CERCLA 108(b) Economic Sector Profile Chemical Manufacturing


CERCLA 108(b) Economic Sector Profile: Chemical Manufacturing

INTRODUCTION

This document summarizes public data collection, research, and analyses conducted with respect
to the Chemical Manufacturing Industry. This class of facilities is potentially subject to
regulation under Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA) 108(b). Specifically, this document focuses on four subsectors of the Chemical
Manufacturing Industry (North American Industry Classification System (NAICS) 325) where
most historical damages cases have occurred: Basic Chemical Manufacturing (NAICS 3251),
Pesticide, Fertilizer, and Other Agricultural Chemical Manufacturing (NAICS 3253),
Pharmaceutical and Medicine Manufacturing (NAICS 3254), and Paint, Coating, and Adhesive
Manufacturing (NAICS 3255).

The chemical manufacturing process involves transforming organic and inorganic raw materials
into products with diverse uses. Industry subsectors incorporate wide-ranging chemical
production, spanning varied end-users and operating in diverse markets. Generally, firms
operating in the industry can be divided into three broad categories: 1

1.	Basic or commodity chemicals manufacturing, which involves transforming raw
materials for further industrial use. Firms in this category operate on thin margins,
depend on economies-of-scale production, and are subject to relatively high levels of
demand volatility. The Basic Chemical Manufacturing and parts of the Pesticide,
Fertilizer, and Other Agricultural Chemical Manufacturing subsectors fall under this
category.

2.	Specialty chemicals manufacturing, which encompasses high-value and niche products
manufacturing. Firms in this category generally incur high Research and Development
(R&D) costs and capture market share through patents. The Pharmaceuticals and
Medicine Manufacturing subsector and parts of the Pesticide, Fertilizer, and Other
Agricultural Chemical Manufacturing subsector operate as specialty manufacturers.2

3.	Consumer products, which include products that are directly sold to end-users. Consumer
products are price-competitive and sales depend on brand loyalty and product
differentiation.3 The Paint, Coating, and Adhesive Manufacturing subsector falls in this
category.

These variations in market type engender unique cost structures by subsector. As seen in Figure
1, feedstock and raw materials account for most of the costs incurred by Basic and Specialty
Chemicals, but less than a third of Pharmaceutical costs. At the same time, Pharmaceuticals

1	KEMA. 2012. Industrial Sectors Market Characterization: Chemical Industry. Prepared for Pacific Gas &
Electric Company and Southern California Edison Company.

2	American Chemistry Council (ACC). 2018. 2018 Elements of the Business of Chemistry. Accessed at
https://www.americanchemistry.com/2018-Elements-of-the-Business-of-Chemistry.pdf.

3	KEMA. 2012. Industrial Sectors Market Characterization: Chemical Industry. Prepared for Pacific Gas &
Electric Company and Southern California Edison Company.

1

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experience a much higher percentage of R&D costs and profits. Unlike Basic and Specialty
Chemical Manufacturing, Consumer Products and Pharmaceuticals Manufacturing do not incur
significant Environmental, Health, and Safety (EH&S) costs (in other words, costs related to the
health and safety of the environment), but generally do incur advertising costs.4

Figure 1. Typical Cost Structure by Subsector

Consumer
Products

Pharmaceuticals

Specialty
Chemicals

Basic Chemicals

0% 20% 40% 60% 80%

¦ Feedstocks & Other Raw Materials ¦ Labor

¦ Advertising "Other Operating Expenses
¦EH&S ¦R&D

¦ Taxes "Profits

100%

ACC 2018

These categories are associated with different market challenges and risk profiles, driving the
need for financial analysis at the subsector level. Therefore, this document provides a Chemical
Manufacturing Industry overview, followed by subsector-specific analyses. Specifically, this
document begins with a high-level industry profile providing insight into recent industry trends,
including the relative size of the industry and subsectors of interest. This section also includes a
summary of relative industry volatility, historical bankruptcy cases, and a broad discussion
outlining environmental liabilities under Chapter 11 of the Bankruptcy Code. Subsequent
sections assess the four subsectors of interest individually, providing an industry profile,

4 American Chemistry Council (ACC). 2018. 2018 Elements of the Business of Chemistry. Accessed at
https://www.americanchemistry.com/2018-Elements-of-the-Business-of-Chemistry.pdf.

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evaluation of the potential universe of regulated entities, and discussion of the industry's
financial health and relative volatility.

This analysis generally finds the sector to be financially stable and able to pay off short-term
obligations, though some subsectors experienced declining profitability and increased risk in
recent years. Overall, financial ratios indicate healthy financial performance, despite an overall
decrease in the total value of shipments and receipts for services in the sector.

Firms in the subsectors of interest are often dependent on other industries for inputs and sales.
For example, Basic Chemical Manufacturing (NAICS 3251) provides raw materials for many
Pesticide, Fertilizer, and Other Agricultural Chemical Manufacturing (NAICS 3253),
Pharmaceutical and Medicine Manufacturing (NAICS 3254), and Paint, Coating, and Adhesive
Manufacturing (NAICS 3255). This analysis attempts to isolate subsector activity, though
industry interdependency presents additional exogenous risk factors.

Note that this report has been prepared primarily for purposes of gathering general information
on the financial make-up and health of the subject sector and subsectors. It is not meant to
provide an explicit forecast of the sector's financial and operational performance nor draw
conclusions from the data with respect to individual companies operating in the sector.

CHEMICAL MANUFACTURING
Industry Profile

The Chemical Manufacturing Industry includes Resin, Synthetic Rubber, and Artificial Synthetic
Fibers and Filaments Manufacturing (NAICS 3252), Soap, Cleaning Compound, and Toilet
Preparation Manufacturing (NAICS 3256), Other Chemical Product and Preparation
Manufacturing (NAICS 3259), in addition to the chemical product manufacturing incorporated in
the four subsectors of interest listed above.

In recent years the global Chemical Manufacturing Industry has been characterized by declining
margins, product commoditization, expanding competition from developing countries, and
customer demands for lower prices.5 Many firms reacted to these trends by cutting costs or
realizing growth through mergers and acquisitions (M&A). Chemical firms spent $100 billion on
M&A in 2018, up 56 percent from 2017 but almost half as much as the $193 billion spent in
2016.6 M&A has been particularly popular among chemical giants such as Linde-Praxair, Dow-
DuPont, Syngenta-ChemChina, and Monsanto-Bayer.7 However, large-scale M&A are

5 Gotpagar, et al. 2018. Chemicals Trends 2018-19: A Tipping Point of Profitability. PWC Strategy#,.
Accessed at https://www.strategvand.pwc.com/media/file/2018-Chemicals-Industrv-Trends.pdf.

6 Bomgardner, Melody M. 2019. Chemical M&A Rebounded in 2018. Chemical & Engineering News.
Accessed at https://cen.acs.org/business/mergers-acquisitions/chem-mna-rebounded-2018/97/i4.

