The following commentary should be read in conjunction with the audited
Consolidated Financial Statements and the accompanying notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
Within the following discussion, unless otherwise stated, "the first quarter of
2020" refers to the three months ended March 31, 2020 and "the first quarter of
2019" refers to the three months ended March 31, 2019.
Forward-Looking and Cautionary Statements
Certain statements in this report, including without limitation, certain
statements made under the caption "Overview and Outlook," are forward-looking
statements within the meaning of and made pursuant to the safe harbor provisions
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, our management may
from time to time make oral forward-looking statements. All statements, other
than statements of historical facts, are forward-looking statements.
Forward-looking statements may be identified by the words "believe," "expect,"
"anticipate," "project," "might," "plan," "estimate," "may," "will," "could,"
"should," "seek" or "intend" and similar expressions. Forward-looking statements
reflect our current expectations and assumptions regarding our business, the
economy and other future events and conditions and are based on currently
available financial, economic and competitive data and our current business
plans. Actual results could vary materially depending on risks and uncertainties
that may affect our operations, markets, services, prices and other factors as
discussed in the Risk Factors section of this report and our other filings with
the SEC. While we believe our assumptions are reasonable, we caution you against
relying on any forward-looking statements as it is very difficult to predict the
impact of known factors, and it is impossible for us to anticipate all factors
that could affect our actual results. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include, but are not limited to, a weakening of global economic and financial
conditions, interruptions in the supply of or increased cost of raw materials,
the loss of, or difficulties with the further realization of, cost savings in
connection with our strategic initiatives, the impact of our indebtedness, our
failure to comply with financial covenants under our credit facilities or other
debt, pricing actions by our competitors that could affect our operating
margins, changes in governmental regulations and related compliance and
litigation costs, uncertainties related to COVID-19 and the impact of our
responses to it and the other factors listed in the Risk Factors section of this
report and in our other SEC filings. For a more detailed discussion of these and
other risk factors, see the Risk Factors section of this report and our most
recent filings made with the SEC. All forward-looking statements are expressly
qualified in their entirety by this cautionary notice. The forward-looking
statements made by us speak only as of the date on which they are made. Factors
or events that could cause our actual results to differ may emerge from time to
time. We undertake no obligation to publicly update or revise any
forward-looking statement as a result of new information, future events or
otherwise, except as otherwise required by law.
Overview and Outlook
COVID-19 Impact
In March 2020, the World Health Organization categorized COVID-19 as a global
pandemic. Subsequent to March 31, 2020, the United States, and the global
regions where we operate, continue to be impacted by COVID-19. Around the world,
local governments' responses to COVID-19 continue to evolve, which has led to
stay-at-home orders and social distancing guidelines that have disrupted various
industries in the global economy.
During this pandemic, we have implemented additional guidelines to further
protect the health and safety of our employees as we continue to operate with
our suppliers and customers. We have committed to maintaining a paramount focus
on the safety of our employees while minimizing potential disruptions caused by
COVID-19. For example we are following all legislatively-mandated travel
directives in the various countries where we operate, and we have also put
additional travel restrictions in place for our associates designed to reduce
the risk from COVID-19. Additionally, we are utilizing extended work from home
options to protect our office associates, while adjusting our meeting protocols
and processes at our manufacturing sites.
Our businesses have been designated by many governments as essential businesses
as of March 31, 2020 and the vast majority of our operations are continuing. We
are closely monitoring the impact of the COVID-19 pandemic on all aspects of our
businesses and geographies, including its impact on our facilities, employees,
customers, suppliers, vendors, business partners and distribution. While we did
not incur significant adverse financial impacts or business disruptions during
the three months ended March 31, 2020 from COVID-19, we are unable to predict
the impact that COVID-19 will have on our future financial position, operating
results or cash flows due to numerous uncertainties, including new information
which may emerge concerning the severity and duration of COVID-19 and the
actions to contain the virus or treat its impact, among others.
Business Overview
We are a large participant in the specialty chemicals industry, one of the
world's largest producers of thermosetting resins, or thermosets, and a leading
producer of adhesive and structural resins and coatings. Thermosets are a
critical ingredient for most paints, coatings, glues and other adhesives
produced for consumer or industrial uses. We provide a broad array of thermosets
and associated technologies and have significant market positions in all of the
key markets that we serve.


