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Hexion Inc. Announces Third Quarter 2021 Results

November 12, 2021 at 7:05 AM EST
 

Third Quarter 2021 Highlights

  • Net sales from continuing operations of $945 million, an increase of 49% compared with $634 million in the prior year period.

  • Net income of $49 million compared with a net loss of $94 million in the prior year period.

  • Segment EBITDA from continuing operations of $188 million compared to $91 million in the prior year period.

  • Liquidity of $721 million

  • Hexion Holdings Corporation, the indirect parent of Hexion Inc., announced plans to separate into two independent companies as part of its strategic initiatives to drive long term shareholder value

COLUMBUS, Ohio, November 12, 2021--(BUSINESS WIRE)--Hexion Inc. ("Hexion" or the "Company") today announced results for the third quarter ended September 30, 2021.

"Our strong third quarter 2021 Segment EBITDA represented our fourth straight quarter of year-over-year increases as we more than doubled our prior year results reflecting our product portfolio aligned with key sustainability market trends, strong market conditions and pricing actions," said Craig Rogerson, Chairman, President and Chief Executive Officer. "We also drove sequential Segment EBITDA increases of $28 million, or 18 percent, in the third quarter of 2021 compared to the second quarter of 2021. Our Adhesives Segment results were supported by strong gains in each global region and positive demand from increasing residential housing construction starts. Our Coatings and Composites segment reflected significant Segment EBITDA gains in base and specialty epoxy resins, as well as solid volume increases in our Versatic™ Acids and Derivatives. Our overall Segment EBITDA margins were nearly 20% percent compared to approximately 14 percent in the prior year. In addition, our net cash provided by operating activities totaled $106 million through the first nine months of the year, which is significantly higher than the comparable 2020 period due to our higher earnings and growing margins. Our net debt to Pro Forma EBITDA leverage ratio was 2.3 times as of the last twelve months ended September 30, 2021 reflecting the improved earnings and cash flow, as well as the 2021 debt reductions."

 

Mr. Rogerson added: "Looking ahead to the fourth quarter of 2021, we expect continued strength in our epoxy business and tailwinds from residential construction demand supporting our adhesives products, partially offset by the impact of a planned turnaround in Versatic™ Acids and Derivatives. We believe we are well-positioned for growth in 2022 and going forward."

Hexion Exploring Value Creation Strategic Alternatives

Hexion's management team and its Board of Directors, as previously announced on September 29, 2021, continues to evaluate strategic value creation options, including the potential spin of Hexion’s epoxy business and an IPO of Hexion’s Adhesives and Versatic product lines. Hexion Holdings has filed registration statements on Form S-1 with the U.S. Securities and Exchange Commission ("SEC") for a proposed initial public offering on the New York Stock Exchange.

The potential spin transaction and IPO remain subject to SEC review, European works councils review, and market conditions. This press release is not an offer to sell securities.

Third Quarter 2021 Results

Total net sales for the quarter ended September 30, 2021 were $945 million, an increase of 49% compared with $634 million in the prior year period. Pricing positively impacted sales by $297 million due primarily to improved market conditions in our base epoxy resins and specialty epoxy resins businesses and significant raw material price increases contractually passed through to customers across many businesses. Foreign currency translation positively impacted net sales by $16 million due to the strengthening of various foreign currencies against the U.S. dollar in the third quarter of 2021 compared to the third quarter of 2020. Volumes negatively impacted net sales by $2 million, primarily due to volume decreases in our specialty epoxy product lines due to lower demand in China and volume decreases in our formaldehyde products driven by Hurricane Ida’s impacts in the Gulf Coast. These were partially offset by volume increases in our North American and Latin American wood adhesives product lines driven by strong market conditions across many key end-markets and increases in our epoxy and VersaticTM Acid and Derivatives product lines driven by strong market demand and continued recovery from COVID-19’s global economic impact across our various industries and markets compared to the third quarter of 2020.

Net income for the three months ended September 30, 2021 was $49 million compared to a net loss of $94 million in the prior year period. Total Segment EBITDA from continuing operations for the quarter ended September 30, 2021 was $188 million, an increase of $97 million compared with the prior year period, or 107 percent, reflecting strong volume gains across both the Adhesives and Coatings and Composites segments, improved market conditions across many of our businesses and raw material productivity positively impacting our wood adhesives and formaldehyde product lines.

