Document
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 September 30, 2018
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  o   No  x

Explanatory Note:  While the registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, it has filed all reports required to be filed by such filing requirements during the preceding 12 months.
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, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 November 1, 2018: 82,556,847


Table of Contents

HEXION INC.
INDEX
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Hexion Inc. Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

Table of Contents

PART I - FINANCIAL INFORMATION
Item 1.    Financial Statements
HEXION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except share data)
September 30,
2018
 
December 31,
2017
Assets
 
 

Current assets:
 
 

Cash and cash equivalents (including restricted cash of $16 and $18, respectively)
$
137

 
$
115

Accounts receivable (net of allowance for doubtful accounts of $17 and $19, respectively)
463

 
462

Inventories:
 
 

Finished and in-process goods
291

 
221

Raw materials and supplies
105

 
92

Current assets held for sale

 
6

Other current assets
62

 
44

Total current assets
1,058

 
940

Investment in unconsolidated entities
19

 
20

Deferred income taxes
9

 
8

Long-term assets held for sale

 
2

Other long-term assets
40

 
49

Property and equipment:
 
 

Land
90

 
84

Buildings
282

 
291

Machinery and equipment
2,297

 
2,327


2,669

 
2,702

Less accumulated depreciation
(1,826
)
 
(1,778
)

843

 
924

Goodwill
109

 
112

Other intangible assets, net
29

 
42

Total assets
$
2,107

 
$
2,097

Liabilities and Deficit
 
 

Current liabilities:
 
 

Accounts payable
$
391

 
$
402

Debt payable within one year
84

 
125

Interest payable
101

 
82

Income taxes payable
7

 
12

Accrued payroll and incentive compensation
63

 
47

Current liabilities associated with assets held for sale

 
2

Other current liabilities
111

 
135

Total current liabilities
757

 
805

Long-term liabilities:
 
 

Long-term debt
3,710

 
3,584

Long-term pension and post employment benefit obligations
247

 
262

Deferred income taxes
12

 
11

Other long-term liabilities
182

 
177

Total liabilities
4,908

 
4,839

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 September 30, 2018 and December 31, 2017
1

 
1

Paid-in capital
526

 
526

Treasury stock, at cost—88,049,059 shares
(296
)
 
(296
)
Accumulated other comprehensive loss
(16
)
 
(8
)
Accumulated deficit
(3,016
)
 
(2,964
)
Total Hexion Inc. shareholder’s deficit
(2,801
)
 
(2,741
)
Noncontrolling interest

 
(1
)
Total deficit
(2,801
)
 
(2,742
)
Total liabilities and deficit
$
2,107

 
$
2,097

See Notes to Condensed Consolidated Financial Statements

3

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2018
 
2017
 
2018
 
2017
Net sales
$
952

 
$
914

 
$
2,893

 
$
2,696

Cost of sales
796

 
797

 
2,414

 
2,312

Gross profit
156

 
117

 
479

 
384

Selling, general and administrative expense
72

 
77

 
231

 
233

Gain on disposition

 

 
(44
)
 

Asset impairments
3

 
13

 
28

 
13

Business realignment costs
5

 
10

 
19

 
27

Other operating expense, net
6

 
1

 
26

 
4

Operating income
70

 
16

 
219

 
107

Interest expense, net
83

 
82

 
250

 
247

Loss on extinguishment of debt

 

 

 
3

Other non-operating (income) expense, net
(1
)
 
(5
)
 
6

 
(10
)
Loss before income tax and earnings from unconsolidated entities
(12
)
 
(61
)
 
(37
)
 
(133
)
Income tax expense
6

 
9

 
17

 
16

Loss before earnings from unconsolidated entities
(18
)
 
(70
)
 
(54
)
 
(149
)
Earnings from unconsolidated entities, net of taxes

 

 
2

 
3

Net loss
(18
)
 
(70
)
 
(52
)
 
(146
)
Net income attributable to noncontrolling interest

 

 
(1
)
 

Net loss attributable to Hexion Inc.
$
(18
)
 
$
(70
)
 
$
(53
)
 
$
(146
)
See Notes to Condensed Consolidated Financial Statements

4

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

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2018

2017
 
2018
 
2017
Net loss
$
(18
)
 
$
(70
)
 
$
(52
)
 
$
(146
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
(6
)
 
10

 
(8
)
 
25

Other comprehensive (loss) income
(6
)
 
10

 
(8
)
 
25

Comprehensive loss
(24
)
 
(60
)
 
(60
)
 
(121
)
Comprehensive income attributable to noncontrolling interest

 

