Quarterly Report
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2010

OR

 

¨ 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 SPECIALTY CHEMICALS, 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)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

As a voluntary filer, the Company 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.

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  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x.

Number of shares of common stock, par value $0.01 per share, outstanding as of the close of business on August 1, 2010: 82,556,847

 

 

 


Table of Contents

HEXION SPECIALTY CHEMICALS, INC.

INDEX

 

         Page
PART I – FINANCIAL INFORMATION   
Item 1.  

Hexion Specialty Chemicals, Inc. Condensed Consolidated Financial Statements (Unaudited)

  
 

Condensed Consolidated Statements of Operations, three months ended June 30, 2010 and 2009

   3
 

Condensed Consolidated Statements of Operations, six months ended June 30, 2010 and 2009

   4
 

Condensed Consolidated Balance Sheets, June 30, 2010 and December 31, 2009

   5
 

Condensed Consolidated Statements of Cash Flows, six months ended June 30, 2010 and 2009

   6
 

Condensed Consolidated Statement of Deficit and Comprehensive Loss, six months ended June 30, 2010

   7
 

Notes to Condensed Consolidated Financial Statements

   8
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   32
Item 3.  

Quantitative and Qualitative Disclosures about Market Risk

   46
Item 4T.  

Controls and Procedures

   46
PART II – OTHER INFORMATION   
Item 1.  

Legal Proceedings

   47
Item 1A.  

Risk Factors

   47
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

   48
Item 3.  

Defaults upon Senior Securities

   48
Item 4.  

Reserved

   48
Item 5.  

Other Information

   48
Item 6.  

Exhibits

   48

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

HEXION SPECIALTY CHEMICALS, INC. (Unaudited)

 

     Three months ended
June 30,
 

(In millions)

   2010     2009  

Net sales

   $ 1,304      $ 947   

Cost of sales

     1,103        823   
                

Gross profit

     201        124   

Selling, general and administrative expense

     94        85   

Terminated merger and settlement income, net

     (27     (12

Asset impairments

     —          44   

Other operating (income) expense, net

     (4     16   
                

Operating income (loss)

     138        (9

Interest expense, net

     72        56   

Gain on extinguishment of debt

     —          (14

Other non-operating expense, net

     4        9   
                

Income (loss) before income tax

     62        (60

Income tax expense (benefit)

     13        (3
                

Income (loss) before earnings from unconsolidated entities

     49        (57

Earnings from unconsolidated entities, net of taxes

     3        1   
                

Net income (loss)

     52        (56
                

Comprehensive (loss) income

   $ (2   $ 10   
                

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

HEXION SPECIALTY CHEMICALS, INC. (Unaudited)

 

     Six months ended
June 30,
 

(In millions)

   2010     2009  

Net sales

   $ 2,478      $ 1,861   

Cost of sales

     2,129        1,647   
                

Gross profit

     349        214   

Selling, general and administrative expense

     175        168   

Terminated merger and settlement income, net

     (35     (42

Asset impairments

     —          47   

Other operating expense, net

     4        38   
                

Operating income

     205        3   

Interest expense, net

     135        120   

Gain on extinguishment of debt

     —          (182

Other non-operating expense, net

     11        5   
                

Income before income tax

     59        60   

Income tax expense

     18        —     
                

Income before earnings from unconsolidated entities

     41        60   

Earnings from unconsolidated entities, net of taxes

     4        1   
                

Net income

     45        61   

Net income attributable to noncontrolling interest

     —          (1
                

Net income attributable to Hexion Specialty Chemicals, Inc.

   $ 45      $ 60   
                

Comprehensive (loss) income

   $ (35   $ 92   
                

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED BALANCE SHEETS

HEXION SPECIALTY CHEMICALS, INC. (Unaudited)

 

(In millions, except share data)

   June 30,
2010
    December 31,
2009
 

Assets

    

Current assets

    

Cash and cash equivalents (including restricted cash of $3 and $7, respectively)

   $ 115      $ 142   

Short-term investments

     12        10   

Accounts receivable (net of allowance for doubtful accounts of $21 and $25, respectively)

     673        478   

Inventories:

    

Finished and in-process goods

     305        264   

Raw materials and supplies

     134        115   

Other current assets

     80        84   
                

Total current assets

     1,319        1,093   
                

Other assets, net

     136        104   

Property and equipment

    

Land

     94        110   

Buildings

     305        322   

Machinery and equipment

     2,221        2,368   
                
     2,620        2,800   

Less accumulated depreciation

     (1,326     (1,360
                
     1,294        1,440   

Goodwill

     161        177   

Other intangible assets, net

     140        159   
                

Total assets

   $ 3,050      $ 2,973   
                

Liabilities and Deficit

    

Current liabilities

    