7 Gotpagar, et al. 2018. Chemicals Trends 2018-19: A Tipping Point of Profitability. PWC Strategy&.
Accessed at https://www.strategvand.pwc.com/media/file/2018-Chemicals-Industrv-Trends.pdf.

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predicted to slow in coming years, as firms undertake smaller, strategic acquisitions to
supplement specific portfolio shortcomings.8

Environmental policy regulating the Chemical Manufacturing Industry has also changed the
global market. In 2007, Registration, Evaluation, Authorization and Restriction of Chemicals
(REACH) regulations came into effect in the European Union (E.U.). The rule requires
companies identify and manage risks associated with products they sell. Authorities can
determine risks unmanageable and ban the substance or impose use restrictions. The effects of
the requirements extended beyond the E.U., as the rule imposes requirements for imported
chemicals. Governments around the world have taken steps to align national regulations with
REACH to remain competitive in the global market. These regulations create incentives for
chemical companies to invest in sustainable chemical substitutes, as products that use sustainable
substitutes for restricted substances may benefit from increased demand over time.9

In the United States, the Chemical Manufacturing Industry accounted for about 14 percent of the
total value of shipments and receipts for services in 2016. However, between 2013 and 2016, the
total value of shipments and receipts for services in the Chemical Manufacturing Industry fell by
about $62 billion, from $786 billion to $723 billion (see Figure 2 below). This decline was
largely driven by Basic Chemical Manufacturing, which fell by roughly $69 billion between
2013 and 2016 in terms of total value of shipments and receipts for services. The drop was
somewhat offset by a growth of about $34 billion in Pharmaceutical and Medicine Chemical
Manufacturing; however, declining values in other subsectors resulted in the industry's net
decrease in value of shipments.

8 Ibid.

9 Ferreira, Rita. 2018. Regulating the Chemical Industry: How Does REACH Impact Companies? Accessed
at https://www.sustainalYtics.com/esg-blog/chemicals-industrv-reach-regulation/.

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Figure 2. Total Value of Shipments and Receipts for Services, 2013-2016

$900

2013

2014

2015

2016

Basic Chemical

Pharmaceutical and Medicine
Chemical Manufacturing

I Pesticide, Fertilizer, and Other Ag
I Paint, Coating, and Adhesive

Source: U.S. Census Bureau1"

Generally, Basic Chemical Manufacturing is concentrated in the Gulf Coast, especially in Texas
and Louisiana, while production of other chemical products is more widely dispersed.11 In 2016,
five states generated almost half of the total value of shipments and receipts for services in the
U.S. Chemical Manufacturing industry:

•	Texas (17 percent)

•	California (11 percent)

•	North Carolina (7 percent)

•	Louisiana (7 percent)

•	Illinois (6 percent)12

111 U.S. Census Bureau: American Factfinder. Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gOv/faces/nav/j sf/pages/searcliresults.xhtinl?refresh=t#none.

11	Office of Efficiency and Renewable Energy. N.d. Chemical Industry Profile. Accessed at
https://www.energy.gov/eere/amo/chemicals-industry-profile.

12	U.S. Census Bureau: American Factfinder. Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gOv/faces/nav/j sf/pages/searchresults.xhtml?refresh=t#none.

5

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Changes in total value of shipments also vary by region/state. For example, between 2013 and
2016, about 60 percent of the total value of shipments and receipts for services in Texas came
from Basic Chemical Manufacturing. During that same time period, Texas's chemical
manufacturing industry experienced a $41 billion drop in total value. On the other hand,
Pharmaceutical and Medicine Manufacturing account for between 73 and 80 percent of
California's chemical manufacturing industry, which grew by over $18 billion between 2013 and
2016.

As seen in Figure 3, Basic Chemical and Pharmaceutical and Medicine Manufacturing account
for the most establishments in the industry, both with about 18 percent of total establishments.
Paint, Coating, and Adhesive Manufacturing and Pesticide, Fertilizer, and Other Agricultural
Manufacturing account for 13 and 7 percent of establishments, respectively.

Figure 3. Portion of Establishments by Subsector, 2016

Other chemical
product and
preparation
manufacturing

Soap, cleaning
compound, and toilet
preparation
manufacturing
17%

Total Establishments: 13,480

Basic chemical
manufacturing

Resin, synthetic
rubber, and artificial
synthetic fibers and
filaments
manufacturing
10%

Pesticide, fertilizer,

and other
agricultural chemical
manufacturing
7%

Paint, coating, and
adhesive
manufacturing
13%

Pharmaceutical and
medicine
manufacturing
18%

Source: U.S. Census Bureau1

The remainder of this section provides high-level analysis of the industry's relative risk and
discusses environmental liabilities under Chapter 11 bankruptcies. As discussed above,
subsectors of the chemical manufacturing industry experience different levels of risk.

13 U.S. Census Bureau: American Factfinder. County Business Patterns. Accessed at
https://factfinder.census.gOv/faces/nav/i sf/pages/searcliresults.xhtinl?refresh=t#none.

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Nonetheless, this high-level summary of relative volatility is included to assess general industry
risk and provide context for the subsequent subsector analyses. Default risk and examples are
also included in this high-level section where data may not be available at the subsector level.

Industry Default Risk and Examples

This section examines the industry's relative volatility and discusses industry bankruptcy cases
in recent years. The discussion relies on two main sources: 2018 U.S. Cost of Capital Valuation
Handbook14 and UCLA-LoPucki Bankruptcy Research Database.15

The 2018 U.S. Cost of Capital Valuation Handbook provides estimates of the industry's relative
volatility. Specifically, Beta estimates in the book analyze industry risk and volatility relative to
the overall market. A Beta value of one indicates that an industry's volatility is in line with the
overall market. Values above one indicate relatively more volatile industries and values below
one show less volatility than the general market. The handbook's primary source for company-
level data in its annual reports is S&P's Research Insight database, capturing large, publicly
owned companies.

The source analyzes 85 companies in the Chemical Manufacturing Industry16, ranging from
$10.4 million to $62.5 billion in sales. The levered Beta value for the median company in the
sample is 1.12, indicating higher volatility than the general market. At the same time, the Beta
value for the largest companies in the sample is lower, at 0.98, indicating slightly less volatility
than the overall market. The Beta value for the smallest companies in the sample is higher, at
1.27, indicating higher volatility than the overall market.

UCLA's Prof. LoPucki reports bankruptcy filings by industry for large (assets greater than $100
million 1980 dollars) public companies for filings under both Chapter 7 and Chapter 11 of the
Bankruptcy Code. Between 2008 and 2009, during the Great Recession, eight chemical
manufacturing companies in LoPucki's sample filed for bankruptcy. One company filed for
bankruptcy in 2011; then, between 2014 and early 2019, six more chemical manufacturing
companies in LoPucki's sample made bankruptcy filings.

