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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-71

  HEXION INC.
(Exact name of registrant as specified in its charter)
New Jersey
 
13-0511250
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
180 East Broad St., Columbus, OH 43215
 
614-225-4000
(Address of principal executive offices including zip code)
 
(Registrant’s telephone number including area code)
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
  
Accelerated filer
 
o
 
 
 
 
 
 
Non-accelerated filer
 
x
  
(Do not check if a smaller reporting company)
 
 
 
 
 
 
 
 
 
 
 
 
 
Smaller reporting company
 
o
 
 
 
 
 
 
 
 
 
 
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x.
Number of shares of common stock, par value $0.01 per share, outstanding as of the close of business on August 1, 2017: 82,556,847


Table of Contents

HEXION INC.
INDEX
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Hexion Inc. Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
Condensed Consolidated Balance Sheets at June 30, 2017 and December 31, 2016
 
 
 
 
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June 30, 2017 and 2016
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2017 and 2016
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2

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HEXION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except share data)
June 30,
2017
 
December 31,
2016
Assets
 
 

Current assets:
 
 

Cash and cash equivalents (including restricted cash of $18 and $17, respectively)
$
128

 
$
196

Accounts receivable (net of allowance for doubtful accounts of $18 and $17, respectively)
497

 
390

Inventories:
 
 

Finished and in-process goods
244

 
199

Raw materials and supplies
102

 
88

Other current assets
45

 
45

Total current assets
1,016

 
918

Investment in unconsolidated entities
19

 
18

Deferred income taxes
12

 
10

Other long-term assets
47

 
43

Property and equipment:
 
 

Land
83

 
79

Buildings
280

 
273

Machinery and equipment
2,277

 
2,353


2,640

 
2,705

Less accumulated depreciation
(1,725
)
 
(1,812
)

915

 
893

Goodwill
125

 
121

Other intangible assets, net
47

 
52

Total assets
$
2,181

 
$
2,055

Liabilities and Deficit
 
 

Current liabilities:
 
 

Accounts payable
$
386

 
$
368

Debt payable within one year
114

 
107

Interest payable
81

 
70

Income taxes payable
7

 
13

Accrued payroll and incentive compensation
31

 
55

Other current liabilities
133

 
159

Total current liabilities
752

 
772

Long-term liabilities:
 
 

Long-term debt
3,585

 
3,397

Long-term pension and post employment benefit obligations
258

 
246

Deferred income taxes
13

 
13

Other long-term liabilities
173

 
166

Total liabilities
4,781

 
4,594

Commitments and contingencies (see Note 7)
 
 

Deficit
 
 

Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at June 30, 2017 and December 31, 2016
1

 
1

Paid-in capital
526

 
526

Treasury stock, at cost—88,049,059 shares
(296
)
 
(296
)
Accumulated other comprehensive loss
(24
)
 
(39
)
Accumulated deficit
(2,806
)
 
(2,730
)
Total Hexion Inc. shareholder’s deficit
(2,599
)
 
(2,538
)
Noncontrolling interest
(1
)
 
(1
)
Total deficit
(2,600
)
 
(2,539
)
Total liabilities and deficit
$
2,181

 
$
2,055

See Notes to Condensed Consolidated Financial Statements

3

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2017

2016
 
2017
 
2016
Net sales
$
912


$
952


$
1,782


$
1,861

Cost of sales
778


854


1,515


1,656

Gross profit
134


98


267


205

Selling, general and administrative expense
75


82


152


166

Gain on dispositions


(240
)



(240
)
Business realignment costs
10


42


17


45

Other operating expense (income), net
9


(4
)

3


(1
)
Operating income
40


218


95


235

Interest expense, net
82


80


165


159

(Gain) loss on extinguishment of debt


(21
)

3


(44
)
Other non-operating income, net
(5
)

(3
)

(1
)

(1
)
(Loss) income before income tax and earnings from unconsolidated entities
(37
)

162


(72
)

121

Income tax (benefit) expense
(1
)

17


7


24

(Loss) income before earnings from unconsolidated entities
(36
)

145


(79
)

97

Earnings from unconsolidated entities, net of taxes
2


5


3


9

Net (loss) income
$
(34
)

$
150


$
(76
)

$
106

See Notes to Condensed Consolidated Financial Statements

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

 
Three Months Ended June 30,
 
Six Months Ended June 30,
(In millions)
2017

2016
 
2017
 
2016
Net (loss) income
$
(34
)
 
$
150

 
$
(76
)
 
$
106

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
9

 
(25
)
 
15

 
1

Loss recognized from pension and postretirement benefits

 
(1
)
 

 
(1
)
Other comprehensive income (loss)
9

 
(26
)
 
15

 

Comprehensive (loss) income
$
(25
)
 
$
124

 
$
(61
)
 
$
106

See Notes to Condensed Consolidated Financial Statements

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended June 30,
(In millions)
2017

2016
Cash flows used in operating activities

 

Net (loss) income
$
(76
)
 
$
106

Adjustments to reconcile net (loss) income to net cash used in operating activities:

 

Depreciation and amortization
56

 
71

Accelerated depreciation

 
106

Deferred tax (benefit) expense
(2
)
 
3

Gain on dispositions

 
(240
)
Gain on sale of assets
(2
)
 

Amortization of deferred financing fees
8

 

Loss (gain) on extinguishment of debt
3

 
(44
)
Unrealized foreign currency losses (gains)
4

 
(45
)
Other non-cash adjustments
(2
)
 
(4
)
Net change in assets and liabilities:

 
 
Accounts receivable
(96
)
 
(119
)
Inventories
(50
)
 
(21
)
Accounts payable
13

 
2

Income taxes payable
1

 
8

Other assets, current and non-current
2

 
(25
)
Other liabilities, current and long-term
(54
)
 
