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 third quarter of
2020" refers to the three months ended September 30, 2020 and "the third quarter
of 2019" refers to the three months ended September 30, 2019, "the first nine
months of 2020" refers to the nine months ended September 30, 2020 and "the
first nine months of 2019" refers to the nine months ended September 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 September 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 nine months ended
September 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.
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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.
Sale of Phenolic Specialty Resins Business
On September 27, 2020, we entered into a definitive agreement (the "Purchase
Agreement") for the sale of our Phenolic Specialty Resins ("PSR"), Hexamine and
European-based Forest Products Resins businesses (together with PSR, the "Held
for Sale Business") to Black Diamond Capital Management, LLC and
Investindustrial (the "Buyers") for a purchase price of approximately $425. The
consideration consists of $335 in cash and certain assumed liabilities with the
remainder in future contingent proceeds based on the performance of the Held for
Sale Business.
As of September 30, 2020, we reclassified the assets and liabilities of our Held
for Sale Business as held for sale on the unaudited Condensed Consolidated
Balance Sheets and reported the results of the operations for the three and nine
months ended September 30, 2020 as "(Loss) income from discontinued operations,
net of taxes" on the unaudited Condensed Consolidated Statements of Operations.
Amounts for prior periods have similarly been retrospectively reclassified for
all periods presented.
Unless otherwise noted, the tables and discussion below represent the Company's
continuing operations and excludes the Held for Sale Business.
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 September
30, 2020, we have three reportable segments, which consist of the following
businesses:
•Adhesives: these businesses focus on the global adhesives market. They include
the Company's global wood adhesives business, which now also includes the
oilfield technologies group, including: forest products resin assets in North
America, Latin America, Australia and New Zealand; and global formaldehyde.
•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 Successor period July 2, 2019
through September 30, 2019 and for the Predecessor periods July 1, 2019 and
January 1, 2019 through July 1, 2019 to reflect the new reportable segments.
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.

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Financial Results Summary

Our financial results for the period from January 1, 2019 through July 1, 2019 are referred to as those of the "Predecessor" period. Our financial results for the period from July 2, 2019 through September 30, 2019 are referred to as those of the "Successor" period. Our results of operations as reported in our Condensed Consolidated Financial Statements for these periods are prepared in accordance with U.S. GAAP, which requires that we report on our results for the period from January 1, 2019 through July 1, 2019 and the period from July 2, 2019 through September 30, 2019 separately.

We do not believe that reviewing the results of these periods in isolation would be useful in identifying any trends in or reaching any conclusions regarding our overall operating performance. Management believes that the key performance metrics such as Net sales, Operating income and Segment EBITDA for the Successor period when combined with the Predecessor period provides more meaningful comparisons to other periods and are useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our Condensed Consolidated Financial Statements in accordance with U.S. GAAP, the tables and discussions below also present the combined results for the three months and nine months ended September 30, 2019.

The combined results (referenced as "Non-GAAP Combined" or "Combined") for the third quarter ended September 30, 2019 and first nine months ended September 30, 2019, which we refer to herein as results for the "Three Months Ended September 30, 2019" and "Nine Months Ended September 30, 2019" represent the sum of the reported amounts for the Predecessor period July 1, 2019 combined with the Successor period from July 2, 2019 through September 30, 2019 and the Predecessor period from January 1, 2019 through July 1, 2019 combined with the Successor period from July 2, 2019 through September 30, 2019, respectively. These Combined results are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations. The Non-GAAP Combined operating results is presented for supplemental purposes only, may not reflect the actual results we would have achieved absent our emergence from bankruptcy, may not be indicative of future results and should not be viewed as a substitute for the financial results of the Predecessor period and Successor period presented in accordance with U.S.

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