 
(1
)
 

Comprehensive loss attributable to Hexion Inc.
$
(24
)
 
$
(60
)
 
$
(61
)
 
$
(121
)
See Notes to Condensed Consolidated Financial Statements

5

Table of Contents

HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended September 30,
(In millions)
2018

2017
Cash flows used in operating activities

 

Net loss
$
(52
)
 
$
(146
)
Adjustments to reconcile net loss to net cash used in operating activities:

 

Depreciation and amortization
85

 
85

Non-cash asset impairments and accelerated depreciation
30

 
27

Deferred tax benefit

 
(1
)
Loss (gain) on sale of assets
3

 
(1
)
Gain on disposition
(44
)
 

Amortization of deferred financing fees
13

 
12

Loss on extinguishment of debt

 
3

Unrealized foreign currency losses (gains)
12

 
(5
)
Other non-cash adjustments

 
(4
)
Net change in assets and liabilities:

 
 
Accounts receivable
(25
)
 
(89
)
Inventories
(91
)
 
(29
)
Accounts payable
10

 
(32
)
Income taxes payable
4

 
8

Other assets, current and non-current
(20
)
 
(4
)
Other liabilities, current and long-term
26

 
(29
)
Net cash used in operating activities
(49
)
 
(205
)
Cash flows used in investing activities

 

Capital expenditures
(62
)
 
(86
)
Capitalized interest

 
(1
)
Proceeds from disposition, net
49

 

Proceeds from sale of assets, net
1

 
5

Net cash used in investing activities
(12
)
 
(82
)
Cash flows provided by financing activities

 

Net short-term debt borrowings
6

 
15

Borrowings of long-term debt
425

 
1,291

Repayments of long-term debt
(343
)
 
(1,079
)
Long-term debt and credit facility financing fees paid
(1
)
 
(25
)
Net cash provided by financing activities
87

 
202

Effect of exchange rates on cash and cash equivalents
(4
)
 
7

Change in cash and cash equivalents
22

 
(78
)
Cash and cash equivalents at beginning of period
115

 
196

Cash and cash equivalents at end of period
$
137

 
$
118

Supplemental disclosures of cash flow information

 

Cash paid for:

 

Interest, net
$
219

 
$
205

Income taxes, net
12

 
10

See Notes to Condensed Consolidated Financial Statements

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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, 2017
$
1

 
$
526

 
$
(296
)
 
$
(8
)
 
$
(2,964
)
 
$
(2,741
)
 
$
(1
)
 
$
(2,742
)
Net (loss) income

 

 

 

 
(53
)
 
(53
)
 
1

 
(52
)
Other comprehensive loss

 

 

 
(8
)
 

 
(8
)
 

 
(8
)
Impact of change in accounting policy

 

 

 

 
1

 
1

 

 
1

Balance at September 30, 2018
$
1

 
$
526

 
$
(296
)
 
$
(16
)
 
$
(3,016
)
 
$
(2,801
)
 
$

 
$
(2,801
)

See Notes to Condensed Consolidated Financial Statements
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 September 30, 2018, the Company had three reportable segments: Epoxy, Phenolic and Coating Resins; Forest Products Resins; and Corporate and Other.
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”).
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights. 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
Revenue Recognition—The Company follows the 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. Revenue, net of estimated allowances and returns, is recognized when the Company has completed its performance obligations under a contract and control of the product is transferred to the customer. Substantially all revenue is recognized at the time shipment is made or upon delivery as risk and title to the product transfer to the customer. Sales, value add, and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue. Contract terms for certain transactions, including sales made on a consignment basis, result in the transfer of control of the finished product to the customer prior to the point at which the Company has the right to invoice for the product. In these cases, timing of revenue recognition will differ from the timing of invoicing to customers and will result in the Company recording a contract asset. At September 30, 2018, a contract asset balance of $12 is recorded within “Other current assets” with a corresponding decrease of $10 recorded within “Finished and in-process goods” in the unaudited Condensed Consolidated Balance Sheet. Refer to Note 10 for additional discussion of the Company’s net sales by reportable segment disaggregated by geographic region.
Shipping and Handling—Freight costs that are billed to customers are included in “Net sales” in the unaudited Condensed Consolidated Statements of Operations. Shipping costs are incurred to move the Company’s products from production and storage facilities to the customer. Handling costs are incurred from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and prepare the products for shipment. Revenue from shipping and handling services is recognized when control of the product is transferred to the customer. Shipping and handling costs are recorded in “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations.
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 September 30, 2018 through the date of issuance of its unaudited Condensed Consolidated Financial Statements.
Cash and Cash Equivalents— The Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. The Company’s restricted cash balances of $16 and $18 as of September 30, 2018 and December 31, 2017, respectively, represent deposits to secure certain bank guarantees issued to third parties to guarantee potential obligations of the Company primarily related to the completion of tax audits and environmental liabilities. These balances will remain restricted as long as the underlying exposures exist and are included in the Consolidated Balance Sheets as a component of “Cash and cash equivalents.” Following the adoption of ASU 2016-18: Statement of Cash Flows (Topic 230) Restricted Cash, the Company includes restricted cash in the cash and cash equivalents balance of the Condensed Consolidated Statements of Cash Flows.
    