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Our products are used in thousands of applications and are sold into diverse
markets, such as forest products, architectural and industrial paints,
packaging, consumer products and automotive coatings, as well as higher growth
markets, such as wind energy and electrical composites. Major industry sectors
that we serve include industrial/marine, construction, consumer/durable goods,
automotive, wind energy, aviation, electronics, architectural, civil
engineering, repair/remodeling and oil and gas drilling. Key drivers for our
business include general economic and industrial conditions, including housing
starts and auto build rates. In addition, due to the nature of our products and
the markets we serve, competitor capacity constraints and the availability of
similar products in the market may impact our results. As is true for many
industries, our financial results are impacted by the effect on our customers of
economic upturns or downturns, as well as by the impact on our own costs to
produce, sell and deliver our products. Our customers use most of our products
in their production processes. As a result, factors that impact their industries
can and have significantly affected our results.
Through our worldwide network of strategically located production facilities, we
serve more than 3,100 customers in approximately 85 countries. Our global
customers include large companies in their respective industries, such as Akzo
Nobel, BASF, Norbord, Louisiana Pacific, Monsanto, Owens Corning, PPG
Industries, Sherwin Williams and Weyerhaeuser.
Realignment of Reportable Segments in 2020
As part of our continuing efforts to drive growth and greater operating
efficiencies, in January 2020, we changed our reporting segments to align around
our two growth platforms: Adhesives; and Coatings and Composites. At March 31,
2020, we have three reportable segments, which consist of the following
businesses:
•      Adhesives: these businesses focus on the global adhesives market. They
       include our global wood adhesives business, including: forest products
       resin assets in North America, Latin America, Europe, Australia and New
       Zealand; global formaldehyde; and the global phenolic specialty resins
       business, which now also includes the oilfield technologies group.


•      Coatings and Composites: these businesses focus on the global coatings and
       composites market. They include our base and specialty epoxy resins and
       Versatic™ Acids and Derivatives businesses.


•      Corporate and Other: primarily corporate general and administrative
       expenses that are not allocated to the other segments, such as shared
       service and administrative functions and foreign exchange gains and
       losses.

In this quarterly report on form 10-Q, we have recast our Net Sales and Segment EBITDA by reportable segment, for the comparable Predecessor three months ended March 31, 2019 to reflect the new reportable segments. The recast of previously issued financial information does not represent a correction of error with respect to, and has no impact on, our previously issued financial statements. Fresh Start Accounting As a result of the Company's reorganization and emergence from Chapter 11 on the Effective Date, we applied fresh start accounting to our financial statements, which resulted in a new basis of accounting and we became a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Condensed Consolidated Financial Statements after the Effective Date are not comparable with the Condensed Consolidated Financial Statements prior to that date. References to "Successor" or "Successor Company" relate to the financial position and results of operations of the Company after the Effective Date. References to "Predecessor" or "Predecessor Company" refer to the financial position and results of operations of the Company on or before the Effective Date.

