in sales volume negatively impacted the year over year change in net sales by $35.4 million. The unfavorable impact of lower average selling prices and foreign currency translation negatively impacted the year-over-year change in net sales by $21.1 million and $3.8 million, respectively. A year-over-year comparison of net sales by region follows:

(Dollars in thousands)

Net sales for North American operations declined $42.9 million, or 18 percent, primarily due to a 13 percent decline in sales volume. The decline in sales volume negatively impacted the year-over-year change in net sales by $31.7 million. Sales volume of polyols used in rigid foam applications decreased four percent during the first nine months of 2020 due to COVID-19 related construction project delays and cancellations. Sales volume of phthalic anhydride decreased 43 percent due to volume lost as a result of the first quarter 2020 Millsdale, IL power outage, share loss at one customer and soft market demand. Lower average selling prices negatively impacted the change in net sales by $11.2 million. The lower average selling prices reflect lower raw material market prices.

Net sales for European operations decreased $18.5 million, or 15 percent. A seven percent decrease in sales volume, lower average selling prices and the unfavorable impact of foreign currency translation negatively impacted the year-over-year change in net sales by $9.2 million, $6.6 million and $2.7 million, respectively. The decline in sales volume principally reflects softer demand due to deferred and canceled construction projects as a result of COVID-19 during the first half of 2020. 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 Asian and Other operations increased $1.0 million, or four percent, primarily due a 14 percent increase in sales volume. The sales volume growth, which positively impacted the change in net sales by $3.8 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 $1.7 million and $1.1 million, respectively. The lower average selling prices reflect lower raw material prices.

Polymer operating income for the first nine months of 2020 declined $12.7 million, or 22 percent, from operating income for the first nine months of 2019. Gross profit decreased $12.9 million, or 16 percent, primarily due to lower unit margins and a nine percent decline in sales volume. The lower unit margins principally reflect higher maintenance, supply chain costs and unit overhead rates incurred as a result of the first quarter 2020 power outage at the Company’s Millsdale, IL site. Unit margins were also negatively impacted by incremental raw material costs incurred as a result of the Illinois River lock closures. These costs were partially offset by a $2.8 million partial insurance recovery received in the third quarter of 2020 related to the Millsdale power outage. In addition, the 2020 nine-month results were favorably impacted by partial government reimbursement related to the government-mandated China JV shutdown in 2012 ($2.3 million). Operating expenses decreased one percent year-over-year. Year-over-year comparisons of gross profit by region and total segment operating expenses and operating income follow:

(In thousands)

Gross profit for North American operations declined $16.6 million, or 30 percent, primarily due to lower unit margins and a 13 percent decline in sales volume. These two items negatively impacted the year-over-year change in gross profit by $9.3 million and $7.3 million, respectively. The decline in margins was primarily attributable to the first quarter 2020 power outage 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, incremental raw material costs were incurred in 2020 as a result of the Illinois River lock closures. Partially offsetting the above was a $2.8 million partial insurance recovery in the third quarter of 2020 related to the Millsdale power outage. The decrease in sales volume in the first nine months of 2020 primarily reflects lost phthalic anhydride volume due to the Millsdale power outage and share loss at one customer combined with lower rigid polyols demand as a result of COVID-19 related construction project delays and cancellations.

Gross profit for European operations increased $1.2 million, or six percent, primarily due to higher unit margins. The higher unit margins positively impacted the change in gross profit by $2.9 million. The higher unit margins partially reflect the non-recurrence of a maintenance shutdown in Germany in 2019. A seven percent decline in sales volume and the unfavorable impact of foreign currency translation negatively impacted the change in gross profit by $1.3 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 during the first half of 2019.

Gross profit for Asian and Other operations improved $2.6 million, or 59 percent, due to higher unit margins and 14 percent sales volume growth during the first nine months of 2020. These items positively impacted the year-over-year change in gross profit by $2.0 million and $0.6 million, respectively. Unit margins benefited from partial government reimbursement related to the government-mandated China JV shutdown in 2012 ($2.3 million). Foreign currency translation negatively impacted the change in gross profit by $0.1 million.