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Table of Contents

The following table includes the restricted cash changes as a result of the adoption of ASU 2016-18 in the unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017:
Unaudited Condensed Consolidated Statements of Cash Flows
 
For the nine months ended September 30, 2017
 
Previous Accounting Method
 
Effect of Accounting Change
 
As Reported
Cash flows used in investing activities
 
 
 
 
 
Change in restricted cash
$
1

 
$
(1
)
 
$

Net cash used in investing activities
(81
)
 
(1
)
 
(82
)
 
 
 
 
 
 
Effect of exchange rates on cash and cash equivalents
5

 
2

 
7

Change in cash and cash equivalents
(79
)
 
1

 
(78
)
Cash and cash equivalents at beginning of period
179

 
17

 
196

Cash and cash equivalents at end of period
$
100

 
$
18

 
$
118

Recently Issued Accounting Standards
Newly Adopted 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 was for annual and interim periods beginning on or after December 15, 2017.
The Company adopted ASU 2014-09 as of January 1, 2018 utilizing a modified retrospective approach, which resulted in a cumulative adjustment to “Accumulated deficit” of $1 on the date of adoption. ASU 2014-09 was applied to all open contracts as of the date of adoption and resulted only in timing differences for recognition of certain revenue items. The cumulative effects of the changes made to the Company’s unaudited Condensed Consolidated Balance Sheet on January 1, 2018 for the adoption of ASU 2014-09 were as follows:
 
 
Balance at December 31, 2017
 
Adjustments due to ASU 2014-09
 
Balance at January 1, 2018
Assets
 
 
 
 
 
 
Inventory
 
$
221

 
$
(11
)
 
$
210

Other current assets
 
44

 
12

 
56

 
 
 
 
 
 
 
Deficit
 
 
 
 
 
 
Accumulated deficit
 
(2,964
)
 
1

 
(2,963
)
In accordance with the new revenue standard requirements, the impact of adoption on the Company’s unaudited Condensed Consolidated Statements of Operations and unaudited Condensed Consolidated Balance Sheets were as follows:
Unaudited Condensed Consolidated Statements of Operations
 
For the three months ended September 30, 2018
 
For the nine months ended September 30, 2018
 
As reported
 
Balances without Adoption of ASC 606
 
Effect of change higher/(lower)
 
As reported
 
Balances without Adoption of ASC 606
 
Effect of change higher/(lower)
Net sales
$
952

 
$
952

 
$

 
$
2,893

 
$
2,892

 
$
1

Cost of sales
796

 
795

 
1

 
2,414

 
2,414

 

Gross profit
156

 
157

 
(1
)
 
479

 
478

 
1


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Table of Contents

Unaudited Condensed Consolidated Balance Sheets

 
Balance at September 30, 2018
Assets
As reported
 
Balances without Adoption of ASC 606
 
Effect of change higher/(lower)
Inventory
$
291

 
$
301

 
$
(10
)
Other current assets
62

 
50

 
12

 
 
 
 
 
 
Deficit
 
 
 
 
 
Accumulated deficit
(3,016
)
 
(3,018
)
 
2

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, accounts receivable factoring, proceeds from the settlement of insurance claims and distributions received from equity method investees. The guidance was effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted ASU 2016-15 as of January 1, 2018 and adoption of this standard had an immaterial impact on the Company’s financial statements.
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 was effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted ASU 2016-18 as of January 1, 2018. As a result of adopting ASU 2016-18, the beginning and ending cash balances within the unaudited Condensed Consolidated Statements of Cash Flows now include restricted cash as of September 30, 2018 and 2017. The impact of the adoption of this standard on the Company’s unaudited Condensed Consolidated Statements of Cash Flows is disclosed above in the cash and cash equivalents section of this footnote.
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 was effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted ASU 2017-01 as of January 1, 2018 and the adoption of this standard had no impact on the Company’s 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 was effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period. The Company adopted ASU 2017-07 as of January 1, 2018. The components of the net (benefit) cost are shown in Note 8.
The impact of these pension and OPEB accounting policy changes were applied through retrospective adoption of the new ASU 2017-07 to all periods presented. Accordingly, all relevant information for the three and nine months ended September 30, 2018 and all prior periods has been adjusted to reflect the application of the changes.