52

Net cash used in operating activities
(195
)
 
(150
)
Cash flows (used in) provided by investing activities

 

Capital expenditures
(57
)
 
(61
)
Capitalized interest

 
(1
)
Proceeds from dispositions, net

 
281

Proceeds from sale of assets, net
4

 
1

Change in restricted cash
1

 
(10
)
Net cash (used in) provided by investing activities
(52
)
 
210

Cash flows provided by (used in) financing activities

 

Net short-term debt borrowings (repayments)
8

 
(12
)
Borrowings of long-term debt
1,119

 
335

Repayments of long-term debt
(928
)
 
(439
)
Long-term debt and credit facility financing fees paid
(24
)
 

Net cash provided by (used in) financing activities
175

 
(116
)
Effect of exchange rates on cash and cash equivalents
3

 

Change in cash and cash equivalents
(69
)
 
(56
)
Cash and cash equivalents (unrestricted) at beginning of period
179

 
228

Cash and cash equivalents (unrestricted) at end of period
$
110

 
$
172

Supplemental disclosures of cash flow information

 

Cash paid for:

 

Interest, net
$
147

 
$
159

Income taxes, net
9

 
16

Non-cash investing activity:
 
 
 
Acceptance of buyer’s note
$

 
$
75

See Notes to Condensed Consolidated Financial Statements

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Table of Contents

HEXION INC.
CONDENSED CONSOLIDATED STATEMENT OF DEFICIT (Unaudited)

(In millions)
Common
Stock
 
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total Hexion Inc. Deficit
 
Noncontrolling Interest
 
Total
Balance at December 31, 2016
$
1

 
$
526

 
$
(296
)
 
$
(39
)
 
$
(2,730
)
 
$
(2,538
)
 
$
(1
)
 
$
(2,539
)
Net loss

 

 

 

 
(76
)
 
(76
)
 

 
(76
)
Other comprehensive income

 

 

 
15

 

 
15

 

 
15

Balance at June 30, 2017
$
1

 
$
526

 
$
(296
)
 
$
(24
)
 
$
(2,806
)
 
$
(2,599
)
 
$
(1
)
 
$
(2,600
)

See Notes to Condensed Consolidated Financial Statements

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(In millions, except share data)
1. Background and Basis of Presentation
Based in Columbus, Ohio, Hexion Inc. (“Hexion” or the “Company”) serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. The Company’s business is organized based on the products offered and the markets served. At June 30, 2017, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins.
The Company’s direct parent is Hexion LLC, a holding company and wholly owned subsidiary of Hexion Holdings LLC (“Hexion Holdings”), the ultimate parent entity of Hexion. Hexion Holdings is controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company’s owner.
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights and variable interest entities in which the Company is the primary beneficiary. Intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement have been included. Results for the interim periods are not necessarily indicative of results for the entire year.
Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Pursuant to the rules and regulations of the Securities and Exchange Commission, certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes included in the Company’s most recent Annual Report on Form 10-K.
2. Summary of Significant Accounting Policies
Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and also requires the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Subsequent Events—The Company has evaluated events and transactions subsequent to June 30, 2017 through the date of issuance of its unaudited Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Board Update No. 2014-09: Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The effective date for ASU 2014-09 is for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted for annual and interim periods beginning on or after December 15, 2016. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09. The Company continues to assess the potential impact of this standard on its financial statements and plans to adopt ASU 2014-09 utilizing a modified retrospective approach, which will result in a cumulative adjustment to equity on the adoption date of January 1, 2018.

In February 2016, the FASB issued Accounting Standards Board Update No. 2016-02: Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 supersedes the existing lease guidance in Topic 840. According to the new guidance, all leases, with limited scope exceptions, will be recorded on the balance sheet in the form of a liability to make lease payments (lease liability) and a right-of-use asset representing the right to use the underlying asset for the lease term. The guidance is effective for annual and interim periods beginning on or after December 15, 2018, and early adoption is permitted. Entities will be required to adopt ASU 2016-02 using a modified retrospective approach, whereby leases will be recognized and measured at the beginning of the earliest period presented. The Company is currently assessing the potential impact of ASU 2016-02 on its financial statements.

In August 2016, the FASB issued Accounting Standards Board Update No. 2016-15: Statement of Cash Flows (Topic 230) (“ASU 2016-15”) as part of the FASB simplification initiative. ASU 2016-15 provides guidance on treatment in the statement of cash flows for eight specific cash flow topics, with the objective of reducing existing diversity in practice. Of the eight cash flow topics addressed in the new guidance, the topics expected to have an impact on the Company include debt prepayment or debt extinguishment costs, proceeds from the settlement of insurance claims, treatment of restricted cash and distributions received from equity method investees. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-15 on its financial statements.