Operating expenses for the Polymers segment decreased $0.2 million, or one percent, year-over-year.

Specialty Products

Net sales for the first nine months of 2020 declined $8.9 million, or 16 percent, versus net sales for the same period of 2019. This decrease was primarily due to a three percent decrease in sales volume and lower average selling prices. Gross profit and operating income decreased by $2.5 million and $2.6 million, respectively, year-over-year primarily due to lower margins within the Company’s medium chain triglycerides product line and customer order patterns 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 $6.7 million between years. Corporate expenses were $53.0 million in the first nine months of 2020 versus $59.7 million in the first nine months of 2019. This decrease was primarily attributable to lower deferred compensation expense ($6.7 million), lower business restructuring expenses ($0.9 million) and lower environmental remediation expenses, partially offset by higher incentive-based compensation expenses and consulting fees.

Deferred compensation expense decreased $6.7 million between years. This decrease was primarily due to a $6.56 per share increase in the market price of the Company’s common stock in the first nine months of 2020 compared to a $23.06 per share increase in the first nine months of 2019. The following table presents the period-end Company common stock market prices used in the computation of deferred compensation expenses for the nine months ended September 30, 2020 and 2019:

LIQUIDITY AND CAPITAL RESOURCES

Overview

For the nine months ended September 30, 2020, operating activities were a cash source of $141.7 million versus a source of $132.7 million for the comparable period in 2019. For the current year period, investing cash outflows totaled $98.1 million versus a cash outflow of $68.5 million in the prior year period. Financing activities were a use of $44.6 million versus a use of $74.4 million in the prior year period. Cash and cash equivalents decreased by $5.0 million compared to December 31, 2019, inclusive of a $3.9 million unfavorable foreign exchange rate impact.

At September 30, 2020, the Company’s cash and cash equivalents totaled $310.4 million. Cash in U.S. money market funds, demand deposit accounts and a certificate of deposit totaled $92.4 million, $61.8 million and $15.0 million, respectively. The Company’s non-U.S. subsidiaries held $141.2 million of cash outside the United States as of September 30, 2020.

Operating Activity

Net income increased by $15.7 million versus the comparable period in 2019. Working capital was a cash use of $23.2 million during the first nine months of 2020 versus a use of $22.2 million for the comparable period in 2019.

Year-to-date accounts receivable were a use of $28.4 million compared to a use of $9.0 million for the comparable period in 2019. Inventories were a use of $2.6 million in 2020 versus a source of $25.9 million in 2019. Accounts payable and accrued liabilities were a source of $12.0 million in 2020 compared to a use of $35.3 million for the same period in 2019.

Working capital requirements were higher in the first nine months 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 wash products as a result of COVID-19. The current year’s increase in inventories cash usage reflects inventory builds to support higher finished goods demand with the consumer products end markets and to provide Polymer-related safety stock as a result of the Illinois River lock closures and a maintenance shutdown planned for the fourth quarter of 2020. 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 $29.6 million year-over-year. Cash used for capital expenditures was $84.9 million in the first nine months of 2020 versus $70.8 million in the comparable prior year period. Other investing activities were a use of $13.2 million in 2020 versus a source of $2.3 million in 2019. The current year cash use in other investing activities was primarily attributable to: (a) the Company’s first quarter 2020 acquisition of certain assets from Logos Technologies LLC’s NatSurFact® business, a rhamnolipid-based line of bio-surfactants derived from renewable resources and; (b) the Company’s third quarter 2020 acquisition of Clariant’s (Mexico) anionic surfactant business.

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 $44.6 million in 2020 versus $74.4 million in 2019. Most of this decrease is attributable to the non-recurrence of the voluntary prepayment 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 the SEC. 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 nine months ended September 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 September 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 of September 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) decreased by $9.2 million in the first nine months of 2020, from a negative $93.3 million to a negative $102.5 million, primarily due to scheduled debt repayments of $14.3 million.