Of the six most recent bankruptcies, three were pharmaceutical companies, one operated in Basic
Chemical Manufacturing, one operated in Resin, Synthetic Rubber, and Artificial Synthetic
Fibers and Filaments Manufacturing, and one operated in both Basic Chemical Manufacturing
and Agricultural Manufacturing. All six filed for bankruptcy under Chapter 11 of the Bankruptcy
Code, which provides for reorganization, including restructuring of the firm's liabilities, but
without impairment of ongoing environmental compliance obligations. Of the three
pharmaceutical manufacturers that filed, two cases are pending, and the other firm did not
emerge. The filing in Resin, Synthetic Rubber, and Artificial Synthetic Fibers and Filaments

14 Duff & Phelps. 2018. 2018 Valuation Handbook: U.S. Industry Cost of Capital. Duff & Phelps, LLC.
Chicago, IL. Print.

15 Lynn M. LoPucki and UCLA School of Law. 2018. Bankruptcy Research Database. Accessed at
http://lopucki.law.ucla.edu/index.htm.

16 The reports analyze industries by Standard Industrial Classification (SIC) code rather thanNAICS code;
this analysis considers SIC code 28, Chemical and Allied Products, which is equivalent to the Chemical
Manufacturing industry, NAICS 325.

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Manufacturing is pending, the Basic Chemical Manufacturer emerged from bankruptcy, and the
firm that operated in both Basic Chemical and Agricultural Manufacturing did not emerge.

Environmental Liabilities Under Chapter 11 Bankruptcy17

As discussed above, firms may file for bankruptcy protection under Chapter 11 of the
Bankruptcy Code. Generally, firms remain liable for environmental compliance obligations in
Sections 101(5) and 1141(d) of the Bankruptcy Code, 11 U.S.C. sees. 101(5), 1141(d), only
provide for a discharge of monetary rights to payment and not for equitable remedies such as
compliance obligations where the Government has not sought the payment of money.18
Moreover, reorganized debtors that own contaminated or defective property are liable to protect
public health and safety like all owners and operators of property regardless of the origin of the
problem as no one is permitted to maintain a nuisance.19

Precedents set in bankruptcy court cases disallow siphoning off environmental liabilities from
other company assets so as to render a company unable to comply with its compliance
obligations. For example, in the Tronox Inc. v. Kerr-McGee Corp case in New York, the court
found the separation of a successful energy business from a failing chemical company
fraudulent, as the division was intended to isolate valuable assets from critical liabilities.20
Another court case, Midlantic National Bank v. NJDEP, limited debtor's ability to abandon
contaminated property in any way that violates laws reasonably designed to protect the public
health or safety from identified hazards.21 At the same time, each bankruptcy proceeding is case-
and company-specific and decisions and outcomes may differ from those described above.

Finally, bankruptcy provisions ensure that companies in Chapter 11 are subject to the same
enforcement proceedings as non-debtor entities. These provisions require entities to comply with
applicable state and federal laws, including financial assurance requirements, while in debt
restructuring and enable governments to take enforcement action in case of noncompliance.
Additionally, an enforcement action resulting in a fine for post-petition violations is generally
classified as an administrative expense.22

The remainder of this document discusses the subsectors of interest in more detail. Specifically,
this analysis provides an industry profile with general information about the size and structure of
the industry, an evaluation of the universe of potentially regulated entities within each subsector,
and a financial summary including an evaluation of financial risk. Financial discussion at the
subsector level relies on the following sources:

Note that this discussion is not specific to the Chemical Manufacturing Industry, but is broadly applicable
to all firms in the U.S. that may have environmental liabilities and be under Chapter 11 bankruptcy protection. Also
note that this brief overview does not constitute an exhaustive legal analysis of this complex issue.

18 United States v. Apex Oil Co., 579 F.3d 734 (7th Cir. 2009); In re Torwico Electronics, Inc., 8 F.3d 146
(3d Cir. 1993); In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991); In re Mark IV Indus., Inc., 438 B.R. 460
(Bankr. S.D.N.Y. 2010), aff d, 459 B.R. 173 (S.D.N.Y. 2011).

19 In re CMC Heartland Partners, 966 F.2d 1143 (7th Cir. 1992); see Ohio v. Kovacs, 469 U.S. 274 (1985).
35 In re Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013)

20 In re Tronox Inc., 503 B.R. 239 (Bankr. S.D.N.Y. 2013).

21 Midlantic Nat'l Bank v. N.J. Dep't of Envtl. Prot., 474 U.S. 494 (1986)

22 In re Munce's Superior Petroleum Products, Inc., 736 F.3d 567 (1st Cir. 2013)..

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• Risk Management Association (RMA)23 reports that provide sector-level financial
outcomes and ratios by asset class for firms with less than $250 million in total assets,

• D&B Hoovers24 reports that provide firm-level financial statements for large, publicly
traded firms in each subsector,25 and

• Bizminer26 reports that estimate the financial performance of the average firm in the
industry.

RMA and D&B Hoovers provide financial statistics for different types of firms in the subsectors.
Specifically, RMA reports consider firms with up to $250 million in assets, excluding large firms
in the industry while D&B Hoovers considers large, publicly traded firms. Thus, the two reports
allow for comparative analysis of relatively large and relatively small firms in the subsectors. On
the other hand, Bizminer reports financial statistics for the average firm in its sample, which
includes firms throughout the United States and of all sales classes. Together, these sources
provide a comprehensive analysis of the financial health and stability of firms in each subsector.

This analysis focuses on four key financial ratios: the current ratio, the interest coverage ratio,
the return on equity (ROE) ratio, and the return on assets (ROA) ratio. The current ratio is a
liquidity and efficiency ratio that measures a firm's ability to pay its short-term liabilities with its
current assets. A current ratio above one usually indicates financial solvency.27 Coverage ratios
evaluate a company's ability to meet its financial obligations such as interest payments and
dividends. An interest coverage ratio below 1.5 indicates that a firm may have trouble making its
interest payments.28 ROA and ROE are profitability ratios that indicate a firm's ability to
generate net income. A ROA ratio of 0.05 or greater is considered healthy29 while a ROE ratio of
0.14 is considered acceptable and a ROE ratio below 0.10 is considered poor.30

This analysis also considers two financial indicators summarizing the relative risk and volatility
of firms in the subsectors: Altman Z-scores and Beta values. Bizminer reports Altman Z-Scores
for its sample, a credit-strength estimate that evaluates the firm's risk of default and likelihood of
bankruptcy. A higher Z-score indicates a lower likelihood of default; a score above 2.9 generally
indicates financial stability. A score below 1.23 indicates possible bankruptcy in the next few
years and scores between 1.23 and 2.9 are inconclusive. The 2018 Cost of Capital Valuation

23 RMA University (Risk Management Association). N.d. eStatementStudies: Industry Data. Accessed at
https://rrnau.org/.

24 D&B Hoovers. N.d. Accessed at http://www.hoovers.com.

25 This report identifies the largest firms using the 2018 Cost of Capital Valuation Handbook, which lists
the largest companies in its sample in terms of sales.