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Table of Contents

In November 2016, the FASB issued Accounting Standards Board Update No. 2016-18: Statement of Cash Flows (Topic 230) Restricted Cash (“ASU 2016-18”) as part of the FASB simplification initiative. ASU 2016-18 requires that amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 also requires supplemental disclosure regarding the nature of restrictions on a company’s cash and cash equivalents, such as the purpose and terms of the restriction, expected duration of the restriction and the amount of cash subject to restriction. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-18 on its financial statements.
In January 2017, the FASB issued Accounting Standards Board Update No. 2017-01: Clarifying the Definition of a Business (Topic 805) (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2017-01 on its financial statements.
In January 2017, the FASB issued Accounting Standards Board Update No. 2017-04: Simplifying the Test for Goodwill Impairment (Topic 350) (“ASU 2017-04”) as part of the FASB simplification initiative. To simplify the subsequent measurement of goodwill, ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, which is Step 1 of the goodwill impairment test. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for goodwill impairment tests performed after December 15, 2019 and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2017-04 on its financial statements.
In March 2017, the FASB issued Accounting Standards Board Update No. 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). ASU 2017-07 requires that an employer report the service cost component of its net periodic pension and postretirement benefit costs (“net benefit cost”) in the same line item or items as other compensation costs arising from services rendered by employees during the period. Additionally, ASU 2017-07 only allows the service cost component of net benefit cost to be eligible for capitalization into inventory. All other components of net benefit cost, which primarily include interest cost, expected return on assets and the annual mark-to-market liability remeasurement, are required to be presented in the income statement separately from the service cost component and outside of income from operations. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is only permitted in the first quarter of 2017. The Company is currently assessing the potential impact of ASU 2017-07 on its financial statements.
Recently Adopted Accounting Standards
In July 2015, the FASB issued Accounting Standards Board Update No. 2015-11: Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”) as part of the FASB simplification initiative. ASU 2015-11 replaces the existing concept of market value of inventory (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin) with the single measurement of net realizable value. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company adopted ASU 2015-11 as of January 1, 2017 and adoption of this standard had no impact on the Company’s financial statements.

In March 2016, the FASB issued Accounting Standards Board Update No. 2016-07: Simplifying the Transition to the Equity Method of Accounting (Topic 323) (“ASU 2016-07”) as part of the FASB simplification initiative. ASU 2016-07 eliminates the requirement that when an existing investment qualifies for use of the equity method, an investor adjust the investment, results of operations and retained earnings retroactively as if the equity method has been in effect in all previous periods that the investment had been held. Under the new guidance, the equity method investor is only required to adopt the equity method as of the date the investment qualifies for the equity method, with no retrospective adjustment required. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company adopted ASU 2016-07 as of January 1, 2017 and adoption of this standard had no impact on the Company’s financial statements.

In March 2016, the FASB issued Accounting Standards Board Update No. 2016-09: Improvements to Employee Share-Based Payment Accounting (Topic 718) (“ASU 2016-09”) as part of the FASB simplification initiative. ASU 2016-09 simplifies various aspects of share-based payment accounting, including the income tax consequences, classification of equity awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company adopted ASU 2016-09 as of January 1, 2017 and adoption of this standard had no impact on the Company’s financial statements.


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3. Business Realignment
    
In the first quarter of 2016, the Company announced a planned rationalization at its Norco, LA manufacturing facility within its Epoxy, Phenolic and Coating Resins segment, and production was ceased at this facility during the second quarter of 2016. As a result of this facility rationalization, the Company recorded one-time costs in 2016 related to the early termination of certain contracts for utilities, site services, raw materials and other items. The Company also recorded a conditional asset retirement obligation (“ARO”) in 2016 related to certain contractually obligated future demolition, decontamination and repair costs associated with this facility rationalization. The Company does not expect to incur any additional contract termination or ARO charges related to this facility rationalization.

The table below summarizes the changes in the liabilities recorded related to contract termination costs and ARO from December 31, 2016 to June 30, 2017, all of which are included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.
 
Contract Termination Costs
 
Asset Retirement Obligation
 
Total
Accrued liability at December 31, 2016
$
18

 
$
13

 
$
31

Activity (1)
(12
)
 
(10
)
 
(22
)
Accrued liability at June 30, 2017
$
6

 
$
3

 
$
9

(1)         These amounts include $21 of cash payments during the six months ended June 30, 2017 and $1 of these amounts are included in “Accounts payable” in the unaudited Condensed Consolidated Balance Sheets as of June 30, 2017.

As a result of the announcement of the Norco facility rationalization, the estimated useful lives of certain long-lived assets related to this facility were shortened, and consequently, during the three months and six months ended June 30, 2016, the Company incurred $30 and $76, respectively, of accelerated depreciation related to these assets, which is included in “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations. These assets were fully depreciated in the second quarter of 2016. In addition, at June 30, 2016 the Company recorded a conditional ARO of $30 related to certain contractually obligated future demolition, decontamination and repair costs associated with this facility rationalization. During the three months ended June 30, 2016, the Company recorded an additional $30 of accelerated depreciation related to this ARO, which is also included in “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations, rendering this item fully depreciated as of June 30, 2016.
    
Lastly, during the three months and six months ended June 30, 2017, the Company incurred additional costs of $1 and $3, respectively, related to other ongoing site closure expenses related to this facility rationalization, which are included in “Business realignment costs” in the unaudited Condensed Consolidated Statements of Operations. During the three months ended June 30, 2016, the Company incurred costs of $25 related to the early termination of certain contracts for utilities, site services, raw materials and other items related to this facility rationalization and $10 related to abnormal production overhead, severance and other expenses to the facility closure. All of these costs are included in “Business realignment costs” in the unaudited Condensed Consolidated Statements of Operations.
4. Related Party Transactions
Administrative Service, Management and Consulting Arrangement
The Company is subject to a Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) that renews on an annual basis, unless notice to the contrary is given by either party. Under the Management Consulting Agreement, the Company receives certain structuring and advisory services from Apollo and its affiliates. The Management Consulting Agreement provides indemnification to Apollo, its affiliates and their directors, officers and representatives for potential losses arising from these services. Apollo is entitled to an annual fee equal to the greater of $3 or 2% of the Company’s Adjusted EBITDA. Apollo elected to waive charges of any portion of the annual management fee due in excess of $3 for the calendar year 2017.
During the three months ended June 30, 2017 and 2016 and during the six months ended June 30, 2017 and 2016, the Company recognized expense under the Management Consulting Agreement of $1 and $2, respectively. This amount is included in “Other operating expense (income), net” in the unaudited Condensed Consolidated Statements of Operations.