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Table of Contents

The effects of the changes to the unaudited Condensed Consolidated Statements of Operations are as follows:
Unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2017:
 
 
Previous Accounting Method
 
Effect of Accounting Change
 
As Reported
Selling, general and administrative expense
 
$
75

 
$
2

 
$
77

Operating income
 
18

 
(2
)
 
16

Other non-operating (income) expense, net
 
(3
)
 
(2
)
 
(5
)
 
Unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2017:
 
 
Previous Accounting Method
 
Effect of Accounting Change
 
As Reported
Selling, general and administrative expense
 
$
227

 
$
6

 
$
233

Operating income
 
113

 
(6
)
 
107

Other non-operating (income) expense, net
 
(4
)
 
(6
)
 
(10
)
Newly Issued Accounting Standards
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. The Company plans to adopt ASU 2016-02 on a prospective basis. The Company is in the process of implementing a software solution to facilitate the development of reporting and disclosure processes and controls around leases to meet the new accounting and disclosure requirements upon adoption in January 2019. In addition, the Company is currently assessing the potential impact of this standard on its financial statements and based on current analysis, the Company anticipates right-of-use assets and offsetting lease liabilities in an approximate range of $80 and $130 to be recorded on the Company’s Balance Sheet upon adoption of the standard.
In February 2018, the FASB issued Accounting Standards Board Update No. 2018-02: Income Statement-Reporting Comprehensive Income (Topic 220) (“ASU 2018-02”). ASU 2018-02 was issued in response to the United States tax reform legislation, the Tax Cuts and Jobs Act (“Tax Reform”), enacted in December 2017. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the new tax legislation. The guidance is effective for annual and interim periods beginning on or after December 15, 2018, and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2018-02 on its financial statements.
3. Restructuring & Business Realignment
    
Restructuring Activities

In November 2017, the Company initiated new restructuring actions with the intent to optimize its cost structure. The total one-time cash costs expected to be incurred for these restructuring activities are estimated at $27, consisting primarily of workforce reduction costs.

The following table summarizes restructuring information by reporting segment:
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Corporate and Other
 
Total
Total restructuring costs expected to be incurred
$
14

 
$
9

 
$
4

 
$
27

Total restructuring costs incurred through September 30, 2018
$
13

 
$
8

 
$
4

 
$
25

 
 
 
 
 
 
 
 
Accrued liability at December 31, 2017
$
11

 
$
3

 
$
3

 
$
17

Restructuring charges and adjustments
1

 
3

 
1

 
5

Payments
(10
)
 
(3
)
 
(2
)
 
(15
)
Accrued liability at September 30, 2018
$
2

 
$
3

 
$
2

 
$
7



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Table of Contents

Oilfield
    
During the first quarter of 2018, the Company indefinitely idled an oilfield manufacturing facility within its Epoxy, Phenolic and Coating Resins segment, and production was shifted to another facility within the oilfield manufacturing group. This represented a triggering event resulting in an impairment evaluation of the fixed and intangible assets within the U.S. oilfield asset group. As a result, an asset impairment of $20 was recorded in the first quarter of 2018 related to the fixed assets at the idled manufacturing facility. In addition, the remaining U.S. oilfield asset group was evaluated for impairment utilizing a discounted cash flow approach, resulting in an additional impairment of $5 that was recorded during the first quarter of 2018 related to an existing customer relationship intangible asset. Overall, the Company incurred $25 of total impairment related to these assets, which is included in “Asset impairments” in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2018.
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 2018 and 2017.
During the three and nine months ended September 30, 2018 and 2017, the Company recognized expense under the Management Consulting Agreement of $1 and $2, respectively. This amount is included in “Other operating expense, net” in the unaudited Condensed Consolidated Statements of Operations.
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 2018 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 2019 (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.
Pursuant to the Shared Services Agreement, the below table summarizes the transactions between the Company and MPM:
 
Nine Months Ended September 30,
 
2018
2017
Total cost pool - Hexion (1)
$
23

 
$
41

Total cost pool - MPM (1)
17

 
31

(1)     Included in the net costs incurred during the nine months ended September 30, 2018 and 2017, were net billings from Hexion to MPM of $11 and $21, 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.
 