26 Bizminer. 2018. Industry Financial Reports. Accessed at https://www.bizminer.eom//mvreports.php.

27 Investopedia. 2019. Current Ratio Definition. Accessed at
https://www.investopedia.eom/terms/c/currentratio.asp.

28 Investopedia. 2019. Interest Coverage Ratio Definition. Accessed at
https://www.investopedia.eom/terms/i/interestcoverageratio.asp.

29 Investopedia. 2019. Return on Assets ROA Definition. Accessed at
https://www.investopedia.eom/terms/r/roaa.asp

311 Investopedia. 2019. Return on Equity ROE Definition. Accessed at
https://www.investopedia.eom/terms/r/returnoneauitv.asp

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Handbook provides Beta estimates. As discussed above, Beta values consider industry volatility
relative to the overall market, with scores above one indicating more volatility than the market.
Note that all ratios and financial estimates are intended to summarize the general financial health
of the industry and do not reflect the financial performance or wellbeing of individual firms.

BASIC CHEMICAL MANUFACTURING
Subsector Profile

The Basic Chemical Manufacturing subsector encompasses Petrochemical Manufacturing
(NAICS 32511), Industrial Gas Manufacturing (32512), Synthetic Dye and Pigment
Manufacturing (NAICS 32513), and Other Basic Inorganic (NAICS 32518) and Organic (32519)
Chemical Manufacturing.

As discussed above, Basic Chemical Manufacturing firms operate in a business-to-business
commodity market. As such, the subsector is characterized by mass-manufacturing of
homogenous products, thus relying on production efficiency and economies of scale.31 As Figure
1 (above) showed, feedstock and raw materials account for over 60 percent of subsector costs.
Thus, profit margins in the subsector remain low, and, in some cases, economic returns may be
less than capital costs.32

Potential Universe of Regulated Entities

There are over 3,032 sites whose primary activities fall within Basic Chemical Manufacturing.
Of those sites, 40 percent and 29 percent are involved in Other Basic Organic and Inorganic
Chemical Manufacturing, respectively (See Figure 4 below).

31 American Chemistry Council (ACC). 2018. 2018 Elements of the Business of Chemistry. Accessed at
https://www.americanchemistry.com/2018-Elements-of-the-Business-of-Chemistry.pdf.

32 Ibid.

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Figure 4. Basic Chemical Manufacturing Sites by Subpart, 2018

PETROCHEMICAL
MANUFACTURING
10%

SYNTHETIC DYE
AND PIGMENT
MANUFACTURING

5%

Source: EPA 201833

Similarly, Other Basic Organic and Inorganic Chemical Manufacturing accounted for 44 and 26
percent of Basic Chemical Manufacturing establishments in 2016 (see Figure 5 below).
Petrochemical Manufacturing accounted for 10 percent of sites but only three percent of
establishments, likely due to multiple sites per establishment.

33 EPA. 2018. Industry (NAICS) Codes Results for 3251, National. Accessed at
https://rcrapublic.epa.gov/rcrainfoweb/action/modules/lid/naicssearch.

11

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Figure 5. Basic Chemical Manufacturing Establishments by Subpart, 2016

Petrochemical
manufacturing

Other basic
organic chemical
manufacturing
44%

Industrial gas
manufacturing
21%

Synthetic dye and
pigment
manufacturing
6%

Other basic
inorganic chemical
manufacturing
26%

Source: U.S. Census Annual Survey of Manufacturers

In 2016, almost half of the total value of shipments and receipts for services came from Texas
(35 percent) and Louisiana (13 percent).34

Financial Summary

As discussed above, RMA provides financial data on relatively small firms. In 2016, RMA
collected data for 315 firms in the Basic Chemical Manufacturing subsector with total net sales
of $32.3 billion and total assets of $18.3 billion. By 2018, net sales and total assets had declined:
RMA reports that 219 firms generated $18.6 billion in net sales and owned $11.7 billion in total
assets. In 2016, the median current and interest coverage ratios for RMA's sample were 2.1 and
12.8, respectively. In 2018, the median firm in RMA's report had a current ratio of 2.1 and a
coverage ratio of 10.5. Despite the decrease in sales, the coverage and current ratios remained
stable, indicating low default risk in RMA's sample.

D&B Hoovers provides financial reports for three of the largest basic chemical manufacturers in
the United States. These companies include Huntsman Corporation, NewMarket Corporation,
and Westgate Chemical Corporation.

34 U.S. Census Bureau: American Factfinder. 2016 Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gov/faces/tableservices/isf/pages/productview.xhtml?pid=ASM 2016 31AS101&prodType
=table.

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Figure 6 illustrates the total revenues and net income for these three manufacturers. Of the three,
the Huntsman Corporation generated the largest revenues in 2018, at $9.38 billion, increasing
from $7.5 billion in 2016. In total, revenue for the three firms ranged from $2.2 to $9.3 billion
and amounted to over $20.3 billion in 2018, increasing from $14.6 billion in 2016. Westgate
Chemical generated the highest net income compared to the two other firms totaling $996
million in 2018, up from $399 million in 2016. All the manufacturers experienced income
growth between 2016 and 2018, with total net income increasing from $968 million in 2016 to
$1.6 billion in 2018. However, although Huntsman Corporation and Westgate Chemical
Corporation experienced revenue growth over this period, net income fell between 2017 and
2018.

Figure 6. Total Revenue and Net income of the Top Basic Chemical Manufacturers
(Millions)

Firm

Metric

2018

2017

2016

Huntsman
Corp.

Total Revenue

$9,379

$8,358

$7,518

Net Income

$337

$636

$326

Westgate
Chemical
Corp.

Total Revenue

$8,635

$8,041

$5,076

Net Income

$996

$1,304

$399

NewMarket
Corp.

Total Revenue

$2,290

$2,198

$2,050

Net Income

$235

$191

$243

Total

Total Revenue

$20,304

$18,597

$14,644

Net Income

$1,568

$2,131

$968

D&B Hoovers N.d.

Figure 7 shows the current ratios between 2016 and 2018 for the three firms. Between 2016 and
2018, the current ratio for the firms ranged from 1.76 to 3.00. The firms maintained current ratios
well above one, suggesting they were generally solvent.

Figure 7. Current Ratios of the Top Basic Chemical Manufacturers

Firm

2018

2017

2016

Huntsman Corp.

1.84

1.83

2.00

Westgate Chemical Corp.

3.00

2.63

2.84

NewMarket Corp.

2.40

1.76

2.04

D&B Hoovers N.d.

Figure 8 illustrates the interest coverage ratios for the three firms between 2016 and 2018. All
firms maintained healthy coverage ratios well above 1.5.

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Figure 8. Coverage Ratios of the Top Basic Chemical Manufacturers

Firm

2018

2017

2016

Huntsman Corp.