2020 Overview Following are highlights from our results of operations for the three months ended March 31, 2020 and 2019:


                              Successor           Predecessor
                           March 31, 2020        March 31, 2019     $ Change    % Change
Statements of Operations:
Net sales                 $           826       $          886     $    (60 )       (7 )%
Operating (loss) income               (31 )                 33          (64 )     (194 )%
Loss before income tax                (57 )                (46 )        (11 )       24  %
Net loss                              (59 )                (52 )         (7 )       13  %
Segment EBITDA:
Adhesives                 $            71       $           76     $     (5 )       (7 )%
Coatings and Composites                39                   44           (5 )      (11 )%
Corporate and Other                   (21 )                (17 )         (4 )       24  %
Total                     $            89       $          103     $    (14 )      (14 )%




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•      Net Sales-In the first three months of 2020, net sales decreased by $60,
       or 7%, compared to the first three months of 2019. Pricing negatively
       impacted sales by $57 due primarily to raw material decreases
       contractually passed through to customers across many of our businesses,
       as well as continued competitive market conditions in our base epoxy
       resins business. Foreign currency translation negatively impacted net
       sales by $15 due to the weakening of various foreign currencies against
       the U.S. dollar in the first three months 2020 compared to the first three
       months of 2019. Volume increases positively impacted net sales by $12
       related to improved volumes in our base and specialty epoxy resins
       businesses driven by strong demand, most notably in global wind energy.
       These volume increases were partially offset by volume reductions in our
       phenolic specialty resins and Latin American resins businesses driven by
       overall weakness in the market, primarily in the automotive and
       construction industries.


•      Net Loss-In the first three months of 2020, net loss increased by $7 as
       compared to the first three months of 2019. This increase in net loss was
       driven by a reduction in operating income of $64, primarily related to an
       increase of $32 in depreciation and amortization expense related to the
       step up of our fixed and intangible assets as a result of the application
       of fresh-start accounting, $16 of asset impairments in our oilfield and
       phenolic specialty resins businesses in the first quarter 2020, a $17
       increase in business realignment costs driven by higher severance expenses
       related to current cost reduction actions and a decrease in gross profit
       due primarily to the margin reductions in our base epoxy resins business
       discussed above. These unfavorable changes to net loss are partially
       offset by a reduction in interest expense of $54 as a result of the
       restructuring of our debt through our Chapter 11 proceedings and $21 of
       costs related to our Chapter 11 proceedings incurred in the first quarter
       2019 prior to filing for bankruptcy.


•      Segment EBITDA-For the first three months of 2020, Segment EBITDA was $89,
       a decrease of 14% compared with $103 in the first three months of 2019.
       This decrease was primarily due to margin reductions in our base epoxy
       resins business driven by continued competitive market conditions,
       partially offset by margin and volume improvements in our versatic acids
       business.


•      Restructuring and Cost Reduction Activities-During the first three months
       of 2020, we achieved $8 in cost savings related to our cost reduction
       activities. These activities include certain in-process facility
       rationalizations and the creation of a business service group within the
       Company to provide certain administrative functions for us going forward.
       Overall we have $15 of in-process cost savings related to these
       activities, which we expect to realize over the next 12 months.