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Transactions with MPM
Shared Services Agreement
On October 1, 2010, the Company entered into a shared services agreement with Momentive Performance Materials Inc. (‘MPM”) (which, from October 1, 2010 through October 24, 2014, was a subsidiary of Hexion Holdings), as amended in October 2014 (the “Shared Services Agreement”). Under this agreement, the Company provides to MPM, and MPM provides to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between the Company and MPM. The Shared Services Agreement was renewed for one year starting October 2016 and is subject to termination by either the Company or MPM, without cause, on not less than 30 days’ written notice, and expires in October 2017 (subject to one-year renewals every year thereafter; absent contrary notice from either party). The Company periodically reviews the scope of services provided under this agreement and has recently begun efforts to reduce the scope of services provided by the Company, in particular with respect to human resources, information technology and accounting and finance.
Pursuant to the Shared Services Agreement, during the six months ended June 30, 2017 and 2016, the Company incurred approximately $31 and $39, respectively, of net costs for shared services and MPM incurred approximately $23 and $29, respectively, of net costs for shared services. Included in the net costs incurred during the six months ended June 30, 2017 and 2016, were net billings from the Company to MPM of $15 and $16, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable agreed upon allocation percentage. The Company had accounts receivable from MPM of $2 and $5 as of June 30, 2017 and December 31, 2016, respectively, and no accounts payable to MPM.
Sales and Purchases of Products with MPM
The Company also sells products to, and purchases products from, MPM. During the three months ended June 30, 2017 and 2016, the Company sold less than $1 and purchased $7, respectively. During the six months ended June 30, 2017 and 2016, the Company sold less than $1 of products to MPM and purchased $12 and $15, respectively. During the three and six months ended June 30, 2017 and 2016, the Company earned less than $1 from MPM as compensation for acting as distributor of products. As of both June 30, 2017 and December 31, 2016, the Company had less than $1 of accounts receivable from MPM and $2 of accounts payable to MPM.
Purchases and Sales of Products and Services with Apollo Affiliates Other than MPM
The Company sells products to various Apollo affiliates other than MPM. These sales were $1 and $2 for the three months ended June 30, 2017 and 2016, respectively, and $2 and $6 for the six months ended June 30, 2017 and 2016, respectively. Accounts receivable from these affiliates were less than $1 at both June 30, 2017 and December 31, 2016. The Company also purchases raw materials and services from various Apollo affiliates other than MPM. There were no purchases for the three and six months ended June 30, 2017 and purchases of $0 and less than $1 for the three and six months ended June 30, 2016, respectively. The Company had no accounts payable to these affiliates at June 30, 2017 and accounts payable of less than $1 at December 31, 2016.
Other Transactions and Arrangements
The Company sells products and provides services to, and purchases products from, its joint ventures which are recorded under the equity method of accounting. These sales were $4 and $14 for the three months ended June 30, 2017 and 2016, respectively, and $8 and $34 for the six months ended June 30, 2017 and 2016, respectively. Accounts receivable from these joint ventures were $4 and $7 at June 30, 2017 and December 31, 2016, respectively. These purchases were $3 and $4 for the three months ended June 30, 2017 and 2016, respectively, and $7 and $10 for the six months ended June 30, 2017 and 2016, respectively. The Company had accounts payable to these joint ventures of $1 at both June 30, 2017 and December 31, 2016.
The Company had a loan receivable of $6 and royalties receivable of $2 as of both June 30, 2017 and December 31, 2016 from its unconsolidated forest products joint venture in Russia. Note that these royalties receivable are also included in the accounts receivable from joint ventures disclosed above.
5. Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:
Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
Level 3: Unobservable inputs that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

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Table of Contents

Recurring Fair Value Measurements
As of June 30, 2017, the Company had derivative assets related to electricity, natural gas and foreign exchange contracts of less than $1, which were measured using level 2 inputs, and consists of derivative instruments transacted primarily over-the-counter markets. There were no transfers between Level 1, Level 2 or Level 3 measurements during the six months ended June 30, 2017 or 2016.
The Company calculates the fair value of its Level 2 derivative assets using standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At both June 30, 2017 and December 31, 2016, no adjustment was made by the Company to reduce its derivative position for nonperformance risk.
When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.
Non-derivative Financial Instruments
The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:
 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2017
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,746

 
$

 
$
3,278

 
$
8

 
$
3,286

December 31, 2016
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,542

 
$

 
$
3,134

 
$
9

 
$
3,143

Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Level 3 amounts represent capital leases whose fair value is determined through the use of present value and specific contract terms. The carrying amount and fair value of the Company’s debt is exclusive of unamortized deferred financing fees. The carrying amounts of cash and cash equivalents, short term investments, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.
6. Debt Obligations
Debt outstanding at June 30, 2017 and December 31, 2016 is as follows:
 
 
June 30, 2017
 
December 31, 2016
 
 
Long-Term
 
Due Within
One Year
 
Long-Term
 
Due Within
One Year
ABL Facility
 
$
119

 
$

 
$

 
$

Senior Secured Notes:
 
 
 
 
 
 
 
 
6.625% First-Priority Senior Secured Notes due 2020 (includes $3 of unamortized debt premium)
 
1,553

 

 
1,553

 

10.00% First-Priority Senior Secured Notes due 2020
 
315

 

 
315

 

10.375% First-Priority Senior Secured Notes due 2022
 
560

 

 

 

8.875% Senior Secured Notes due 2018 (includes $1 of unamortized debt discount at December 31, 2016)
 

 

 
706

 

13.75% Senior Secured Notes due 2022
 
225

 

 

 

9.00% Second-Priority Senior Secured Notes due 2020
 
574

 

 
574

 

Debentures:
 
 
 
 
 
 
 
 
9.2% debentures due 2021
 
74

 

 
74

 

7.875% debentures due 2023
 
189

 

 
189

 

Other Borrowings:
 
 
 
 
 
 
 
 
Australia Facility due 2017
 

 
54

 