9.19

4.92

3.33

Westgate Chemical Corp.

11.59

7.80

8.06

NewMarket Corp.

11.87

15.40

21.43

D&B Hoovers N.d.

Figure 10 illustrates the ROE and ROA ratios for the three companies. All three firms have
relatively healthy ROEs, though Huntsman Corporation's ROE fell slightly below the healthy
range in 2018. In 2016, all three firms experienced ROA ratios slightly below the healthy
threshold. Two firms, Westgate Chemical Corporation and NewMarket Corporation, recovered
by 2018, both with ROA values of 0.09. That said, the previously discussed thresholds apply to
all firms in the U.S. and do not account for the specifics of the Basic Chemical Manufacturing
sub sector.

Figure 10. Return on Equity (ROE) and Return on Assets (ROA) of the Top Basic
Chemical Manufacturers

Firm

Metric

2018

2017

2016

Huntsman
Corp.

ROE

0.13

0.24

0.25

ROA

0.04

0.06

0.04

Westgate
Chemical
Corp.

ROE

0.18

0.27

0.11

ROA

0.09

0.11

0.04

NewMarket
Corp.

ROE

0.48

0.32

0.50

ROA

0.09

0.11

0.04

D&B Hoovers N.d.

Bizminer reports financial ratios for the average Basic Chemical Manufacturing firm. Bizminer
finds average revenue in the subsector increased from $39.4 million in 2015 to $50.5 million in
2017. Bizminer's analysis of the average firm is likely affected by numerous small firms, driving
down average revenues. The average firm's current ratio also fell between 2015 and 2017, from
1.84 to 1.52. Nevertheless, this current ratio indicates sufficient liquidity to satisfy short-term
obligations. The average coverage ratio within Bizminer's sample remained well above 1.5,
though it fell from 8.27 in 2015 to 4.43 in 2017.

In 2017, the average modified Altman Z-Score in the subsector was 1.6, falling in the
inconclusive range. The 2018 Cost of Capital Valuation Handbook provides Beta estimates for
the Basic Chemical Manufacturing subsector. As discussed above, a value above one indicates
volatility in line with the overall market, while values below and above one indicate less and
more relative volatility, respectively. The book considers subparts of Basic Chemical

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Manufacturing separately. Specifically, the book considers Industrial Inorganic Chemicals,
Industrial Organic Chemicals, and Miscellaneous Chemical Products, which all fall, at least in
part, under the Basic Chemical Manufacturing subsector. The handbook estimates median
levered Beta scores for these three subparts to be 1.23, 1.24, and 1.34 respectively. These scores
identify high subsector volatility.

Generally, data from Bizminer, D&B Hoovers, and RMA suggest that the Basic Chemical
Manufacturing subsector's financial position is relatively healthy though somewhat riskier than
the overall market. Across the samples, the current, interest coverage, ROA, and ROE ratios
generally remain within a healthy range. Further, the top firms in the subsector experienced
revenue growth between 2016 and 2018. However, sales and assets decreased within RMA's
dataset, indicating that smaller firms have struggled in recent years. High Beta values and a
relatively low Z-scores also indicate some default risk among firms in the subsector. Operating
in a commodity market contributes to this intrinsic risk as firms operate on thin margins and
depend on volatile demand.

PESTICIDE, FERTILIZER, AND OTHER AGRICULTURAL CHEMICAL
MANUFACTURING

Subsector Profile

Pesticide, Agricultural chemicals manufacturing operates in both specialty and commodity
markets. Fertilizers and pesticides are used to promote plant growth. As such, they are generally
inputs in the farming sector, though they can also be used in households, hospitals, and other
industries. Like Basic Chemical Manufacturing, fertilizer prices are largely driven by raw
material costs.35

Certain components of the agricultural chemicals subsector are characterized by high market
concentration through M&A. In 2015, six firms controlled 75 percent of the global pesticides
market and 62 percent of the seeds market. These six firms have continued to consolidate in
recent years: in 2016, Bayer announced its acquisition of Monsanto; Dow and Dupont merged in
2017.36 Although all of these firms operate facilities in the US, only three are headquartered
here.

35 American Chemistry Council (ACC). 2018. 2018 Elements of the Business of Chemistry. Accessed at
https://www.americanchemistry.com/2018-Elements-of-the-Business-of-Chemistry.pdf.

36 DeCarlo, Samantha. 2018. And Then There Were Four? M&A in the Agricultural Chemicals Industry.
United States International Trade Commission. Accessed at
https://www.usitc.gov/publications/332/executive briefings/ag ma ebot final.pdf.

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Figure 9. Global Market Share of Pesticides and Seeds, 2015

Company

Pesticide

Seed

Syngenta

20%

Bayer

18%

6ASF

13%

Dow

10%

Total 7S% 62%

Sources: Ort>isr USD A, and the ETC Group

Mote: Estimated sales for pesticides and seeds were $51 billion

and $36 billion, respectively.

Source: DeCarlo 2018

Potential Universe of Regulated Entities

The universe of agricultural chemical manufacturers in the United States is also relatively small
and highly concentrated: there are about 950 establishments in the U.S. subsector (including
establishments owned by one parent company) and the largest eight fertilizer and pesticide
producers account for almost three-quarters of subsector revenues. These large firms operate in
commodity markets, benefitting from large-scale production efficiency. On the other hand,
smaller firms operate in specialty markets where they sell specialized chemical mixtures to local
markets.37

In 2016, five states generated almost half of the total value of shipments and receipts for services
in the subsector:

• Louisiana (16 percent)

• Missouri (13 percent)

• Florida (10 percent)

• Illinois (5 percent)

• Iowa (5 percent)38

37 Dun & Bradstreet: First Research. 2019. Agricultural Chemical Manufacturing Industry Profile. Hoovers
Inc. Accessed at http://www.firstresearch.com/Industry-Researcli/Agricultural-Chemical-Manufacturing.html.

U.S. Census Bureau: American Factfinder. 2016 Annual Survey of Manufacturers. Accessed at
https ://factfinder. census. gov/faces/tableservices/i sf/pages/productview. xhtml?pid=ASM 2016 31AS 101 &prodType
=table

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Financial Summary

In 2016, RMA collected information on 148 firms in the agricultural chemical subsector. The net
sales for these firms totaled $8.6 billion and assets totaled $6.1 billion. The median current ratio
was 1.7 while the median interest coverage ratio was 6.4. Between 2016 and 2018, net sales and
total assets declined: in 2018, RMA reports that 113 firms generated $5.5 billion in net sales and
owned $4 billion in total assets. The current and interest coverage ratios also fell: in 2018, the
median firm in RMA's sample had a current ratio of 1.6 and a coverage ratio of 5.6. The decline
in total sales may be related to the smaller sample size in 2018. The coverage and current ratios
remained stable, suggesting that the default risk for firms in RMA's sample remained relatively
low.