Segment Results

Following are net sales and Segment EBITDA by reportable segment for Hexion's continuing operations for the three and six months ended September 30, 2021 and 2020:

 

Three Months Ended
September 30, 2021

 

Three Months Ended
September 30, 2020

 

Nine Months Ended
September 30, 2021

 

Nine Months Ended
September 30, 2020

Net Sales (1):

             

Adhesives

$

428

   

$

293

   

$

1,198

   

$

874

 

Coatings and Composites

517

   

341

   

1,352

   

981

 

Total

$

945

   

$

634

   

$

2,550

   

$

1,855

 
               

Segment EBITDA:

             

Adhesives

$

72

   

$

58

   

$

215

   

$

156

 

Coatings and Composites

138

   

50

   

311

   

115

 

Corporate and Other

(22

)

 

(17

)

 

(64

)

 

(51

)

Total

$

188

   

$

91

   

$

462

   

$

220

 
 

(1)

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

Liquidity and Capital Resources

As of September 30, 2021, total debt was approximately $1.6 billion and consisted primarily of the Company’s approximately $1.2 billion Senior Secured Term Loans due 2026 and $450 million Senior Notes due 2027. At September 30, 2021, the Company had $721 million in liquidity, including $352 million of unrestricted cash and cash equivalents. Hexion has no upcoming maturities on its term loan or notes until 2026.

Earnings Call

Hexion will host a teleconference to discuss Third Quarter 2021 results on Friday, November 12, 2021 at 9:00 a.m. Eastern Time. Interested parties are asked to dial-in approximately 10 minutes before the call begins at the following numbers:

U.S. Participants: (844) 492-6045

International Participants: (574) 990-2716

Participant Passcode: 2546646

Live internet access to the call and presentation materials will be available through the Investor Relations section of the Company’s website: www.hexion.com. A replay of the call will be available for one week following the call and can be access by dialing (855) 859-2056 (U.S.) and (404) 537-3406 (International). The passcode is 2546646.

Non-U.S. GAAP Measures

Segment EBITDA

Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash and non-recurring expenses. Segment EBITDA is an important measure used by the Company's senior management and board of directors to evaluate operating results and allocate capital resources among segments. Corporate and Other primarily represents certain corporate, general and administrative expenses that are not allocated to the other segments. Segment EBITDA should not be considered a substitute for net income (loss) or other results reported in accordance with U.S. GAAP. Segment EBITDA may not be comparable to similarly titled measures reported by other companies. See Schedules 4 and 5 to this release for reconciliation of net income (loss) to Segment EBITDA.

Pro Forma EBITDA

Pro Forma EBITDA is defined as EBITDA adjusted for certain non-cash and certain non-recurring items and other adjustments calculated on a pro forma basis, including the expected future cost savings from business optimization programs or other programs and the expected future impact of acquisitions, in each case as determined under the governing debt instrument. The Company believes that including the supplemental adjustments that are made to calculate Pro Forma EBITDA provides additional information to investors about the Company’s ability to comply with its financial covenants and to obtain additional debt in the future. Pro Forma EBITDA and Fixed Charges are not defined terms under U.S. GAAP. Pro Forma EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. Additionally, Pro Forma EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not take into account certain items such as interest and principal payments on our indebtedness, depreciation and amortization expense (because the Company uses capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures. Fixed Charges under the Indenture governing the Senior Notes due 2027 should not be considered an alternative to interest expense. See Schedule 6 to this release for reconciliation of net loss to Pro Forma EBITDA and the calculation of the Fixed Charges Ratio.

Free cash flow

Free cash flow is a liquidity measure used by the Company and is defined by the Company as net cash provided by (used in) operations, less capital expenditures on property, plant and equipment. We believe that free cash flow provides useful information to management, investors, analysts and other parties in evaluating the Company's liquidity and credit quality assessment because it provides an indication of the long-term cash generating ability of our business. See Schedule 7 to this release for the Company's free cash flow by quarter.

Net debt

Net debt is defined by the Company as total debt less cash and cash equivalents. We believe that net debt provides useful information to management, investors, analysts and other parties in evaluating changes to the Company's capital structure and credit quality assessment. See Schedule 8 to this release for the Company's net debt by quarter.

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, a weakening of global economic and financial conditions, interruptions in the supply of or increased cost of raw materials, the loss of, or difficulties with the further realization of, cost savings in connection with our strategic initiatives, the impact of our indebtedness, our failure to comply with financial covenants under our credit facilities or other debt, pricing actions by our competitors that could affect our operating margins, changes in governmental regulations and related compliance and litigation costs, uncertainties related to COVID-19 and the impact of our responses to it and the other factors listed in the Risk Factors section of 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 adhesive, coatings, composites 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.

See Attached Financial Statements

 

HEXION INC.