September 30, 2018
 
December 31, 2017
Accounts receivable from MPM
$
1

 
$
3




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Table of Contents

Sales and Purchases of Products with MPM
The Company also sells products to, and purchases products from, MPM. There were no products sold during the three months ended September 30, 2018 and during the three months ended September 30, 2017, the Company sold less than $1 of products to MPM. During the nine months ended September 30, 2018 and 2017, the Company sold less than $1 of products to MPM. During the three and nine months ended September 30, 2018 and 2017, the company earned less than $1 from MPM as compensation for acting as distributor of products. Refer to the below table for the summary of the purchases of products with MPM:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
2017
Purchases from MPM
$
9

 
$
6

 
$
25

 
$
18

 
September 30, 2018
 
December 31, 2017
Accounts payable to MPM
$
3

 
$
2

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 for both the three months ended September 30, 2018 and September 30, 2017 and $2 and $3 for the nine months ended September 30, 2018 and 2017, respectively. Accounts receivable from these affiliates were less than $1 at both September 30, 2018 and December 31, 2017.
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. Refer to the below table for a summary of the sales and purchases with the Company and its joint ventures which are recorded under the equity method of accounting:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
2017
 
2018
 
2017
Sales to joint ventures
$
1

 
$
1

 
$
7

 
$
9

Purchases from joint ventures
< 1

 
3

 
5

 
10

 
September 30, 2018
 
December 31, 2017
Accounts receivable from joint ventures
$
3

 
$
6

Accounts payable to joint ventures
< 1

 
1

In addition to the accounts receivable from joint ventures disclosed above, the Company had a loan receivable of $7 and $6 as of September 30, 2018 and December 31, 2017, respectively, from its unconsolidated forest products joint venture in Russia.
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.
Recurring Fair Value Measurements
As of September 30, 2018, the Company had derivative assets related to foreign exchange, electricity and natural gas contracts of $1, which were measured using level 2 inputs, and consisted of derivative instruments transacted primarily in over-the-counter markets. There were no transfers between Level 1, Level 2 or Level 3 measurements during the nine months ended September 30, 2018 or 2017.

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The Company calculates the fair value of its Level 2 derivative liabilities 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 September 30, 2018 and December 31, 2017, 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(1)
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2018
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,826

 
$

 
$
3,468

 
$
65

 
$
3,533

December 31, 2017
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,750

 
$

 
$
3,206

 
$
49

 
$
3,255

(1)
Debt carrying amounts exclude unamortized deferred debt issuance costs of $32 and $41 at September 30, 2018 and December 31, 2017, respectively.
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 September 30, 2018 and December 31, 2017 is as follows:
 
 
September 30, 2018
 
December 31, 2017
 
 
Long-Term
 
Due Within
One Year
 
Long-Term
 
Due Within
One Year
ABL Facility
 
$
150

 
$

 
$
81

 
$

Senior Secured Notes:
 
 
 
 
 
 
 
 
6.625% First-Priority Senior Secured Notes due 2020 (includes $1 and $2 of unamortized debt premium at September 30, 2018 and December 31, 2017, respectively)
 
1,551

 

 
1,552

 

10.00% First-Priority Senior Secured Notes due 2020
 
315

 

 
315

 

10.375% First-Priority Senior Secured Notes due 2022
 
560

 

 
560

 

13.75% Senior Secured Notes due 2022
 
225

 

 
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 2021 (1)
 
33

 
4

 

 
50

Brazilian bank loans
 
12

 
35

 
9

 
34

Lease obligations
 
56

 
9

 
44

 
5

Other
 
3

 
36

 
2

 
36

Unamortized debt issuance costs
 
(32
)
 

 
(41
)
 

Total
 
$
3,710

 
$
84

 
$
3,584

 
$
125

(1)     In February 2018, the Company extended its Australian Term Loan Facility through January 2021.
The Company has $1.9 billion of First-Priority Senior Secured Notes maturing in April 2020 and $0.6 billion of Second-Priority Senior Secured Notes maturing in November 2020. Additionally, if 91 days prior to the scheduled maturity of these notes, more than $50 aggregate principal amount of the maturing notes is outstanding, the ABL Facility, which matures in December 2021, will accelerate and become immediately due and payable.