The six large agricultural chemical manufacturing firms discussed above operate globally and
across multiple subsectors of the chemical manufacturing industry. To isolate the financial
performance of agricultural chemical manufacturers, this report considers the three largest (in
terms of sales) firms whose core operations involve agricultural chemical manufacturing: CF
Industries Holdings Inc., FMC Corporation, and Scotts Miracle-Gro.39 D&B Hoovers provides
financial statements for these large firms. Figure 11 illustrates the total revenues and net income
for the manufacturers. In 2018, revenue for the three firms ranged from $2.6 billion to $4.4
billion and amounted to over $11.8 billion in 2018, increasing from $8.7 billion in 2016. Overall,
the manufacturers experienced income growth between 2016 and 2018, with total net income
increasing from $247 million in 2016 to $856 million in 2018. However, Scotts Miracle-Gro's
net income declined from $315 million to $64 million between 2016 and 2018. FMC
Corporation's and CF Industries Holdings' net income also slightly declined from 2017 to 2018.

Figure 11. Total Revenue and Net income of the Top Pesticide, Fertilizer, and Other
Agricultural Chemical Manufacturers (Millions)

Firm

Metric

2018

2017

2016

Total Revenue

$4,429

$4,130

$3,685

39 Scott's Miracle-Gro is a North American subsidiary of Monsanto.

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Firm

Metric

2018

2017

2016

CF Industries
Holdings Inc.

Net Income

$290

$358

-$277

FMC

Corporation

Total Revenue

$4,728

$2,879

$2,539

Net Income

$502

$536

$209

Scotts
Miracle-Gro

Total Revenue

$2,663

$2,642

$2,506

Net Income

$64

$218

$315

Total

Total Revenue

$11,820

$9,651

$8,730

Net Income

$856

$1,112

$247

D&B Hoovers N.d.

Figure 12 shows current ratios for the sample firms between 2016 and 2018. The firms
maintained current ratios above one, indicating sufficient solvency to cover short-term debt.
Between 2016 and 2018, the current ratio for the firms ranged from 1.35 to 3.87.

Figure 12. Current Ratios of the Top Pesticide, Fertilizer, and Other Agricultural
Chemical Manufacturers

Firm

2018

2017

2016

CF Industries Holdings Inc.

1.81

2.53

3.87

FMC Corporation

1.35

1.65

1.98

Scotts Miracle-Gro

1.45

1.62

1.46

D&B Hoovers N.d.

Figure 13 illustrates the interest coverage ratios for the three firms between 2016 and 2018. In
2018, all firms maintained healthy coverage ratios above 1.5. In 2016, CF Industries Holdings
had a coverage ratio of -0.60, but recovered to a ratio of 3.4 in 2018. However, Scotts Miracle-
Gro's coverage ratio decreased from 7.10 to 2.34 between 2016 and 2018. While these ratios
point to a relatively healthy financial position, the firms experienced some degree of
performance volatility.

Figure 13. Coverage Ratios of the Top Pesticide, Fertilizer, and Other Agricultural
Chemical Manufacturers

Firm

2018

2017

2016

-------
CF Industries Holdings Inc.

3.40

0.58

-0.60

FMC Corporation

6.53

3.26

3.85

Scotts Miracle-Gro

2.34

5.14

7.10

D&B Hoovers N.d.

Figure 14 presents the ROE and ROA for the subsector's largest companies. Generally, FMC
Corporation and Scotts Miracle Gro report ROE ratios within the acceptable threshold while CF
Industries Holdings' score remains poor. ROA scores for the three firms vary across years, often
falling below the healthy range for all firms.

Figure 14. Return on Equity (ROE) and Return on Assets (ROA) of the Top Pesticide,
Fertilizer, and Other Agricultural Chemical Manufacturers

Firm

Metric

2018

2017

2016

CF Industries
Holdings Inc.

ROE

0.10

-0.08

ROA

0.02

0.03

-0.02

FMC

Corporation

ROE

0.16

0.20

0.11

ROA

0.05

0.06

0.03

Scotts
Miracle-Gro

ROE

0.18

0.34

0.44

ROA

0.02

0.08

0.11

D&B Hoovers N.d.

Bizminer reports that revenue for the average firm in the subsector increased from $22.3 million
in 2015 to $43.3 million in 2017. In 2017, the current ratio was 1.65, down from 2.21 in 2015 but
remaining in a healthy range. The average coverage ratio in Bizminer's sample was 4.38 in 2017,
down from 18.45 in 2016. Generally, the report indicates a healthy but declining financial
position for the average firm in the subsector.

As discussed above, a higher Z-score is generally better and indicates low likelihood of default.
Between 2016 and 2017 the Z-score for the average firm in Bizminer's sample decreased from
3.33 to 1.81, falling from a financially stable position to moderate bankruptcy risk. The 2018
Cost of Capital Valuation Handbook analyzes five companies in the Agricultural Chemicals
subsector, ranging from $330.8 million to $4.2 billion in sales. For these five firms, the book
estimates a median levered Beta score 1.06, indicating slightly more volatility than the overall
market.

Data from Bizminer, D&B Hoovers, and RMA suggest the Pesticide, Fertilizer, and Other
Agricultural Chemical Manufacturing subsector remains relatively healthy in terms of ability to
pay off debts, but experienced elevated financial risk in recent years. While revenues grew and
financial ratios generally fall within a healthy range, declining current and coverage ratios,
volatile ROA and ROE ratios, a low Z-score, and slightly high Beta value indicate some
financial instability and higher than average default risk among firms in the subsector.

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PHARMACEUTICAL AND MEDICINE MANUFACTURING

Subsector Profile

The Pharmaceutical and Medicine Manufacturing subsector encompasses Medicinal and
Botanical Manufacturing (NAICS 325411), Pharmaceutical Preparation Manufacturing (NAICS
32512), In-Vitro Diagnostic Substance Manufacturing (NAICS 325413), and Biological Product
(except diagnostic) Manufacturing (NAICS 325414).

Pharmaceutical and Medicine Manufacturing is characterized by high R&D costs and higher
profit margins than other subsectors. Patents and other intellectual property protections
encourage growth in the subsector despite high capital costs. The U.S. pharmaceutical subsector
is projected to reach $497 billion by 2020, up from $354 billion in 2015.40 The subsector's
growth has already begun: the total value of shipments and receipts for services rose by over 18
percent between 2013 and 2016.41

Potential Universe of Regulated Entities

As of April 2019, the 2,400 pharmaceutical manufacturing establishments in the United States
generate combined annual revenues of about $225 billion.42 According to U.S. Census data, there
were 2,366 establishments in Pharmaceutical and Medicine Manufacturing in 2016. As seen in
Figure 10, most of these establishments were involved in pharmaceutical preparation
manufacturing.