 
51

Brazilian bank loans
 
12

 
30

 
14

 
26

Capital leases
 
7

 
1

 
7

 
2

Other
 
4

 
29

 
3

 
28

Unamortized debt issuance costs
 
(47
)
 

 
(38
)
 

Total
 
$
3,585

 
$
114

 
$
3,397

 
$
107


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Table of Contents

2017 Refinancing Transactions
In February 2017, the Company issued $485 aggregate principal amount of 10.375% First-Priority Senior Secured Notes due 2022 (the “New First Lien Notes”) and $225 aggregate principal amount of 13.75% Senior Secured Notes due 2022 (the “New Senior Secured Notes”). Upon the closing of these offerings, the Company used the net proceeds from these offerings, together with cash on its balance sheet, to redeem all of the Company’s outstanding 8.875% Senior Secured Notes due 2018 (the “Old Senior Secured Notes”), which occurred in March 2017. In connection with the extinguishment of the Old Senior Secured Notes, the Company wrote off $3 of unamortized deferred debt issuance costs and discounts, which are included in “(Gain) loss on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations.
In May 2017, the Company issued an additional $75 aggregate principal amount of New First Lien Notes at an issue price of 100.5%. These notes mature on February 1, 2022 and have the same terms as the New First Lien Notes issued in February 2017. The Company used the net proceeds from these notes for general corporate purposes.
The Company also amended and restated its ABL Facility in December 2016 with modifications to, among other things, permit the refinancing of the Old Senior Secured Notes. In connection with the issuance of the new notes in February 2017, certain lenders under the ABL Facility provided extended revolving credit facility commitments in an aggregate principal amount of $350 with a maturity date of December 5, 2021 (subject to certain early maturity triggers), the existing commitments were terminated and the size of the ABL Facility was reduced from $400 to $350.    
These transactions are collectively referred to as the “2017 Refinancing Transactions.”
7. Commitments and Contingencies
Environmental Matters
The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Environmental Institution of Paraná IAP—On August 10, 2005, the Environmental Institute of Paraná (IAP), an environmental agency in the State of Paraná, provided Hexion Quimica Industria, the Company’s Brazilian subsidiary, with notice of an environmental assessment in the amount of 12 Brazilian reais. The assessment related to alleged environmental damages to the Paranagua Bay caused in November 2004 from an explosion on a shipping vessel carrying methanol purchased by the Company. The investigations performed by the public authorities have not identified any actions of the Company that contributed to or caused the accident. The Company responded to the assessment by filing a request to have it cancelled and by obtaining an injunction precluding execution of the assessment pending adjudication of the issue. In November 2010, the Court denied the Company’s request to cancel the assessment and lifted the injunction that had been issued. The Company responded to the ruling by filing an appeal in the State of Paraná Court of Appeals. In March 2012, the Company was informed that the Court of Appeals had denied the Company’s appeal, and on June 4, 2012 the Company filed appeals to the Superior Court of Justice and the Supreme Court of Brazil. In September 2016, the Superior Court of Justice decided that strict liability does not apply to administrative fines issued by environmental agencies and reversed the decision of the State of Paraná Court of Appeals. The Superior Court of Justice remanded the case back to the Court of Appeals to determine if the IAP met its burden of proving negligence by the Company. The Company continues to believe it has strong defenses against the validity of the assessment, and does not believe that a loss is probable. At June 30, 2017, the amount of the assessment, including tax, penalties, monetary correction and interest, is 55 Brazilian reais, or approximately $16.
The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at June 30, 2017 and December 31, 2016:
 
Liability
 
Range of Reasonably Possible Costs at June 30, 2017
Site Description
June 30, 2017
 
December 31, 2016
 
Low
 
High
Geismar, LA
$
14

 
$
14

 
$
9

 
$
22

Superfund and offsite landfills – allocated share:
 
 
 
 
 
 
 
Less than 1%
2

 
2

 
1

 
5

Equal to or greater than 1%
7

 
6

 
5

 
13

Currently-owned
4

 
4

 
3

 
9

Formerly-owned:
 
 
 
 
 
 
 
Remediation
28

 
30

 
26

 
43

Monitoring only
1

 
1

 