As of September 30, 2020, the ratio of total debt to total debt plus shareholders’ equity was 18.1 percent compared to 19.9 percent at December 31, 2019. As of September 30, 2020, the ratio of net debt to net debt plus shareholders’ equity was negative 12.3 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 September 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 unsecured facility is the Company’s primary source of short-term borrowings. As of September 30, 2020, the Company had outstanding letters of credit totaling $5.3 million under the revolving credit agreement and no borrowings, with $344.7 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. At September 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 September 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 $325.0 million.

4. The Company is permitted to pay dividends and purchase treasury shares after December 31, 2017, in amounts of up to $100.0 million plus 100 percent of net income and cash proceeds of stock option exercises, measured cumulatively beginning December 31, 2017. 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 September 30, 2020.

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 nine months of 2020 and 2019, the Company’s expenditures for capital projects related to the environment were $4.2 million and $1.3 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 $26.5 million and $22.8 million for the nine months ended September 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 $22.4 million to $41.1 million at September 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 $22.4 million at September 30, 2020 and $25.9 million at December 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 $3.8 million for the nine months ended September 30, 2020, compared to $2.8 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 material 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 with SEC, 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.

OUTLOOK

Management believes the Company’s Surfactant segment should continue to benefit from higher demand in the consumer product end markets, driven by increased demand for cleaning, disinfection and personal wash products. Management believes the demand for surfactants within the agricultural market will approximate prior year and that the oilfield market will remain down for the balance of 2020. Management believes its Polymer segment will continue to be challenged for the remainder of the year as construction projects have been deferred or canceled as a result of COVID-19. Management believes the long-term prospects for the Polymer segment remain attractive because of 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

(In millions, except per share amounts)

(In millions, except per share amounts)

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.

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 on September 30, 2020 as cash balances of $310.4 million exceeded total debt of $208.0 million.

(In millions)

40

a. Evaluation of Disclosure Controls and Procedures

We have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of September 30, 2020. Based on this evaluation of our disclosure controls and procedures, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of September 30, 2020, such that the information required to be disclosed in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the Exchange Act and is accumulated and communicated to management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.

b. Changes in Internal Control Over Financial Reporting

There were no changes in the Company’s internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes to the risk factors disclosed in the Company’s 2019 Annual Report on Form 10-K, except for the addition of the following risk factor:

The COVID-19 pandemic could have a material adverse impact on our business, financial position, results of operations and cash flows.

The current novel coronavirus (or COVID-19) pandemic has disrupted our operations and will affect our business, including as a result of government authorities imposing mandatory closures, work-from-home orders and social distancing protocols, or imposing other restrictions that could materially adversely affect our ability to adequately staff and maintain our operations. Specifically, we have experienced a temporary facility closure in response to government mandates in one jurisdiction in which we operate. In addition, for the safety of our employees, we temporarily halted one distinct part of production at one facility in response to positive diagnoses of employees for COVID-19 in that part of the facility. We may experience additional closures in the future. The COVID-19 outbreak could also impact our ability to secure supplies for our facilities and to provide appropriate personal protective equipment for our employees, which could impact our operations. Our operations could also be adversely affected by other impacts of the pandemic, including, among others, disruption of our supply of raw materials and transportation and delivery of our products. The COVID‑19 outbreak, and resulting perceptions of health risks, could have long-term effects on our customers and the economies of countries in which we and our customers operate, and demand for certain of our products could be adversely affected. Because the Company cannot predict the duration, scope or broader impact of the COVID-19 pandemic, the impact on the Company cannot be reasonably estimated, but the pandemic could have a material adverse effect on the Company’s business, financial position, results of operations and cash flows.

In addition, we cannot predict the impact that COVID-19 will have on our customers, suppliers, vendors, and other business partners, and each of their financial conditions; however, any material effect on these parties could adversely impact us. The impact of COVID-19 may also exacerbate other risks discussed under “Part I-Item IA. Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, any of which could have a material effect on us. This situation is changing rapidly and additional impacts of which we are not currently aware may arise.