411 Pharmaceutical Technology. 2017. Report: US pharmaceutical market projected to grow at CAGR of
4.4% up to 2020. Accessed at https://www.pliamiaceutical-teclmologv.com/research-reports/researclireportreport-
us-pharmaceutical-market-proiected-to-grow-at-a-cagr-of-44-up-to-2020-5720032/.

41 U.S. Census Bureau: American Factfinder. Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gOv/faces/iiav/isf/pages/searcliresults.xlitml7refreslFt#none.

42 Dun & Bradstreet: First Research. 2019. Pharmaceutical Manufacturing Industry Profile. Hoovers Inc.
Accessed at http://www.firstresearch.coni/Industrv-Researcli/Pliannaceutical-Manufacturing.htnil.

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Figure 10. Distribution of Pharmaceutical and Medicine Manufacturing Establishments,

Source: U.S. Census Annual Survey of Manufacturers

In 2016, over half of the total value of shipments and receipts for services were generated in
California, North Carolina, and Illinois, with 30, 15, and 7 percent respectively.43

Financial Summary

In 2016, net sales for 293 firms in RMA's Pharmaceuticals Manufacturing sample totaled $15.9
billion while total assets equaled $13.8 billion. The median current ratio was 2.1 while the
median interest coverage ratio was 11.0, indicating a healthy financial position. Between 2016
and 2018, net sales and total assets slightly decreased, but remained relatively stable. In 2018,
RMA reports that 240 firms generated $15.9 billion in net sales and owned $11.7 billion in total
assets. The small decline may be the result of the smaller sample size in 2018. In 2018, the
median current ratio was 1.8 and the interest coverage ratio was 4.5. Despite the decline from
2016, both ratios remained above their respective thresholds, suggesting low default risk in
RMA's sample.

43 U.S. Census Bureau: American Factfinder. 2016 Annual Survey of Manufacturers. Accessed at
https ://factfinder. census. gov/faces/tableservices/i sf/pages/productview. xhtml?pid=ASM 2016 31AS 101 &prodType
=table.

2016

In-vitro diagnosl
substance
manufacturing
10%

21

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D&B Hoovers provides financial data for three largest pharmaceutical manufacturers in the
United States in terms of total sales: Abbvie, Merck Co., and Pfizer. Figure 15 illustrates the total
revenues and net income for these three manufacturers. In total, revenue for the three firms
ranged from $28.2 billion to $53.6 billion and amounted to over $128.7 billion in 2018,
increasing from $118.3 billion in 2016. Between 2016 and 2018, total net income increased from
$17.1 billion to $23.1 billion. All firms experienced steady revenue growth over this time period,
indicating a relatively healthy financial position.

Figure 15. Total Revenue and Net income of the Top Pharmaceutical Manufacturers
(Millions)

Firm

Metric

2018

2017

2016

Abbvie Inc.

Total Revenue

$32,753

$28,216

$25,638

Net Income

$5,687

$5,309

$5,953

Merck Co.
Inc.

Total Revenue

$42,294

$40,122

$39,807

Net Income

$6,220

$2,394

$3,920

Pfizer Inc.

Total Revenue

$53,647

$52,546

$52,824

Net Income

$11,153

$21,308

$7,215

Total

Total Revenue

$128,694

$120,884

$118,269

Net Income

$23,060

$29,011

$17,088

D&B Hoovers N.d.

Figure 16 shows the current ratios between 2016 and 2018 for the sample firms. In 2018, all
firms reported a current ratio below one, indicating insufficient liquidity to satisfy short-term
obligations. Between 2016 and 2018, the current ratio for the firms ranged from 0.48 to 1.65.

Figure 16. Current Ratios of the Top Pharmaceutical Manufacturers

Firm

2018

2017

2016

Abbvie Inc.

0.98

1.28

1.65

Merck Co.

0.77

0.71

0.81

Pfizer Inc.

0.78

0.59

0.48

D&B Hoovers N.d.

Figure 17 presents the interest coverage ratios for the three firms between 2016 and 2018. Over
these three years, all firms maintained healthy coverage ratios well above 1.5.

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Figure 17. Coverage Ratios of the Top Pharmaceutical Manufacturers

Firm

2018

2017

2016

Abbvie Inc.

4.86

7.72

8.53

Merck Co.

12.27

9.65

7.72

Pfizer Inc.

10.03

10.69

8.04

D&B Hoovers N.d.

As shown in Figure 18, Pfizer maintained healthy ROE and ROA ratios from 2016 to 2018,
while Merck Co reported low ratios in 2016 and 2017 but recovered to a healthy range in 2018.
At the same time, Abbvie reports healthy ROA ratios but volatile ROE ratios, ranging from a
high of 1.28 to a low of -0.67, making comparisons and conclusions difficult.

Figure 18. Return on Equity (ROE) and Return on Assets (ROA) of the Top
Pharmaceutical Manufacturers

Firm

Metric

2018

2017

2016

Abbvie Inc.

ROE

-0.67

1.04

1.28

ROA

0.10

0.08

0.09

Merck Co.

ROE

0.23

0.07

0.10

ROA

0.08

0.03

0.04

Pfizer Inc.

ROE

0.18

0.30

0.12

ROA

0.07

0.12

0.04

D&B Hoovers N.d.

Bizminer indicates that revenue for the average firm in its sample increased dramatically in
2017; between 2013 and 2016, revenue ranged from $34.6 million to $40.0 million before
increasing to $410 million in 2017. In 2017, the current ratio was 1.49, a decline from 2.00 in
2015, but remained within a healthy range. The coverage ratio for the average firm in Bizminer's
sample was 10.97 in 2017, down from 22.54 in 2015.

The modified Altman Z-Score was 1.28 in 2017, just above the high bankruptcy risk range. The
2018 Cost of Capital Valuation Handbook analyzes 41 companies in the drug subsector, ranging
from $10.4 million to $52.5 billion in sales. For this sample, the book estimates a median levered
Beta score of 1.05, indicating slightly higher volatility than the overall market. For the largest
companies in the subsector, the levered Beta value of 0.87 indicates low volatility. At the same
time, small companies in the subsector experience high volatility, with a levered Beta score of
1.37.

Overall, this analysis finds the subsector in a healthy financial position. The subsector is growing
and is expected to continue its growth in the near future. Between 2016 and 2018 the top three
firms within the pharmaceutical manufacturing subsector experienced significant growth in

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income and revenue. Bizminer data also show an increase in revenue between 2015 and 2017.
At the same time, as discussed above, there have been three large bankruptcy cases in the
pharmaceutical manufacturing subsector in recent years. Inconsistent financial ratios and a low
Z-score indicate some default risk among firms in the subsector. This risk seems to be
concentrated among relatively smaller firms: RMA's reports suggest that smaller firms (with
under $250 million in total assets) remained relatively stagnant while the large firms grew. In
addition, the high Beta score for small firms indicates higher volatility relative to large firms and
the overall market. High R&D and capital costs increase risk for small firms that cannot rely on
established products for consistent sales. Nonetheless, the number of Pharmaceutical and
Medicine Manufacturing establishments increased from 2,177 in 2014 to 2,366 in 2016,
suggesting net growth in the subsector.