 
1

Total
$
56

 
$
57

 
$
44

 
$
93


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Table of Contents

These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At June 30, 2017 and December 31, 2016, $13 have been included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets, with the remaining amount included in “Other long-term liabilities.”
Following is a discussion of the Company’s environmental liabilities and the related assumptions at June 30, 2017:
Geismar, LA Site—The Company formerly owned a basic chemicals and polyvinyl chloride business that was taken public as Borden Chemicals and Plastics Operating Limited Partnership (“BCPOLP”) in 1987. The Company retained a 1% interest, the general partner interest and the liability for certain environmental matters after BCPOLP’s formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the District of Delaware among the Company, BCPOLP, the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality, the Company agreed to perform certain of BCPOLP’s obligations for soil and groundwater contamination at BCPOLP’s Geismar, Louisiana site. The Company bears the sole responsibility for these obligations because there are no other potentially responsible parties (“PRP”) or third parties from whom the Company could seek reimbursement.
A groundwater pump and treat system to remove contaminants is operational, and natural attenuation studies are proceeding. If closure procedures and remediation systems prove to be inadequate, or if additional contamination is discovered, costs that would approach the higher end of the range of possible outcomes could result.
Due to the long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, a portion of this liability was recorded at its net present value, assuming a 3% discount rate and a time period of 22 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 22 years, is approximately $20. Over the next five years, the Company expects to make ratable payments totaling $6.
Superfund Sites and Offsite Landfills—The Company is currently involved in environmental remediation activities at a number of sites for which it has been notified that it is, or may be, a PRP under the United States Comprehensive Environmental Response, Compensation and Liability Act or similar state “superfund” laws. The Company anticipates approximately 50% of the estimated liability for these sites will be paid within the next five years, with the remainder over the next twenty-five years. The Company generally does not bear a significant level of responsibility for these sites, and as a result, has little control over the costs and timing of cash flows.
The Company’s ultimate liability will depend on many factors including its share of waste volume, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. The range of possible outcomes takes into account the maturity of each project, resulting in a more narrow range as the project progresses. To estimate both its current reserves for environmental remediation at these sites and the possible range of additional costs, the Company has not assumed that it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The Company has limited information to assess the viability of other PRPs and their probable contribution on a per site basis. The Company’s insurance provides very limited, if any, coverage for these environmental matters.
Sites Under Current Ownership—The Company is conducting environmental remediation at a number of locations that it currently owns, of which ten sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The Company expects to pay approximately $4 of these liabilities within the next five years, with the remainder over the next ten years. The factors influencing the ultimate outcome include the methods of remediation elected, the conclusions and assessment of site studies remaining to be completed, and the time period required to complete the work. No other parties are responsible for remediation at these sites.
Formerly-Owned Sites—The Company is conducting, or has been identified as a PRP in connection with, environmental remediation at a number of locations that it formerly owned and/or operated. Remediation costs at these former sites, such as those associated with our former phosphate mining and processing operations, could be material. The Company has accrued those costs for formerly-owned sites which are currently probable and reasonably estimable. One such site is the Coronet Industries, Inc. Superfund Alternative Site in Plant City, Florida. The Company entered into a settlement agreement effective February 1, 2016 with Coronet Industries and another former site owner. Pursuant to the agreement, the Company agreed to pay $10 in fulfillment of the contribution claim against the Company for past remediation costs, payable in three annual installments, of which one installment remains to be paid in 2018. Additionally, the Company accepted a 40% allocable share of specified future remediation costs at this site. The Company estimates its allocable share of future remediation costs to be approximately $15. The final costs to the Company will depend on the method of remediation chosen, the amount of time necessary to accomplish remediation and the ongoing financial viability of the other PRPs. Currently, the Company has insufficient information to estimate the range of reasonably possible costs related to this site.
Monitoring Only Sites—The Company is responsible for a number of sites that require monitoring where no additional remediation is expected. The Company has established reserves for costs related to these sites. Payment of these liabilities is anticipated to occur over the next ten or more years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.

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Table of Contents

Indemnifications—In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.
Non-Environmental Legal Matters
The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $4 and $2 at June 30, 2017 and December 31, 2016, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At June 30, 2017 and December 31, 2016, $3 and $1, respectively, has been included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets, with the remaining amount included in “Other long-term liabilities.”
The Company is also involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings, including actions that allege harm caused by products the Company has allegedly made or used, containing silica, vinyl chloride monomer and asbestos. The Company believes it has adequate reserves and that it is not reasonably possible that a loss exceeding amounts already reserved would be material. Furthermore, the Company has insurance to cover claims of these types.
8. Pension and Postretirement Benefit Plans
Following are the components of net pension and postretirement (benefit) expense recognized by the Company for the three and six months ended June 30, 2017 and 2016:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended June 30,
 
Three Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
Service cost
$

 
$
4

 
$
1

 
$
3

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
2

 
2

 
2

 
3

 

 
1

 

 
1

Expected return on assets
(3
)
 
(3
)
 
(4
)
 
(2
)
 

 

 

 

Amortization of prior service benefit

 

 

 

 

 

 
(1
)
 

Net (benefit) expense
$
(1
)
 
$
3

 
$
(1
)
 
$
4

 
$

 
$
1

 
$
(1
)
 
$
1

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Six Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
Service cost
$
1

 
$
8

 
$
2

 
$
7

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
4

 
4

 
4

 
5

 

 
1

 

 
1

Expected return on assets
(7
)
 
(5
)
 
(7
)
 
(5
)
 

 

 

 

Amortization of prior service benefit

 

 

 

 

 

 
(1
)
 

Net (benefit) expense
$
(2
)
 
$
7

 
$
(1
)
 
$
7

 
$

 
$
1

 
$
(1
)
 
$
1

9. Segment Information
The Company’s business segments are based on the products that the Company offers and the markets that it serves. At June 30, 2017, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins. A summary of the major products of the Company’s reportable segments follows:
 
Epoxy, Phenolic and Coating Resins: epoxy specialty resins, phenolic encapsulated substrates, versatic acids and derivatives, basic epoxy resins and intermediates and phenolic specialty resins and molding compounds
 
Forest Products Resins: forest products resins and formaldehyde applications

Reportable Segments
Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs not allocated to continuing segments.

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Table of Contents

Net Sales (1):
 
Three Months Ended June 30,
 
Six Months Ended June 30.
 
2017

2016
 
2017
2016
Epoxy, Phenolic and Coating Resins
$
517


$
613

 
$
1,009

$
1,188

Forest Products Resins
395


339

 
773

673

Total
$
912


$
952

 
$
1,782

$
1,861

(1)     Intersegment sales are not significant and, as such, are eliminated within the selling segment.
Reconciliation of Net (Loss) Income to Segment EBITDA:
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
Reconciliation:
 
 
 
 
 
 
 
Net (loss) income
$
(34
)
 
$
150

 
$
(76
)
 
$
106

Income tax (benefit) expense
(1
)
 
17

 
7

 
24

Interest expense, net
82

 
80

 
165

 
159

Depreciation and amortization
28

 
36

 
56

 
71

Accelerated depreciation

 
60

 

 
106

EBITDA
$
75

 
$
343

 
$
152

 
$
466

Items not included in Segment EBITDA:
 
 
 
 

 

Business realignment costs
$
10

 
$
42

 
$
17

 
$
45

Gain on dispositions

 
(240
)
 

