Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): June 19, 2019
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HEXION INC.
(Exact Name of Registrant as Specified in Its Charter)
 New Jersey
(State or Other Jurisdiction of Incorporation)
 
 
1-71
13-0511250
(Commission File Number)
(I.R.S. Employer Identification No.)
 
 
180 East Broad Street, Columbus, Ohio
43215-3799
(Address of Principal Executive Offices)
(Zip Code)

614-225-4000
(Registrant's Telephone Number, Including Area Code)

(Former Name or Former Address, if Changed Since Last Report)

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
None
 
None
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
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





Item 7.01 Regulation FD Disclosure
On June 19, 2019, Hexion Inc. (the “Company”) issued a news release, pursuant to Rule 135c of the Securities Act of 1933, as amended (the “Securities Act”), announcing its intent to offer $450 million aggregate principal amount of new senior unsecured notes due 2027 (the “Notes”) through a private placement (the “Offering”). The Company intends to use the net proceeds from the offering of the Notes to fund the repayment of its existing debtor-in-possession credit facilities and the other distributions provided for under the Plan of Reorganization (the “Plan”) in connection with the emergence proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and to pay certain fees and expenses relating to the foregoing and its emergence from bankruptcy. A copy of such news release is furnished hereto as Exhibit 99.1 and is incorporated herein by reference.
In connection with the Offering, the Company provided potential investors with a preliminary offering circular, dated June 19, 2019 (the “Preliminary Offering Circular”). The Preliminary Offering Circular contains unaudited pro forma condensed consolidated financial information and notes thereto giving effect to the Company’s emergence from bankruptcy in accordance with the Plan as described therein. This pro forma information is attached as Exhibit 99.2 hereto and is incorporated by reference herein.
The information contained in this Item 7.01, including in Exhibit 99.2, shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, and shall not be deemed to be incorporated by reference into any of the Company’s filings under the Securities Act or the Exchange Act, whether made before or after the date hereof and regardless of any general incorporation language in such filings, except to the extent expressly set forth by specific reference in such a filing.
Forward-Looking Statements
Certain statements in this report are forward-looking statements within the meaning of and made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, our management may from time to time make oral forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “might,” “plan,” “estimate,” “may,” “will,” “could,” “should,” “seek” or “intend” and similar expressions. Forward-looking statements reflect our current expectations and assumptions regarding our business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors as discussed in the Risk Factors section of our filings with the Securities and Exchange Commission (the “SEC”). While we believe our assumptions are reasonable, we caution you against relying on any forward-looking statements as it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to obtain the approval of the Bankruptcy Court with respect to motions filed in the Chapter 11 cases and the outcomes of Bankruptcy Court rulings and the Chapter 11 cases in general, the effectiveness of the overall restructuring activities pursuant to the Chapter 11 filings and any additional strategies that we may employ to address our liquidity and capital resources, the actions and decisions of creditors, regulators and other third parties that have an interest in the Chapter 11 cases, restrictions on us due to the terms of the credit facilities that we entered into in connection with the Chapter 11 cases and restrictions imposed by the Bankruptcy Court, our ability to effectuate the Chapter 11 plan of reorganization described in the restructuring support agreement with certain of our equityholders and creditors, our ability to continue as a going concern, effects of disruption from the Chapter 11 cases and any restructuring transactions, the timing for resolving and any impact of the network security incident, a weakening of global economic and financial conditions, interruptions in the supply of or increased cost of raw materials, the loss of, or difficulties with the further realization of, cost savings in connection with our strategic initiatives, the impact of our substantial indebtedness, our failure to comply with financial covenants under our credit facilities or other debt, pricing actions by our competitors that could affect our operating margins, changes in governmental regulations and related compliance and litigation costs and the other factors listed in the Risk Factors section of our SEC filings. For a more detailed discussion of these and other risk factors, see the Risk Factors section of our most recent filings made with the SEC. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The forward-looking statements made by us speak only as of the date on which they are made. Factors or events that could cause our actual results to differ may emerge from time to time. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

Item 9.01        Financial Statements and Exhibits
(d) Exhibits
Exhibit No.
Description
99.1

99.2







SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
HEXION INC.
 
 
 
 
Date:
 
June 19, 2019
 
By:
 
/s/  George F. Knight
 
 
 
 
 
 
George F. Knight
 
 
 
 
 
 
Executive Vice President and Chief Financial Officer



Exhibit



Exhibit 99.1
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Hexion Inc.
 