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Table of Contents

The Company regularly reviews its portfolio and is currently exploring potential divestitures. While there is no guarantee of a transaction, it could include a specific business unit or combination of several businesses. The Company expects that the proceeds from a transaction or transactions upon completion would be used to help reduce the absolute amount of the Company’s debt.
Further, depending upon market, pricing and other conditions, including the current state of the high yield bond market, as well as cash balances and available liquidity, the Company or its affiliates, may seek to acquire notes or other indebtedness of the Company through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as the Company or its affiliates may determine (or as may be provided for in the indentures governing the notes), for cash or other consideration.
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.
The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at September 30, 2018 and December 31, 2017:
 
Liability
 
Range of Reasonably Possible Costs at September 30, 2018
Site Description
September 30, 2018
 
December 31, 2017
 
Low
 
High
Geismar, LA
$
13

 
$
14

 
$
9

 
$
22

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

 
2

 
1

 
5

Equal to or greater than 1%
5

 
6

 
5

 
14

Currently-owned
4

 
4

 
2

 
8

Formerly-owned:
 
 
 
 
 
 
 
Remediation
23

 
26

 
21

 
39

Monitoring only
1

 

 
1

 
4

Total
$
48

 
$
52

 
$
39

 
$
92

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 September 30, 2018 and December 31, 2017, $9 and $11, respectively, 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 September 30, 2018:
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 tasks related to 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 21 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 21 years, is approximately $18. Over the next five years, the Company expects to make ratable payments totaling $5.

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Table of Contents

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 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 the Company’s 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 current owner of the site alleged that it incurred environmental costs at the site for which it has a contribution claim against the Company, and that additional future costs are likely to be incurred. The Company signed a settlement agreement with the current owner and past owner of the site, which provides the Company will pay $10 over three annual installments in fulfillment of the contribution claim against the Company for past remediation costs. The Company timely paid all three annual installments. 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 $14. 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.
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 $2 and $3 at September 30, 2018 and December 31, 2017, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At September 30, 2018 and December 31, 2017, $2 has been included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets, with less than $1 included in “Other long-term liabilities.”
Other Legal Matters—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.

15

Table of Contents

8. Pension and Postretirement Benefit Plans
As a result of the adoption of ASU 2017-07, the Company’s service cost component of net benefit cost is included in “Operating income” and all other components of net benefit cost are included in “Other non-operating (income) expense, net” within the Company’s unaudited Condensed Consolidated Statements of Operations. Following are the components of net benefit cost recognized by the Company for the three and nine months ended September 30, 2018 and 2017:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
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

 
$
4

 
$
1

 
$
4

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
1

 
3

 
2

 
3

 

 
1

 

 

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

 

 

 

Net (benefit) expense
$
(1
)
 
$
3

 
$

 
$
4

 
$

 
$
1

 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
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
$
2

 
$
13

 
$
2

 
$
12

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
5

 
8

 
6

 
7

 

 
1

 

 
1

Expected return on assets
(10
)
 
(10
)
 
(10
)
 
(8
)
 

 

 

 

Net (benefit) expense
$
(3
)
 
$
11

 
$
(2
)
 
$
11

 
$

 
$
1

 
$

 
$
1

9. Dispositions

ATG
On January 8, 2018, the Company completed the sale of its Additives Technology Group business (“ATG”). ATG was previously included within the Company’s Forest Products Resins segment and includes manufacturing sites located in Somersby, Australia and Sungai Petani, Malaysia. The ATG business produces a range of specialty chemical materials for the engineered wood, paper impregnation and laminating industries, including catalysts, release agents and wetting agents.

The Company received gross cash consideration for the ATG business in the amount of $49, which was used for general corporate purposes. The Company recorded a gain on this disposition of $44 which is included in “Gain on disposition” in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2018.
10. Segment Information
The Company’s business segments are based on the products that the Company offers and the markets that it serves. In the fourth quarter of 2017, the Company added Corporate and Other as a reportable segment. At September 30, 2018, the Company had three reportable segments: Epoxy, Phenolic and Coating Resins; Forest Products Resins; and Corporate and Other. 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

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

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 other 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):
Following is revenue by reportable segment. Product sales within each reportable segment share economically similar risks. These risks include general economic and industrial conditions, competitive pricing pressures and the Company’s ability to pass on fluctuations in raw material prices to its customers. A substantial number of the Company’s raw material inputs are petroleum-based and their prices fluctuate with the price of oil. Due to differing regional industrial and economic conditions, the geographic distribution of revenue may impact the amount, timing and uncertainty of revenue and cash flows from contracts with customers.
Following is net sales by reportable segment disaggregated by geographic region:
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Epoxy, Phenolic and Coating Resins

Forest Products Resins
 
Total
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Total
North America
$
225

