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 second quarter of
2020" refers to the three months ended June 30, 2020 and "the second quarter of
2019" refers to the three months ended June 30, 2019, "the first half of 2020"
refers to the six months ended June 30, 2020 and "the first half of 2019" refers
to the six months ended June 30, 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. Around the world, local governments' responses to COVID-19 continue to
evolve, which has led to stay-at-home orders, social distancing guidelines and
other preventative measures that have disrupted various industries in the global
economy and the markets in which our products are manufactured, distributed and
sold.
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
and our operations have continued through June 30, 2020. While we have continued
to operate during the pandemic, we did incur adverse financial impacts to our
sales and profitability results during the three and six months ended June 30,
2020 from COVID-19, primarily related to reduced volumes associated with the
pandemic. The pandemic has impacted global economic conditions and lowered
demand in many of the end use markets in which the Company operates such as
automotive, aerospace, industrial products, oil and gas, construction and
housing. The ultimate impact that COVID-19 will have on our future financial
position, operating results and cash flows involves numerous risks and
uncertainties, including new information which may emerge concerning the
severity and duration of COVID-19 and actions to contain the virus or treat its
impact.
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.

                                       20

--------------------------------------------------------------------------------


  Table of Contents
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 June 30,
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 and six
months ended June 30, 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 six months ended June 30, 2020 and 2019:


                                      Successor            Predecessor
                                    June 30, 2020         June 30, 2019      $ Change      % Change
     Statements of Operations:
     Net sales                     $      1,454          $      1,778       $  (324)          (18) %
     Operating (loss) income                (64)                   88          (152)         (173) %
     Loss before income tax                (111)                 (146)           35            24  %
     Net loss                              (101)                 (159)           58            36  %
     Segment EBITDA:
     Adhesives                     $        122          $        149       $   (27)          (18) %
     Coatings and Composites                 65                    96           (31)          (32) %
     Corporate and Other                    (33)                  (30)           (3)          (10) %
     Total                         $        154          $        215       $   (61)          (28) %



                                       21

--------------------------------------------------------------------------------


  Table of Contents
•Net Sales-In the first half of 2020, net sales decreased by $324, or 18%,
compared to the first half of 2019. COVID-19's global impact on demand across
various industries and markets in the second quarter of 2020 was the main driver
of the decrease in net sales. Volumes negatively impacted net sales by $194,
which was primarily related to volume decreases in our North American resins
business due to weaker demand and in our base epoxy and phenolic resins
businesses due to overall weakness in the market, primarily in the automotive
and construction industries. Pricing negatively impacted sales by $98 due
primarily to raw material price decreases contractually passed through to
customers across many of our businesses, as well as softer market conditions in
our base epoxy resins business. Foreign currency translation negatively impacted
net sales by $32 due to the weakening of various foreign currencies against the
U.S. dollar in the first half of 2020 compared to the first half of 2019.
•Net Loss-In the first half of 2020, net loss decreased by $58 as compared to
the first half of 2019. This decrease in net loss was mainly driven by $156 of
reorganization costs incurred in the first half of 2019 and a reduction in
interest expense of $38 as a result of the restructuring of our debt through our
Chapter 11 proceedings. These were partially offset by a reduction in operating
income of $152, primarily related to an increase of $62 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 $24 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 impacts of COVID-19 on volumes in
our businesses.
•Segment EBITDA-For the first half of 2020, Segment EBITDA was $154, a decrease
of 28% compared with $215 in the first half of 2019. This decrease was primarily
due to the impacts of COVID-19 on volumes in our businesses, most notably in our
base epoxy resins and forest products resins businesses. We also experienced a
temporary manufacturing outage at our Pernis site, which negatively impacted our
second quarter 2020 Segment EBITDA by approximately $8. These Segment EBITDA
decreases were partially offset by favorability in our specialty epoxy business
driven by strong global demand in wind energy.
•Restructuring and Cost Reduction Activities-During the first half 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 $11 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 negative COVID-19 volume impacts to continue 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 and through the
second quarter, specifically within automotive and certain industrial markets.
We expect these weaknesses and overall lower global economic demand caused by
COVID-19 to negatively impact our sales and profitability results through the
remainder of 2020. The ultimate impact that COVID-19 will have on our operating
results will depend on the severity and duration of the COVID-19 pandemic and
actions to contain the virus or treat its impact.
We anticipate that the COVID-19 pandemic will have an 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 our epoxy
specialty business to continue to benefit from government supported investment
in the China wind energy market, as well as a strong overall 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 COVID-19's
impact on the latest expectations in U.S. housing starts, remodeling and
macroeconomic conditions. We also expect COVID-19 to negatively impact market
demand for volumes in our North American formaldehyde business throughout the
remainder of 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 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 efficiency initiatives in 2020,
which include process improvement and other productivity projects. Lastly,
despite the prevailing economic headwinds, the benefits of 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.
                                       22

--------------------------------------------------------------------------------


  Table of Contents
In addition, during the first half of 2019, we incurred $179 directly related to
our Chapter 11 proceedings. These costs included certain professional fees,
financing fees payable, DIP ABL Facility fees, and other legal fees and
expenses. Of these costs, $156 are classified within "Reorganization items, net"
and we incurred $21 of costs related to our Chapter 11 proceedings prior to
filing which are classified within "Selling, general and administrative expense"
in the unaudited Condensed Consolidated Statements of Operations.
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 half of 2020 compared to the first half of 2019, the
average price of phenol, urea and methanol decreased by approximately 5%, 8% and
20%, respectively. The impact of passing through raw material price changes to
customers can result in significant variances in sales comparisons from year to
year.
We expect long-term raw material cost volatility to continue because of price
movements of key feedstocks. To help mitigate raw material volatility, we have
purchase and sale contracts and commercial arrangements with many of our vendors
and customers that contain periodic price adjustment mechanisms. Due to
differences in timing of the pricing trigger points between our sales and
purchase contracts, there is often a "lead-lag" impact. In many cases this
"lead-lag" impact can negatively impact our margins in the short term in periods
of rising raw material prices and positively impact them in the short term in
periods of falling raw material prices.
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 56% of our sales in the first half 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 is designated 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.
                                       23

--------------------------------------------------------------------------------

Table of Contents

© Edgar Online, source Glimpses