180 East Broad Street
Columbus, OH 43215
hexion.com
 
NEWS RELEASE
FOR IMMEDIATE RELEASE
Hexion Inc. Announces
Proposed $450 Million Debt Offering
COLUMBUS, Ohio - (June 19, 2019) - Hexion Inc. (the “Company”) announced today that it is proposing to issue $450 million aggregate principal amount of new senior unsecured notes due 2027 (the “Notes”) in a private offering that is exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The Notes will be guaranteed on a senior basis by the Company’s existing domestic subsidiaries that guarantee obligations under the credit facilities to be entered into upon the Company’s emergence from bankruptcy.
The Company intends to use the net proceeds from the offering of the Notes to fund the repayment of its existing debtor-in-possession credit facilities and the other distributions provided for under the Plan of Reorganization (the “Plan”) in connection with the emergence proceedings under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) and to pay certain fees and expenses relating to the foregoing and its emergence from bankruptcy. The proposed offering of the Notes is subject to market and other conditions, and may not occur as described or at all.
The Notes are being offered only to persons reasonably believed to be qualified institutional buyers in reliance on Rule 144A under the Securities Act, and outside the United States, only to non-U.S. investors in reliance on Regulation S under the Securities Act. The Notes will not be registered under the Securities Act or any state securities laws and may not be offered or sold in the United States absent an effective registration statement or an applicable exemption from registration requirements or in a transaction not subject to the registration requirements of the Securities Act or any state securities laws.
This press release does not constitute an offer to sell or a solicitation of an offer to buy any securities nor will there be any sales of the Notes in any state or other jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such state or jurisdiction. This notice is being issued pursuant to and in accordance with Rule 135(c) under the Securities Act.
Forward-Looking Statements
Certain statements in this press release are forward-looking statements within the meaning of and made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, our management may from time to time make oral forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “might,” “plan,” “estimate,” “may,” “will,” “could,” “should,” “seek” or “intend” and similar expressions. Forward-looking statements reflect our current expectations and assumptions regarding our business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors as discussed in the Risk Factors section of our filings with the Securities and Exchange Commission (the “SEC”). While we believe our assumptions are reasonable, we caution you against relying on any forward-looking statements as it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, our ability to obtain the approval of the Bankruptcy Court with respect to motions filed in the Chapter 11 cases and the outcomes of Bankruptcy Court rulings and the Chapter 11 cases in general, the effectiveness of the overall restructuring activities pursuant to the Chapter 11 filings and any additional strategies that we may employ to address our liquidity and capital resources, the actions and decisions of creditors, regulators and other third parties that have an interest in the Chapter 11 cases, restrictions on us due to the terms of the credit facilities that we entered into in connection with the Chapter 11 cases and restrictions imposed by the Bankruptcy Court, our ability to effectuate the Chapter 11 plan of reorganization described in the restructuring support agreement with certain of our equityholders and creditors, our ability to continue as a going concern, effects of disruption from the Chapter 11 cases and any restructuring transactions, the timing for resolving and any impact of the network security incident, a weakening of global economic and financial conditions, interruptions in the supply of or increased cost of raw materials, the loss of, or difficulties with the further realization of, cost savings in connection with our strategic initiatives, the impact of our substantial indebtedness, our failure to comply with financial covenants under our credit facilities or other debt, pricing actions by our competitors that could affect our operating margins, changes in governmental regulations and related compliance and litigation costs and the other factors listed in the Risk Factors section of our SEC filings. For a more detailed discussion of these and other risk factors, see the Risk Factors section of our most recent filings made with the SEC. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The forward-looking statements made by us speak only as of the date on which they are made. Factors or events that could cause our actual results to differ may emerge from time to time. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.