SCHEDULE 1: CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

 

(In millions)

Three Months Ended
September 30, 2021

 

Three Months Ended
September 30, 2020

 

Nine Months Ended
September 30, 2021

 

Nine Months Ended
September 30, 2020

 

Net sales

$

945

   

$

634

   

$

2,550

   

$

1,855

 

Cost of sales (exclusive of depreciation and amortization shown below)

702

   

500

   

1,922

   

1,514

 

Selling, general and administrative expense

90

   

56

   

243

   

164

 

Depreciation and amortization

48

   

47

   

148

   

143

 

Asset impairments

   

   

   

16

 

Business realignment costs

6

   

19

   

19

   

57

 

Other operating expense, net

2

   

4

   

2

   

15

 

Operating income (loss)

97

   

8

   

216

   

(54

)

Interest expense, net

24

   

25

   

72

   

76

 

Other non-operating income, net

(1

)

 

(8

)

 

(8

)

 

(12

)

Income (loss) from continuing operations before income tax and earnings from unconsolidated entities

74

   

(9

)

 

152

   

(118

)

Income tax expense

26

   

17

   

51

   

8

 

Income (loss) from continuing operations before earnings from unconsolidated entities

48

   

(26

)

 

101

   

(126

)

Earnings from unconsolidated entities, net of taxes

1

   

   

2

   

2

 

Income (loss) from continuing operations, net of taxes

49

   

(26

)

 

103

   

(124

)

Loss from discontinued operations, net of taxes

   

(68

)

 

(5

)

 

(71

)

Net income (loss)

$

49

   

$

(94

)

 

$

98

   

$

(195

)

 

HEXION INC.

SCHEDULE 2: CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 
 

(In millions, except share data)

September 30, 2021

 

December 31, 2020

Assets

     

Current assets:

     

Cash and cash equivalents (including restricted cash of $2 and $4, respectively)

$

354

   

$

204

 

Accounts receivable (net of allowance for doubtful accounts of $3 and $3, respectively)

413

   

331

 

Inventories:

     

Finished and in-process goods

273

   

180

 

Raw materials and supplies

122

   

85

 

Current assets held for sale

5

   

114

 

Other current assets

51

   

39

 

Total current assets

1,218

   

953

 

Investment in unconsolidated entities

12

   

10

 

Deferred tax assets

7

   

7

 

Long-term assets held for sale

   

342

 

Other long-term assets

77

   

85

 

Property and equipment:

     

Land

78

   

79

 

Buildings

124

   

122

 

Machinery and equipment

1,294

   

1,270

 
 

1,496

   

1,471

 

Less accumulated depreciation

(309

)

 

(212

)

 

1,187

   

1,259

 

Operating lease assets

94

   

103

 

Goodwill

164

   

164

 

Other intangible assets, net

1,025

   

1,079

 

Total assets

$

3,784

   

$

4,002

 

Liabilities and Equity

     

Current liabilities:

     

Accounts payable

$

360

   

$

339

 

Debt payable within one year

47

   

82

 

Interest payable

19

   

30

 

Income taxes payable

38

   

6

 

Accrued payroll and incentive compensation

71

   

42

 

Current liabilities associated with assets held for sale

3

   

70

 

Current portion of operating lease liabilities

16

   

19

 

Other current liabilities

104

   

111

 

Total current liabilities

658

   

699

 

Long-term liabilities:

     

Long-term debt

1,546

   

1,710

 

Long-term pension and post employment benefit obligations

228

   

250

 

Deferred income taxes

147

   

161

 

Operating lease liabilities

71

   

76

 

Long-term liabilities associated with assets held for sale

   

74

 

Other long-term liabilities

207

   

209

 

Total liabilities

2,857

   

3,179

 

Equity

     

Common stock—$0.01 par value; 100 shares authorized, issued and outstanding

at both September 30, 2021 and December 31, 2020

   

 

Paid-in capital

1,192

   

1,169

 

Accumulated other comprehensive loss

(44

)

 

(27

)

Accumulated deficit

(221

)

 

(319

)

Total equity

927

   

823

 

Total liabilities and equity

$

3,784

   

$

4,002

 
 

HEXION INC.