PAINT, COATING, AND ADHESIVE MANUFACTURING
Subsector Profile

The Paint, Coating, and Adhesives Manufacturing subsector encompasses Paint and Coating
Manufacturing (NAICS 3251) and Adhesive Manufacturing (NAICS 3252). As part of the
Consumer Products category, Paint, Coating, and Adhesives are generally sold to end-users, and
compete on price point and product differentiation. Between 2013 and 2016, the subsector grew
about 8 percent in terms of total value of shipments and receipts for services.44

Potential Universe of Regulated Entities

In 2016, there were 1,696 establishments in the Paint, Coating, and Adhesives Manufacturing
Subsector. About 68 percent (1,151 establishments) were involved in Paint and Coating
Manufacturing while the remaining 32 percent (545 establishments) were adhesive
manufacturers.

In 2016, six states generated over half of the total value of shipments and receipts for services in
the subsector:

• Ohio (13 percent)

• Texas (10 percent)

• Illinois (9 percent)

• Pennsylvania (7 percent)

• California (7 percent)

• Michigan (6 percent)45
Financial Summary

44 U.S. Census Bureau: American Factfinder. Annual Survey of Manufacturers. Accessed at
https://factfinder.census.gOv/faces/nav/jsf/pages/searcliresults.xhtinl7refreslFt#none.

45 U.S. Census Bureau: American Factfinder. 2016 Annual Survey of Manufacturers. Accessed at

https ://factfinder. census. gov/faces/tableservices/i sf/pages/productview. xhtml?pid=ASM 2016 31AS 101 &prodType
=table

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In 2016, RMA collected data for 196 firms in the Paint, Coating, and Adhesives Manufacturing
subsector. The total net sales for these firms were $8.4 billion while total assets were $5.4
billion. The median current ratio was 2.3, while the median interest coverage ratio was 11.8.
Between 2016 and 2018, net sales and total assets decreased. In 2018, 151 firms generated $6.4
billion in net sales and owned $3.8 billion in total assets. In 2018, the median current and
coverage ratios also declined, with scores of 2.0 and 5.7, respectively. The decline may be due to
the smaller sample size in 2018 relative to 2016. The coverage and current ratios remained
stable, suggesting that the default risk for firms in RMA's sample is relatively low.

D&B Hoovers provides financial data for the three firms with the highest net sales in the
subsector: Cabot Corporation, Cabot Microelectronics, and H.B. Fuller Corporation. Figure 19
illustrates the total revenues and net income for these three manufacturers. In total, revenue
amounted to over $6.9 billion in 2018, increasing from $4.9 billion in 2016. All firms saw
increases in revenues over these years. However, only two firms experienced net income growth
between 2016 and 2018, with total net income decreasing from $329 million in 2016 to $168
million in 2018. This decline was due to Cabot Corporation's decrease in net income from $248
million in 2017 to negative $113 million in 2018.

Figure 19. Total Revenue and Net income of the Top Paint, Coating, and Adhesive
Manufacturers (Millions)

Firm

Metric

2018

2017

2016

Cabot Corp.

Total Revenue

$3,242

$2,717

$2,411

Net Income

-$113

$248

$147

Cabot

Microelectronics

Total Revenue

$590

$507

$430

Net Income

$110

$87

$60

H.B. Fuller Co.

Total Revenue

$3,041

$2,306

$2,095

Net Income

$171

$59

$122

Total

Total Revenue

$6,873

$5,530

$4,936

Net Income

$168

$394

$329

D&B Hoovers N.d.

Figure 20 displays current ratios between 2016 and 2018. In 2018, the three companies report
current ratios above one, suggesting they are solvent. Between 2016 and 2018, the current ratio
for the firms ranged from 1.46 to 6.63.

Figure 20. Current Ratios of the Top Paint, Coating, and Adhesive Manufacturers

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Firm

2018

2017

2016

Cabot Corp.

1.46

1.75

2.64

Cabot Microelectronics

5.17

6.04

6.63

H.B. Fuller Co.

1.99

2.29

2.07

D&B Hoovers N.d.

Figure 21 presents the interest coverage ratios for the three firms between 2016 and 2018. Over
the three years, the firms maintained coverage ratios well above 1.5, indicating a healthy
financial position.

Figure 21. Coverage Ratios of the Top Paint, Coating, and Adhesive Manufacturers

Firm

2018

2017

2016

Cabot Corp.

3.17

6.64

4.54

Cabot Microelectronics

56.76

25.31

16.00

H.B. Fuller Co.

2.41

2.39

6.96

D&B Hoovers N.d.

Figure 22 presents the ROE and ROA ratios for the firms between 2016 and 2018. Cabot
Microelectronics maintained relatively healthy ROA and ROE ratios. H.B. Fuller maintained
relatively healthy ratios in 2016 and 2018, but had a low ROE AND ROA in 2017. In contrast,
due to its negative net income, Cabot Corporation experienced a negative ROE and ROA in
2018, though these negative ratios were preceded by relatively healthy ratios in 2017 and 2016.

Figure 22. Return on Equity (ROE) and Return on Assets (ROA) of the Top Paint,
Coating, and Adhesive Manufacturers

Firm

Metric

2018

2017

2016

Cabot Corp.

ROE

-0.10

0.16

0.12

ROA

-0.03

0.07

0.05

Cabot

Microelectronics

ROE

0.16

0.15

0.12

ROA

0.14

0.10

0.08

H.B. Fuller Co.

ROE

0.15

0.06

0.13

ROA

0.04

0.01

0.06

D&B Hoovers N.d.

Bizminer finds that revenue for the average firm in its sample increased from $26.1 million in
2015 to $27.1 million in 2017. In 2017, the current ratio was 1.63, down from 1.68 in 2015. The
average coverage ratio was 8.35 in 2017, decreasing from 8.40 in 2015.

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In 2017, the modified Altman Z-Score for the average firm was 2.41, falling below the target
healthy threshold of 2.9. The 2018 Cost of Capital Valuation Handbook does not produce Beta
estimates for Paints and Allied Products. However, some activities that fall under the Paint,
Coating, and Adhesives Manufacturing subsector are included in Miscellaneous Chemical
Products. For this subsector, the book estimates a median levered Beta value of 1.34, indicating
relatively high volatility.

Bizminer, D&B Hoovers, and RMA reports indicate a healthy financial outlook with relatively
low default risk. Firms generally maintained healthy current, interest coverage, ROA, and ROE
ratios. Although RMA's report suggests that smaller firms experienced a decline in assets and
sales, Bizminer finds increases in revenue for the average firm in the subsector. D&B Hoovers
reports healthy financial statistics for two of the top three firms in the subsector.

27

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