About the Company
Based in Columbus, Ohio, Hexion Inc. is a global leader in thermoset resins. Hexion Inc. serves the global wood and industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. Additional information about Hexion Inc. and its products is available at www.hexion.com.
Contacts
Investors and Media:
John Kompa
614-225-2223
john.kompa@hexion.com





exhibit992
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION On April 24, 2019, we filed with the Bankruptcy Court the Plan and related disclosure statement. The Plan provides for, among other things, (1) classification and treatment of various claims and equity interests, (2) a reduction of the Company’s liabilities upon emergence by approximately $2.2 billion as of March 31, 2019 on a pro forma basis, and (3) the recapitalization of the Company, as described above under “Offering Circular Summary—The Reorganization and Exit Financings.” The following unaudited pro forma condensed consolidated statements of operations for the year ended December 31, 2018, the three months ended March 31, 2019 and the twelve months ended March 31, 2019 give effect to the Transactions contemplated by the Plan and our emergence from Chapter 11, including the settlement of various liabilities, securities issuances, incurrence of new indebtedness, including the notes offered hereby, and cash payments and asset and liability revaluation consistent with our reorganization value, in each case, as if they had occurred as of the beginning of the earliest period presented, and the unaudited pro forma condensed consolidated balance sheet gives effect to the Transactions contemplated by the Plan and our emergence from Chapter 11, including the settlement of various liabilities, securities issuances, incurrence of new indebtedness, including the notes offered hereby, and cash payments and asset and liability revaluation consistent with our reorganization value, in each case, as if they had occurred on March 31, 2019. Upon emergence from Chapter 11, we will adopt “fresh-start” reporting, which requires us to revalue our assets and liabilities to fair value. In estimating fair value, we based our estimates and assumptions on the guidance prescribed by ASC 820, “Fair Value Measurement.” Estimates or allocation of fair value between our assets and liabilities will change up to the first period reported after emergence from Chapter 11. To facilitate the calculation of the enterprise value of the successor company, management developed a set of valuations for the successor company using a number of estimates and assumptions. With the assistance of financial advisors, management determined the enterprise and corresponding equity value of the successor company based on the valuations using various valuation methods, including (1) a comparison of our projected performance to the market values of comparable companies; (2) a review and analysis of several recent transactions in our industry; and (3) a calculation of the present value of future cash flows based on our projections. The enterprise value, and corresponding equity value, are dependent upon achieving the future financial results set forth in our valuations, as well as the realization of certain other assumptions. There can be no assurance that the projections will be achieved or that the assumptions will be realized. All estimates, assumptions, valuations, appraisals and financial projections, including the fair value adjustments, the financial projections, the enterprise value and equity value projections, are inherently subject to significant uncertainties and the resolution of contingencies beyond our control. Accordingly, there can be no assurance that the estimates, assumptions, valuations, appraisals and the financial projections will be realized, and actual results could vary materially. The following unaudited pro forma condensed consolidated financial data is provided for illustrative purposes only and is based on available information and assumptions that we believe are reasonable. It does not purport to represent what our actual results of operations or financial position would have been had the transactions as contemplated in the Plan occurred on the dates indicated, or on any other date, nor is it necessarily indicative of our future consolidated results of operations or consolidated financial position after emergence. Our actual financial position and results of operations after emergence will differ, perhaps significantly, from the pro forma amounts reflected herein due to a variety of factors, including access to additional information, changes in value or allocation of value not currently identified and changes in our operating results following the date of the unaudited pro forma condensed consolidated financial data. The Company has not provided earnings per share metrics as the number of shares to be issued has not yet been determined. 42


 
You should read this unaudited pro forma condensed consolidated financial data in conjunction with our consolidated financial statements, the related notes and other financial information contained elsewhere in this offering circular, as well as the other financial information incorporated by reference in this offering circular, and the sections titled “Offering Circular Summary—The Reorganization and Exit Financings” and “The Offering— Summary Historical and Unaudited Pro Forma Financial Data.” 43