 
$
294

 
$
519

 
$
215

 
$
254

 
$
469

Europe
215

 
49

 
264

 
220

 
49

 
269

Asia Pacific
80

 
35

 
115

 
91

 
34

 
125

Latin America
1

 
53

 
54

 
2

 
49

 
51

Total
$
521


$
431

 
$
952

 
$
528

 
$
386

 
$
914

 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Total
 
Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Total
North America
$
695

 
$
856

 
$
1,551

 
$
623

 
$
773

 
$
1,396

Europe
709

 
155

 
864

 
665

 
145

 
810

Asia Pacific
218

 
101

 
319

 
243

 
99

 
342

Latin America
3

 
156

 
159

 
6

 
142

 
148

Total
$
1,625

 
$
1,268

 
$
2,893

 
$
1,537

 
$
1,159

 
$
2,696

(1)     Intersegment sales are not significant and, as such, are eliminated within the selling segment.

Reconciliation of Net Loss to Segment EBITDA:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Reconciliation:
 
 
 
 
 
 
 
Net loss attributable to Hexion Inc.
$
(18
)
 
$
(70
)
 
$
(53
)
 
$
(146
)
Net income attributable to noncontrolling interest

 

 
(1
)
 

Net loss
(18
)
 
(70
)
 
(52
)
 
(146
)
Income tax expense
6

 
9

 
17

 
16

Interest expense, net
83

 
82

 
250

 
247

Depreciation and amortization
27

 
29

 
85

 
85

Accelerated depreciation
2

 
14

 
2

 
14

EBITDA
$
100

 
$
64

 
$
302

 
$
216

Items not included in Segment EBITDA:
 
 
 
 

 

Asset impairments and write-downs
$
7

 
$
13

 
$
32

 
$
13

Business realignment costs
5

 
10

 
19

 
27

Gain on disposition

 

 
(44
)
 

Realized and unrealized foreign currency losses (gains)
4

 
(5
)
 
26

 
(7
)
Loss on extinguishment of debt

 

 

 
3

Other
12

 
14

 
39

 
39

Total adjustments
28

 
32

 
72

 
75

Segment EBITDA
$
128

 
$
96

 
$
374

 
$
291

 
 
 
 
 


 


Segment EBITDA:
 
 
 
 


 


Epoxy, Phenolic and Coating Resins
$
66

 
$
45

 
$
208

 
$
143

Forest Products Resins
76

 
66

 
219

 
195

Corporate and Other
(14
)
 
(15
)
 
(53
)
 
(47
)
Total
$
128

 
$
96

 
$
374

 
$
291


17

Table of Contents

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 nine months ended September 30, 2018 and 2017, these items primarily include expenses from retention programs and certain professional fees related to strategic projects. Business realignment costs for the three and nine months ended September 30, 2018 and 2017 primarily include costs related to certain in-process facility rationalizations and cost reduction programs.
11. Changes in Accumulated Other Comprehensive Loss
Following is a summary of changes in “Accumulated other comprehensive loss” for the three and nine months ended September 30, 2018 and 2017:
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
1

 
$
(11
)
 
$
(10
)
 
$
3

 
$
(27
)
 
$
(24
)
Other comprehensive (loss) income before reclassifications, net of tax

 
(6
)
 
(6
)
 

 
10

 
10

Ending balance
$
1

 
$
(17
)
 
$
(16
)
 
$
3

 
$
(17
)
 
$
(14
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
1

 
$
(9
)
 
$
(8
)
 
$
3

 
$
(42
)
 
$
(39
)
Other comprehensive (loss) income before reclassifications, net of tax

 
(8
)
 
(8
)
 

 
25

 
25

Ending balance
$
1

 
$
(17
)
 
$
(16
)
 
$
3

 
$
(17
)
 