SCHEDULE 3: CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

 

(In millions)

Nine Months Ended
September 30, 2021

 

Nine Months Ended
September 30, 2020

Cash flows provided by (used in) operating activities

     

Net income (loss)

$

98

   

$

(195

)

Less: Loss from discontinued operations, net of tax

(5

)

 

(71

)

Income (loss) from continuing operations

103

   

(124

)

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

     

Depreciation and amortization

148

   

143

 

Non-cash asset impairments

   

16

 

Deferred tax (benefit) expense

(3

)

 

5

 

Loss on sale of assets and dispositions

2

   

7

 

Unrealized foreign currency losses (gains)

8

   

(1

)

Non-cash stock based compensation expense

 

23

   

13

 

Other non-cash adjustments

   

(1

)

Net change in assets and liabilities:

     

Accounts receivable

(93

)

 

(55

)

Inventories

(139

)

 

31

 

Accounts payable

34

   

(14

)

Income taxes payable

38

   

(8

)

Other assets, current and non-current

(2

)

 

(27

)

Other liabilities, current and non-current

(13

)

 

(22

)

Net cash provided by (used in) operating activities from continuing operations

106

   

(37

)

Net cash (used in) provided by operating activities from discontinued operations

(1

)

 

12

 

Net cash provided by (used in) operating activities

105

   

(25

)

Cash flows provided by (used in) investing activities

     

Capital expenditures

(80

)

 

(78

)

Proceeds from disposition of Held for Sale Business (see Note 4)

304

   

 

Proceeds from sale of assets and dispositions, net

11

   

2

 

Net cash provided by (used in) investing activities from continuing operations

235

   

(76

)

Net cash used in investing activities from discontinued operations

(6

)

 

(13

)

Net cash provided by (used in) investing activities

229

   

(89

)

Cash flows (used in) provided by financing activities

     

Net short-term debt repayments

(8

)

 

(12

)

Borrowings of long-term debt

131

   

209

 

Repayments of long-term debt

(301

)

 

(167

)

Return of capital to parent

   

(10

)

Financing fees paid

(1

)

 

 

Net cash (used in) provided by financing activities

(179

)

 

20

 

Effect of exchange rates on cash and cash equivalents, including restricted cash

   

(2

)

Change in cash and cash equivalents, including restricted cash and cash classified within current assets held for sale

155

   

(96

)

Change in cash classified within current assets held for sale

(5

)

 

 

Cash, cash equivalents and restricted cash at beginning of period

204

   

254

 

Cash, cash equivalents and restricted cash at end of period

354

   

158

 

Supplemental disclosures of cash flow information

     

Cash paid for:

     

Interest, net

$

80

   

$

88

 

Income taxes, net

21

   

12

 
 

HEXION INC.

SCHEDULE 4: RECONCILIATION OF NET INCOME (LOSS) TO SEGMENT EBITDA (Unaudited)

 
 
 

Three Months Ended
September 30, 2021

 

Three Months Ended
September 30, 2020

 

Nine Months Ended
September 30, 2021

 

Nine Months Ended
September 30, 2020

Reconciliation:

 

.

 

.

 

.

 

Net income (loss)

$

49

   

$

(94

)

 

$

98

   

$

(195

)

Less: Net loss from discontinued operations

   

(68

)

 

(5

)

 

(71

)

Net income (loss) from continuing operations

49

   

(26

)

 

103

   

(124

)

Income tax expense

26

   

17

   

51

   

8

 

Interest expense, net

24

   

25

   

72

   

76

 

Depreciation and amortization (1)

48

   

47

   

148

   

143

 

EBITDA

147

   

63

   

374

   

103

 

Adjustments to arrive at Segment EBITDA:

             

Asset impairments

$

   

$

   

$

   

$

16

 

Business realignment costs (2)

6

   

19

   

19

   

57

 

Transaction costs (3)

16

   

1

   

23

   

4

 

Realized and unrealized foreign currency losses (gains)

5

   

(3

)

 

9

   

2

 

Other non-cash items (4)

11

   

6

   

36

   

29

 

Other (5)

3

   

5

   

1

   

9

 

Total adjustments

41

   

28

   

88

   

117

 

Segment EBITDA

$

188

   

$

91

   

$

462

   

$

220

 
               

Segment EBITDA:

             

Adhesives

$

72

   

$

58

   

$

215

   

$

156

 

Coatings and Composites

138

   

50

   

311

   

115

 

Corporate and Other

(22

)

 

(17

)

 

(64

)

 

(51

)

Total

$

188

   

$

91

   

$

462

   

$

220

 

(1)

For both the nine months ended September 30, 2021 and 2020, accelerated depreciation of $2 has been included in "Depreciation and amortization." There was no accelerated depreciation for both the three months ended September 30, 2021 and 2020.

(2)

Business realignment costs for the periods below included:

 

Three Months Ended
September 30, 2021

 

Three Months Ended
September 30, 2020

 

Nine Months Ended
September 30, 2021

 

Nine Months Ended
September 30, 2020

Severance costs

$

1

   

$

4

   

$