Short-term Outlook
Overall, we expect COVID-19 impacts to challenge our business results throughout
the remainder of 2020. While our businesses have been designated by many
governments as essential businesses which has allowed our operations to continue
during the pandemic, we saw weaker economic conditions begin to develop in the
latter half of March 2020, specifically within automotive and certain industrial
markets. We expect these weaknesses and overall lower global economic demand
caused by COVID-19 to impact our sales and profitability results beginning in
the second quarter 2020. While circumstances around COVID-19 continue to evolve,
thus creating uncertainties around predicting the future impacts on our
financial results, we anticipate that both of our operating segments will be
impacted in some manner by COVID-19 through 2020, due to the global economic
impacts of this pandemic.
We anticipate that the COVID-19 pandemic will have a modest impact on our
overall Coatings and Composites segment due to the markets and geographies in
which this segment operates. Despite overall economic headwinds, we expect
improvement in our epoxy specialty business in 2020 due to the ongoing
introduction of new products and government supported investment in the China
wind energy market, as well as a strong global wind energy market. We expect
competitive market conditions in our base epoxy business to continue throughout
2020.
Within our Adhesives segment, we expect year over year declines in Segment
EBITDA in our North American forest products resins business based on the latest
expectations in U.S. housing starts, remodeling and COVID-19 impacts. We also
expect COVID-19 to negatively impact volumes in our North American formaldehyde
business in 2020. We also expect weaker volumes in our phenolic specialty resins
business due primarily to the impact of COVID-19 on the automotive industry.
We also anticipate that all of our businesses will continue to benefit from the
savings associated with our restructuring and cost reduction initiatives. In
addition, we expect lower raw material costs to positively impact results across
many of our businesses. Further, we plan to implement a variety of growth and
efficiency initiatives in 2020, which include accelerating new product
development efforts and process improvement initiatives. Lastly, despite the
prevailing economic headwinds, the benefits our new capital structure and
decreasing working capital will have a positive impact on free cash flow in
2020.
Matters Impacting Comparability of Results
Chapter 11 Bankruptcy and Fresh Start Accounting Impacts
As a result of the emerging from Chapter 11 and qualifying for the application
of fresh-start accounting, at the Effective Date, our assets and liabilities
were recorded at their estimated fair values which, in some cases, were
significantly different than amounts included in our financial statements prior
to the Effective Date. Accordingly, our financial condition and results of
operations on and after the Effective Date are not directly comparable to our
financial condition and results of operations prior to the Effective Date.
Specifically, our depreciation and amortization expense after the Effective Date
reflects the step-up of fixed and intangible assets as a result of fresh-start
accounting, and our interest expense after the Effective Date reflects the
restructuring of our debt through the Chapter 11 process.
In addition, we incurred costs related to our Chapter 11 proceedings prior to
filing. For the three months ended March 31, 2019, these costs were $21 and are
classified within "Selling, general and administrative expense" in the
Consolidated Statements of Operations.

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Raw Material Prices
Raw materials comprise approximately 80% of our cost of sales (excluding
depreciation expense). The three largest raw materials used in our production
processes are phenol, methanol and urea. These materials represent about half of
our total raw material costs. Fluctuations in energy costs, such as volatility
in the price of crude oil and related petrochemical products, as well as the
cost of natural gas have historically caused volatility in our raw material and
utility costs. In the first three months of 2020 compared to the first three
months of 2019, the average price of phenol increased by approximately 16% and
the average price of urea and methanol decreased by approximately 4% and 15%,
respectively. The impact of passing through raw material price changes to
customers can result in significant variances in sales comparisons from year to
year.
Other Comprehensive Loss
Our other comprehensive loss is primarily impacted by foreign currency
translation. The impact of foreign currency translation is driven by the
translation of assets and liabilities of our foreign subsidiaries which are
denominated in functional currencies other than the U.S. dollar. Our non-U.S.
operations accounted for approximately 55% of our sales in the first three
months of 2020. The primary assets and liabilities driving the adjustments are
cash and cash equivalents; accounts receivable; inventory; property, plant and
equipment; accounts payable; pension and other postretirement benefit
obligations and certain intercompany loans payable and receivable. The primary
currencies in which these assets and liabilities are denominated are the euro,
Brazilian real, Chinese yuan, Canadian dollar and Australian dollar.
In 2019, we entered into an interest rate swap agreement to hedge interest rate
variability caused by quarterly changes in cash flow due to associated changes
in LIBOR under our Senior Secured Term Loan. This swap was designed as a cash
flow hedge and the change in fair value was recorded in "Accumulated other
comprehensive loss".
The impact of defined benefit pension and postretirement benefit adjustments is
primarily driven by unrecognized prior service cost related to our defined
benefit and other non-pension postretirement benefit plans ("OPEB"), as well as
the subsequent amortization of these amounts from accumulated other
comprehensive income in periods following the initial recording of such amounts.
Upon the application of fresh start accounting, on the Effective Date, all prior
unrecognized service cost within accumulated other comprehensive income related
to our defined benefit pension and OPEB plans were reset in accordance with ASC
852.

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