 
Unaudited Pro Forma Condensed Consolidated Balance Sheet As of March 31, 2019 Pro Forma March 31, Exit Financing March 31, 2019 Impacts Fresh Start 2019 (in millions) Assets Current assets: Cash and cash equivalents (including restricted cash of $15) ............................................ $ 111 $ (50) $ 61 Accounts receivable (net of allowance for doubtful accounts of $15) ........................ 496 496 Inventories........................................... 352 $ 40 A 392 Other current assets ................................... 67 67 Total current assets ............................... 1,026 (50) 40 1,016 Investment in unconsolidated entities ........................ 20 20 Other long-term assets ..................................... 40 40 Property and equipment, net ................................ 824 946 B 1,770 Operating lease assets ..................................... 99 99 Goodwill................................................. 108 129 C 237 Other intangible assets, net ................................. 25 1,310 D 1,335 Total assets...................................... $ 2,142 $ (50) $2,425 $4,517 Liabilities and Equity Current liabilities: Accounts payable ..................................... $ 354 $ 354 Debt payable within one year........................... 3,875 $(3,783) 92 Interest payable....................................... 100 (98) 2 Income taxes payable ................................. 8 8 Accrued payroll and incentive compensation ............. 47 47 Current portion of operating lease liabilities .............. 23 23 Other current liabilities ................................ 105 105 Total current liabilities ............................ 4,512 (3,881) 631 Long-term liabilities: Long-term debt....................................... 94 1,650 1,744 Long-term pension and post-employment benefit obligations......................................... 215 215 Deferred income taxes................................. 15 $ 327 E 342 Operating lease liabilities .............................. 76 76 Other long-term liabilities ............................. 196 (10) F 186 Total liabilities................................... 5,108 (2,231) 317 3,194 Equity Common stock ....................................... 1 1 (1) G 1 Paid-in capital........................................ 526 1,324 (526) G 1,324 Treasury stock........................................ (296) 296 G — Accumulated other comprehensive loss.................. (18) 18 G — Accumulated deficit................................... (3,177) 856 2,321 G — Total Hexion Inc. shareholder’s (deficit) equity ...... (2,964) 2,181 2,108 1,325 Noncontrolling interest ................................ (2) (2) Total (deficit) equity.............................. (2,966) 2,181 2,108 1,323 Total liabilities and equity .................... $2,142 $ (50) $2,425 $4,517 44


 
Unaudited Pro Forma Condensed Consolidated Statement of Operations Year Ended December 31, 2018 Pro Forma Year Ended Year Ended December 31, Exit Financing December 31, 2018 Impacts Fresh Start 2018 (in millions) Net sales......................................... $3,797 $3,797 Cost of sales ..................................... 3,226 $ 103 A 3,329 Gross profit ...................................... 571 (103) 468 Selling, general and administrative expense .......... 295 70 B 365 Gain on disposition ............................... (44) (44) Asset impairments ................................ 28 28 Business realignment costs......................... 29 29 Other operating expense, net ....................... 36 36 Operating income................................. 227 (173) 54 Interest expense, net .............................. 365 $(108) C (365) C 108 Other non-operating income, net.................... (12) (12) Loss before income tax and earnings from unconsolidated entities .......................... (126) (108) 192 (42) Income tax expense ............................... 40 (30) D 54 D 64 Loss before earnings from unconsolidated entities .... (166) (78) 138 (106) Earnings from unconsolidated entities, net of taxes . . . 3 3 Net loss ......................................... (163) (78) 138 (103) Net loss attributable to noncontrolling interest........ 1 1 Net loss attributable to Hexion Inc. ................. $ (162) $ (78) $ 138 $ (102) 45


 
Unaudited Pro Forma Condensed Consolidated Statement of Operations Three Months Ended March 31, 2019 Pro Forma Three Months Three Months Ended Ended March 31, Exit Financing March 31, 2019 Impacts Fresh Start 2019 (in millions) Net sales ...................................... $886 $886 Cost of sales ................................... 750 $ 56 A 806 Gross profit.................................... 136 (56) 80 Selling, general and administrative expense........ 91 (5) B 86 Business realignment costs ...................... 4 4 Other operating expense, net ..................... 8 8 Operating income .............................. 33 (51) (18) Interest expense, net ............................ 80 $ 27 C (80) C 27 Other non-operating income, net ................. (1) (1) Loss before income tax and earnings from unconsolidated entities........................ (46) (27) 29 (44) Income tax expense............................. 7 (8) D 9 D 8 Loss before earnings from unconsolidated entities...................................... (53) (19) 20 (52) Earnings from unconsolidated entities, net of taxes........................................ 1 1 Net loss ....................................... $(52) $(19) $ 20 $ (51) 46