$
(14
)
12. Income Taxes

On December 22, 2017, the United States enacted tax reform legislation (“Tax Reform”) that included a broad range of business tax provisions, including but not limited to a reduction in the U.S. federal tax rate from 35% to 21% as well as provisions that limit or eliminate various deductions or credits. The legislation also causes U.S. expenses, such as interest and general administrative expenses, to be taxed and imposes a new tax on U.S. cross-border payments. The 2017 provision for income taxes included a provisional charge of $65 for the transition tax on accumulated foreign earnings and profits, which resulted in an associated reduction of an estimated $185 in the Company’s net operating loss carryforward. The Company filed its 2017 tax return during the third quarter of 2018, which included a transition tax of $63 and an associated reduction of $181 in the Company’s net operating loss carryforward.
In response to the enactment of U.S. tax reform, the SEC issued guidance (referred to as “SAB 118”) to address the complexity in accounting for this new legislation. When the initial accounting for items under the new legislation is incomplete, the guidance allows companies to recognize provisional amounts when reasonable estimates can be made or to continue to apply the prior tax law if a reasonable estimate of the impact cannot be made. The SEC has provided up to a one-year window for companies to finalize the accounting for the impacts of this new legislation and the Company anticipates finalizing its accounting during the fourth quarter of 2018.
The Company's accounting for the above items is based upon reasonable estimates of the tax effects of Tax Reform; however, its estimates may change upon the finalization of its implementation and additional interpretive guidance from regulatory authorities.  The Company will complete its accounting for the above tax effects of Tax Reform during the fourth quarter of 2018 as provided in SAB 118 and will reflect any adjustments to its provisional amounts as an adjustment to the provision for taxes in the reporting period in which the amounts are finally determined.
Additionally, certain provisions of Tax Reform are not effective until 2018. The Company continues to evaluate the impact of these provisions and has recorded a net zero impact in the financial statements due to U.S.’ valuation allowance. The Company has not made any accounting policy elections with respect to these items.
The effective tax rate was (50)% and (15)% for the three months ended September 30, 2018 and 2017, respectively. The effective tax rate was (46)% and (12)% for the nine months ended September 30, 2018 and 2017, 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.


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Table of Contents

For the three and nine months ended September 30, 2018 and 2017, income tax expense relates primarily to income from certain foreign operations. In 2018 and 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.
13. 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.; Hexion Deer Park LLC (became a subsidiary guarantor in June 2018); 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. (dissolved in September 2017)) 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 and Brazilian subsidiaries are restricted in 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.

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Table of Contents

HEXION INC.
SEPTEMBER 30, 2018
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 $16, respectively)
$
34

 
$
1

 
$
102

 
$

 
$
137

Accounts receivable, net
120

 
1

 
342

 

 
463

Intercompany accounts receivable
64

 

 
49

 
(113
)
 

Intercompany loans receivablecurrent portion
69

 

 

 
(69
)
 

Inventories:
 
 
 
 
 
 
 
 


Finished and in-process goods
123

 

 
168

 

 
291

Raw materials and supplies
43

 

 
62

 

 
105

Other current assets
28

 

 
34

 

 
62

Total current assets
481

 
2

 
757

 
(182
)
 
1,058

Investment in unconsolidated entities
144

 
13

 
19

 
(157
)
 
19

Deferred income taxes

 

 
9

 

 
9

Other assets, net
13

 
7

 
20

 

 
40

Intercompany loans receivable
1,121

 

 
135

 
(1,256
)
 

Property and equipment, net
365

 

 
478

 

 
843

Goodwill
52

 

 
57

 

 
109

Other intangible assets, net
21

 

 
8

 

 
29

Total assets
$
2,197

 
$
22

 
$
1,483

 
$
(1,595
)
 
$
2,107

Liabilities and Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
117

 
$
1

 
$
273

 
$

 
$
391

Intercompany accounts payable
49

 

 
64

 
(113
)
 

Debt payable within one year
13

 

 
71

 

 
84

Intercompany loans payable within one year

 

 
69

 
(69
)
 

Interest payable
99

 

 
2

 

 
101

Income taxes payable
4

 

 
3

 

 
7

Accrued payroll and incentive compensation
29

 

 
34

 

 
63

Other current liabilities
62

 

 
49

 

 
111

Total current liabilities
373

 
1

 
565

 
(182
)
 
757

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
3,536

 

 
174

 

 
3,710

Intercompany loans payable
135

 

 
1,121

 
(1,256
)
 

Accumulated losses of unconsolidated subsidiaries in excess of investment
812

 
157

 

 
(969
)
 

Long-term pension and post employment benefit obligations
28

 

 
219

 

 
247

Deferred income taxes
2

 

 
10

 

 
12

Other long-term liabilities
112

 

 
70

 

 
182

Total liabilities
4,998

 
158

 
2,159

 
(2,407
)
 
4,908

Total deficit
(2,801
)
 
(136
)
 
(676
)
 
812

 
(2,801
)
Total liabilities and deficit
$
2,197

 
$
22

 
$
1,483

 
$
(1,595
)
 
$
2,107






20

Table of Contents

HEXION INC.
DECEMBER 31, 2017
CONDENSED CONSOLIDATING BALANCE SHEET
 
 
Hexion
Inc.
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets