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 endedSeptember 30, 2020 and "the third quarter of 2019" refers to the three months endedSeptember 30, 2019 , "the first nine months of 2020" refers to the nine months endedSeptember 30, 2020 and "the first nine months of 2019" refers to the nine months endedSeptember 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 theSEC . 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 otherSEC 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 theSEC . 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 InMarch 2020 , theWorld 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 throughSeptember 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 endedSeptember 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. 25
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Table of Content s
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 asAkzo Nobel , BASF, Norbord, Louisiana Pacific,Monsanto , Owens Corning, PPG Industries,Sherwin Williams and Weyerhaeuser. Sale of Phenolic Specialty Resins Business OnSeptember 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") toBlack 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 ofSeptember 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 endedSeptember 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, inJanuary 2020 , we changed our reporting segments to align around our two growth platforms: Adhesives; and Coatings and Composites. AtSeptember 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 inNorth 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 ourNet Sales and Segment EBITDA by reportable segment, for the comparable Successor periodJuly 2, 2019 throughSeptember 30, 2019 and for the Predecessor periodsJuly 1, 2019 andJanuary 1, 2019 throughJuly 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. 26
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Table of Content s Financial Results Summary
Our financial results for the period from
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
The combined results (referenced as "Non-GAAP Combined" or "Combined") for the
third quarter ended
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