 
Unaudited Pro Forma Condensed Consolidated Statement of Operations Last Twelve Months Ended March 31, 2019 Pro Forma Last Twelve Last Twelve Months Months Ended Exit Ended March 31, Financing March 31, 2019 Impacts Fresh Start 2019 (in millions) Net sales.......................................... $3,737 $3,737 Cost of sales ...................................... 3,187 $ 103 A 3,290 Gross profit ....................................... 550 (103) 447 Selling, general and administrative expense ........... 304 48 B 352 Asset impairments ................................. 3 3 Business realignment costs ......................... 24 24 Other operating expense, net ........................ 35 35 Operating income.................................. 184 (151) 33 Interest expense, net ............................... 362 $ 108 C (362) C 108 Other non-operating income, net..................... (12) (12) Loss before income tax and earnings from unconsolidated entities ........................... (166) (108) 211 (63) Income tax expense ................................ 39 (30) D 59 D 68 Loss before earnings from unconsolidated entities ..... (205) (78) 152 (131) Earnings from unconsolidated entities, net of taxes .... 3 3 Net loss .......................................... (202) (78) 152 (128) Net loss attributable to noncontrolling interest......... 1 1 Net loss attributable to Hexion Inc. .................. $ (201) $ (78) $ 152 $ (127) 47


 
Notes to the Unaudited Pro Forma Condensed Consolidated Financial Data Adjustments to Unaudited Pro Forma Condensed Consolidated Balance Sheet The adjustments in the unaudited pro forma condensed consolidated balance sheet in the columns captioned “Exit Financing Impacts,” and “Fresh Start” reflect the effect of the consummation of the transactions contemplated by the Plan and our emergence from Chapter 11, including the settlement of various liabilities, issuance of new equity, incurrence of new indebtedness and cash payments as described below and as more fully described elsewhere in this offering circular. Exit Financing Impacts. Adjustments reflect the elimination of liabilities subject to compromise on our unaudited pro forma condensed consolidated balance sheet as if the Effective Date occurred on the unaudited pro forma condensed consolidated balance sheet date. The adjustments represent: • the discharge of $3,783 million debt related the Prior ABL Facility and the existing senior secured notes and debentures; • the issuance of $1,650 million of new debt as related to the Exit Financings, consisting of a $1,200 million Term Loan Facility and $450 million in notes offered hereby; • the estimated reduction of interest payable at March 31, 2019 of $98 million on a pro forma basis, based on our new capital structure; • the estimated net cash reduction of $50 million as a result of the Exit Financings, which includes the proceeds from the issuance of new debt, repayment of all amounts due under the Debtor-in-Possession Term Loan Facility and Debtor-in-Possession ABL Facility and cash paid for other exit expenditures; and • the issuance of $1,325 million of new equity as part of our Exit Financing and emergence from Chapter 11 and adjustments necessary to reset accumulated deficit under fresh start reporting. Fresh Start. At the effective date of our emergence, we anticipate meeting the requirements under ASC 852 for fresh start accounting. Fresh start accounting requires the revaluation of our tangible and intangible assets to fair value, resulting in a higher fair value of our existing tangible assets and the recognition of new intangible, amortizable assets, namely customer relationships, trademarks and technology. The effect of these fresh start adjustments is primarily to increase the depreciation and amortization charges relating to these tangible and intangible assets in reporting periods subsequent to the emergence date, which will primarily increase our cost of goods sold and selling, general and administrative expense and decrease gross profit and operating income in future periods. Fresh start accounting also requires us to eliminate all predecessor earnings or deficits in accumulated deficit and accumulated other comprehensive loss. Additionally, an adjustment was made to remove certain costs directly related to our bankruptcy proceedings. These adjustments reflect preliminary estimates and actual amounts to be recorded as of the effective date of emergence may be materially different from these estimates. Significant adjustments reflected in the pro forma condensed consolidated balance sheet based on the revaluation of assets and liabilities for fresh start are summarized as follows: A. Inventories. For purposes of the unaudited pro forma condensed consolidated financial statements, preliminary fair value of our inventory has been determined based on currently available information and certain assumptions, and may be different from the final estimate of fair value, and the difference could be material. A preliminary adjustment of $40 million was included to increase the value of our inventories to their estimated fair value, less costs to sell the inventories net of a reasonable profit allowance. B. Property, plant, equipment, net. The fair value of property, plant, equipment, net is estimated based on either a review and analysis of several recent transactions in our industry or a calculation of the present value of future cash flows based on our projections. A preliminary adjustment of $946 million was included to increase the net book value of our property, plant, equipment, net to their estimated fair value. The preliminary estimates 48


 
of the fair value of our property, plant and equipment and the associated depreciation expense included in the pro forma condensed consolidated financial statements, based upon a weighted average useful life of 18 years, could be different from the final values determined through fresh start reporting, and the difference could be material. C. Goodwill. As part of fresh start accounting, identifiable goodwill is required to be measured at fair value. A preliminary adjustment of $129 million was included to recognize the increase in the fair value of goodwill across our identified reporting units. These estimates of goodwill could be different from the final values determined through fresh start reporting, and the difference could be material. D. Other intangible assets, net. As part of fresh start accounting, identifiable intangible assets are required to be measured at fair value. A preliminary adjustment of $1,310 million was included to recognize the estimated fair value of certain of our customer relationships, trademarks and technology. Preliminary identifiable intangible assets are comprised of customer relationships of $858 million (estimated 20 year life), trademarks of $231 million (estimated 15 year life) and technology of $246 million (estimated 15 year life). These estimates of intangible assets could be different from the final values determined through fresh start reporting, and the difference could be material. E. Deferred income taxes. As part of fresh start accounting, we are required to remeasure our deferred tax positions. A preliminary adjustment of $327 million was included to increase our deferred tax liability as a result of additional estimated book basis allocated to our non-U.S. assets. A blended statutory tax rate of 28% was utilized. These estimates could be different from the final values determined through fresh start reporting, and the difference could be material. F. Other long-term liabilities. As part of fresh start accounting, existing deferred revenue balances are fully realized upon emergence as the performance obligation under the arrangement has been satisfied. A liability reduction of $10 million was included to recognize the realization of certain of the Company’s deferred revenue balances. G. Hexion Inc. stockholders’ equity. The adoption of fresh start reporting will result in a new reporting entity with no beginning retained earnings or accumulated deficit. Additionally, all treasury stock and accumulated other comprehensive income/loss will be reset under fresh start reporting. All common stock and paid-in capital of the predecessor company will be eliminated and replaced by the new equity structure of the Plan as presented in “Capitalization.” As discussed above, the $1,325 million represents the new equity value for the successor company, using various valuation methods to estimate fair value. At the adoption of fresh start reporting, we will also be required to remeasure other items on our balance sheet, including: operating lease assets and liabilities, foreign debt obligations, investments in unconsolidated entities, non-controlling interests, long-term pension and post-employment benefit obligations and others. These adjustments will be determined based on the facts, circumstances and relevant assumptions at the time of the adoption. Management has preliminarily assessed, based on its best available information, that book value approximates fair value for purposes of these pro forma financial statements. Adjustments at the time of adoption of fresh start reporting may be material. 49


 
Adjustments to Unaudited Pro Forma Condensed Consolidated Statements of Operations The adjustments in the unaudited pro forma condensed consolidated statements of operations reflect the effect of the consummation of the transactions contemplated by the Plan as if the Effective Date occurred at the beginning of the period presented. Significant adjustments reflected in the unaudited pro forma condensed consolidated statements of operations are summarized as follows: A. Cost of sales. Adjustments include: - an estimated increase of $40 million in operating costs associated with the realization of our increased inventory values (as will be determined through fresh start reporting) into earnings; and - an estimated increase in depreciation expense as a result of the estimated fresh start reporting adjustments for plant, property and equipment of $63 million for the year ended December 31, 2018 and the twelve months ended March 31, 2019 and $16 million for the three months ended March 31, 2019. B. Selling, general and administrative expense. Adjustments include: - an estimated decrease to eliminate the costs associated with our Chapter 11 proceedings as we would not expect these to continue after emergence from Chapter 11 of $22 million for the twelve months ended March 31, 2019 and for the three months ended March 31, 2019; - an estimated increase of amortization expense as a result of the estimated fresh start reporting adjustments for intangible assets of $65 million for the year ended December 31, 2018 and the twelve months ended March 31, 2019 and $16 million for the three months ended March 31, 2019; and - an estimated increase in depreciation expense as a result of the estimated fresh start reporting adjustments for plant, property and equipment of $5 million for the year ended December 31, 2018 and the twelve months ended March 31, 2019 and $1 million for the three months ended March 31, 2019. C. Interest expense. This adjustment reflects the elimination of interest expense associated with the predecessor company’s capital structure and reflects the estimated interest expense associated with the capital structure as contemplated in the Plan with an assumed weighted average interest rate of approximately 6%. A 0.125% change in assumed weighted average interest rate would increase/(decrease) pro forma interest expense, net associated with the capital structure contemplated in the Plan by approximately $2 million. D. Income tax expense. This adjustment represents the estimated tax impact of the “Exit Financing Impacts” and “Fresh Start” discussed above at a blended statutory tax rate of 28%. 50