 
(240
)
Realized and unrealized foreign currency gains
(1
)
 
(11
)
 
(2
)
 
(9
)
(Gain) loss on extinguishment of debt

 
(21
)
 
3

 
(44
)
Other
16

 
17

 
25

 
34

Total adjustments
25

 
(213
)
 
43

 
(214
)
Segment EBITDA
$
100

 
$
130

 
$
195

 
$
252

 
 
 
 
 


 


Segment EBITDA:
 
 
 
 


 


Epoxy, Phenolic and Coating Resins
$
46

 
$
83

 
$
98

 
$
166

Forest Products Resins
68

 
63

 
129

 
119

Corporate and Other
(14
)
 
(16
)
 
(32
)
 
(33
)
Total
$
100

 
$
130

 
$
195

 
$
252

Items Not Included in Segment EBITDA
Not included in Segment EBITDA are certain non-cash items and other income and expenses. For the three and six months ended June 30, 2017 and 2016, these items primarily include expenses from retention programs and certain professional fees related to strategic projects. Business realignment costs for the three and six months ended June 30, 2017 primarily include costs related to certain in-process facility rationalizations and cost reduction programs. Business realignment costs for the three and six months ended June 30, 2016 primarily include costs related to the planned facility rationalization within the Epoxy, Phenolic and Coating Resins segment and costs related to certain in-process cost reduction programs.

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Table of Contents

10. Changes in Accumulated Other Comprehensive Loss
Following is a summary of changes in “Accumulated other comprehensive loss” for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended June 30, 2017
 
Three Months Ended June 30, 2016
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
3

 
$
(36
)
 
$
(33
)
 
$
4

 
$
7

 
$
11

Other comprehensive income (loss) before reclassifications, net of tax

 
9

 
9

 
(1
)
 
(25
)
 
(26
)
Ending balance
$
3

 
$
(27
)
 
$
(24
)
 
$
3

 
$
(18
)
 
$
(15
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2017
 
Six Months Ended June 30 2016
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
3

 
$
(42
)
 
$
(39
)
 
$
4

 
$
(19
)
 
$
(15
)
Other comprehensive income (loss) before reclassifications, net of tax

 
15

 
15

 
(1
)
 
1

 

Ending balance
$
3

 
$
(27
)
 
$
(24
)
 
$
3

 
$
(18
)
 
$
(15
)

11. Income Taxes

The effective tax rate was 3% and 11% for the three months ended June 30, 2017 and 2016, respectively. The effective tax rate was (10)% and 20% for the six months ended June 30, 2017 and 2016, respectively. The change in the effective tax rate was primarily attributable to the amount and distribution of income and losses among the various jurisdictions in which we operate. The effective tax rates were also impacted by operating gains and losses generated in jurisdictions where no tax expense or benefit was recognized due to the maintenance of a full valuation allowance.

For the three and six months ended June 30, 2017 and 2016, income tax expense relates primarily to income from certain foreign operations. In 2017, losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to the maintenance of a full valuation allowance. In 2016, the income tax expense related to the gain on dispositions was substantially reduced by net operating loss utilization which was offset by a decrease to the respective valuation allowances.
12. Guarantor/Non-Guarantor Subsidiary Financial Information
The Company’s 6.625% First-Priority Senior Secured Notes due 2020, 10.00% First-Priority Senior Secured Notes due 2020, 10.375% First-Priority Senior Secured Notes due 2022, 13.75% Senior Secured Notes due 2022 and 9.00% Second-Priority Senior Secured Notes due 2020 are guaranteed by certain of its U.S. subsidiaries.
The following information contains the condensed consolidating financial information for Hexion Inc. (the parent), the combined subsidiary guarantors (Hexion Investments Inc.; Lawter International, Inc.; HSC Capital Corporation (dissolved in April 2017); Hexion International Inc.; Hexion CI Holding Company (China) LLC; NL COOP Holdings LLC and Oilfield Technology Group, Inc.) and the combined non-guarantor subsidiaries, which includes all of the Company’s foreign subsidiaries.
All of the subsidiary guarantors are 100% owned by Hexion Inc. All guarantees are full and unconditional, and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its domestic subsidiaries by dividend or loan. While the Company’s Australian, New Zealand, Brazilian and China subsidiaries contain certain restrictions related to the payment of dividends and intercompany loans due to the terms of their credit facilities, there are no material restrictions on the Company’s ability to obtain cash from the remaining non-guarantor subsidiaries.
These financial statements are prepared on the same basis as the consolidated financial statements of the Company except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.
This information includes allocations of corporate overhead to the combined non-guarantor subsidiaries based on net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates.


17

Table of Contents

HEXION INC.
June 30, 2017
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
 
 
Hexion
Inc.
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0 and $18, respectively)
$
12

 
$

 
$
116

 
$

 
$
128

Accounts receivable, net
126

 
2

 
369

 

 
497

Intercompany accounts receivable
135

 

 
25

 
(160
)
 

Intercompany loans receivable - current portion
4

 

 

 
(4
)
 

Inventories:
 
 
 
 
 
 
 
 


Finished and in-process goods
101

 

 
143

 

 
244

Raw materials and supplies
39

 

 
63

 

 
102

Other current assets
16

 

 
29

 

 
45

Total current assets
433

 
2

 
745

 
(164
)
 
1,016

Investment in unconsolidated entities
128

 
13

 
19

 
(141
)
 
19

Deferred income taxes

 

 
12

 

 
12

Other assets, net
16

 
6

 
25

 

 
47

Intercompany loans receivable
1,075

 

 
254

 
(1,329
)
 

Property and equipment, net
436

 

 
479

 

 
915

Goodwill
66

 

 
59

 

 
125

Other intangible assets, net
37

 

 
10

 

 
47

Total assets
$
2,191

 
$
21

 
$
1,603

 
$
(1,634
)
 
$
2,181

Liabilities and Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
134

 
$

 
$
252

 
$

 
$
386

Intercompany accounts payable
25

 

 
135

 
(160
)
 

Debt payable within one year

 

 
114

 

 
114

Intercompany loans payable within one year

 

 
4

 
(4
)
 

Interest payable
78

 

 
3

 

 
81

Income taxes payable
6

 

 
1

 

 
7

Accrued payroll and incentive compensation
4

 

 
27

 

 
31

Other current liabilities
80

 

 
53

 

 
133

Total current liabilities
327

 

 
589

 
(164
)
 
752

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
3,482

 

 
103

 

 
3,585

Intercompany loans payable
254

 

 
1,075

 
(1,329
)
 

Accumulated losses of unconsolidated subsidiaries in excess of investment
575

 
141

 

 
(716
)
 

Long-term pension and post employment benefit obligations
40

 

 
218

 

 
258

Deferred income taxes
5

 

 
8

 

 
13

Other long-term liabilities
107

 

 
66

 

 
173

Total liabilities
4,790

 
141

 
2,059

 
(2,209
)
 
4,781

Total Hexion Inc. shareholder’s deficit
(2,599
)
 
(120
)
 
(455
)
 
575

 
(2,599
)
Noncontrolling interest

 

 
(1
)
 

 
(1
)
Total deficit
(2,599
)
 
(120
)
 
(456
)
 
575

 
(2,600
)
Total liabilities and deficit
$
2,191

 
$
21

 
$
1,603

 
$
(1,634
)
 
$
2,181






18

Table of Contents

HEXION INC.
DECEMBER 31, 2016
CONDENSED CONSOLIDATING BALANCE SHEET
 
 
Hexion
Inc.
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0 and $17, respectively)
$
28

 
$

 
$
168

 
$

 
$
196

Accounts receivable, net
119

 
1

 
270

 

 
390

Intercompany accounts receivable
106

 

 
60

 
(166
)
 

Intercompany loans receivable - current portion

 

 
175

 
(175
)
 

Inventories:
 
 
 
 
 
 
 
 


Finished and in-process goods
82

 

 
117

 

 
199

Raw materials and supplies
31

 

 
57

 

 
88

Other current assets
26

 

 
19

 

 
45

Total current assets
392

 
1

 
866

 
(341
)
 
918

Investment in unconsolidated entities
93

 
13

 
18

 
(106
)
 
18

Deferred income taxes

 

 
10

 

 
10

Other long-term assets
17

 
6

 
20

 

 
43

Intercompany loans receivable
1,050

 

 
180

 
(1,230
)
 

Property and equipment, net
448

 

 
445

 

 
893

Goodwill
65

 

 
56

 

 
121

Other intangible assets, net
41

 

 
11

 

 
52

Total assets
$
2,106

 
$
20

 
$
1,606

 
$
(1,677
)
 
$
2,055

Liabilities and Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
142

 
$

 
$
226

 
$

 
$
368

Intercompany accounts payable
60

 

 
106

 
(166
)
 

Debt payable within one year
6

 

 
101

 

 
107

Intercompany loans payable within one year
175

 

 

 
(175
)
 

Interest payable
69

 

 
1

 

 
70

Income taxes payable
6

 

 
7

 

 
13

Accrued payroll and incentive compensation
28

 

 
27

 

 
55

Other current liabilities
110

 

 
49

 

 
159

Total current liabilities
596

 

 
517

 
(341
)
 
772

Long term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
3,378

 

 
19

 

 
3,397

Intercompany loans payable
180

 

 
1,050

 
(1,230
)
 

Accumulated losses of unconsolidated subsidiaries in excess of investment
339

 
106

 

 
(445
)
 

Long-term pension and post employment benefit obligations
42

 

 
204

 

 
246

Deferred income taxes
4

 

 
9

 

 
13

Other long-term liabilities
105

 

 
61

 

 
166

Total liabilities
4,644

 
106

 
1,860

 
(2,016
)
 
4,594

Total Hexion Inc. shareholder’s deficit
(2,538
)
 
(86
)
 
(253
)
 
339

 
(2,538
)
Noncontrolling interest

 

 
(1
)
 

 
(1
)
Total deficit
(2,538
)
 
(86
)
 
(254
)
 
339

 
(2,539
)
Total liabilities and deficit
$
2,106

 
$
20

 
$
1,606

 
$
(1,677
)
 
$
2,055


19

Table of Contents

HEXION INC.
THREE MONTHS ENDED JUNE 30, 2017
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
 
 
Hexion
Inc.
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
417

 
$

 
$
550

 
$
(55
)
 
$
912

Cost of sales
355

 

 
478

 
(55
)
 
778

Gross profit
62

 

 
72

 

 
134

Selling, general and administrative expense
32

 

 
43

 

 
75

Business realignment costs
6

 

 
4

 

 
10

Other operating income, net
3

 

 
6

 

 
9

Operating income
21

 

 
19

 

 
40

Interest expense, net
78

 

 
4

 

 
82

Intercompany interest (income) expense, net
(18
)
 

 
18

 

 

Other non-operating (income) expense, net
(48
)
 

 
43

 

 
(5
)
Income (loss) before tax and earnings from unconsolidated entities
9

 

 
(46
)
 

 
(37
)
Income tax expense (benefit)
2

 

 
(3
)
 

 
(1
)
Income (loss) before earnings from unconsolidated entities
7

 

 
(43
)
 

 
(36
)
(Losses) earnings from unconsolidated entities, net of taxes
(41
)
 
(32
)
 
1

 
74

 
2

Net loss
$
(34
)
 
$
(32
)
 
$
(42
)