Accounts and drafts payable

   $ 553      $ 481   

Debt payable within one year

     85        78   

Affiliated debt payable within one year

     4        4   

Interest payable

     70        36   

Income taxes payable

     41        42   

Accrued payroll and incentive compensation

     46        50   

Other current liabilities

     148        197   

Total current liabilities

     947        888   

Long-term liabilities

    

Long-term debt

     3,448        3,328   

Affiliated long-term debt

     100        100   

Long-term pension and post employment benefit obligations

     212        233   

Deferred income taxes

     114        120   

Other long-term liabilities

     126        128   

Advance from affiliates

     225        225   
                

Total liabilities

     5,172        5,022   
                

Commitments and contingencies (See Note 8)

    

Deficit

    

Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at June 30, 2010 and December 31, 2009

     1        1   

Paid-in capital

     458        485   

Treasury stock, at cost—88,049,059 shares

     (296     (296

Note receivable from parent

     (24     (24

Accumulated other comprehensive income

     19        99   

Accumulated deficit

     (2,284     (2,328
                

Total Hexion Specialty Chemicals, Inc. shareholder’s deficit

     (2,126     (2,063

Noncontrolling interest

     4        14   
                

Total deficit

     (2,122     (2,049
                

Total liabilities and deficit

   $ 3,050      $ 2,973   
                

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

HEXION SPECIALTY CHEMICALS, INC. (Unaudited)

 

     Six months ended
June 30,
 

(In millions)

   2010     2009  

Cash flows (used in) provided by operating activities

    

Net income

   $ 45      $ 61   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     86        88   

Gain on extinguishment of debt

     —          (182

Pushdown of recovery of expense paid by owner

     (28     (30

Non-cash impairments and accelerated depreciation

     —          48   

Deferred tax provision (benefit)

     2        (9

Write-off of deferred financing fees

     7        —     

Other non-cash adjustments

     8        (2

Net change in assets and liabilities:

    

Accounts receivable

     (236     125   

Inventories

     (89     134   

Accounts and drafts payable

     111        53   

Income taxes payable

     3        8   

Other assets, current and non-current

     (15     5   

Other liabilities, current and long-term

     (2     (45
                

Net cash (used in) provided by operating activities

     (108     254   
                

Cash flows used in investing activities

    

Capital expenditures

     (47     (57

Capitalized interest

     (1     (2

(Purchases of) proceeds from matured debt securities

     (2     5   

Change in restricted cash

     4        (7

Deconsolidation of variable interest entities

     (4     —     

Proceeds from the sale of assets

     12        4   

Dividends from unconsolidated affiliate

     3        —     
                

Net cash used in investing activities

     (35     (57
                

Cash flows provided by (used in) financing activities

    

Net short-term debt repayments

     —          (4

Borrowings of long-term debt

     1,379        252   

Repayments of long-term debt

     (1,222     (487

Net borrowings of affiliated debt

     —          104   

Purchase of note receivable due from parent

     —          (24

Deconsolidation of noncontrolling interest in variable interest entity

     —          (24

Long-term debt and credit facility financing fees

     (33     —     

Payments of dividends on common stock

     —          (9
                

Net cash provided by (used in) financing activities

     124        (192
                

Effect of exchange rates on cash and cash equivalents

     (4     6   

(Decrease) increase in cash and cash equivalents

     (23     11   

Cash and cash equivalents (unrestricted) at beginning of period

     135        121   
                

Cash and cash equivalents (unrestricted) at end of period

   $ 112      $ 132   
                

Supplemental disclosures of cash flow information

    

Cash paid (received) for:

    

Interest, net

   $ 97      $ 128   

Income taxes, net of cash refunds

     20        4   

See Notes to Condensed Consolidated Financial Statements

 

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CONDENSED CONSOLIDATED STATEMENT OF DEFICIT AND COMPREHENSIVE LOSS

HEXION SPECIALTY CHEMICALS, INC. (Unaudited)

 

(In millions)

   Common
Stock
   Paid-in
Capital
    Treasury
Stock
    Note
Receivable
From Parent
    Accumulated
Other
Comprehensive
Income (a)
    Accumulated
Deficit
    Noncontrolling
Interest
    Total  

Balance at December 31, 2009

   $ 1    $ 485      $ (296   $ (24   $ 99      $ (2,328   $ 14      $ (2,049

Net income

     —        —          —          —          —          45        —          45   

Net losses on cash flow hedges reclassified to income

     —        —          —          —          12        —          —          12   

Loss recognized in comprehensive income from pension and postretirement benefits, net of tax

     —        —          —          —          (1     —          —          (1

Translation adjustments

     —        —          —          —          (91     —          —          (91
                       

Comprehensive loss

                    (35
                       

Stock-based compensation expense

     —        1        —          —          —          —          —          1   

Pushdown of recovery of expense paid by owner

     —        (28       —          —          —          —          (28

Impact of adoption of new accounting guidance for variable interest entities (See Note 2)

     —        —          —          —          —          (1     (10     (11
                                                               

Balance at June 30, 2010

   $ 1    $ 458      $ (296   $ (24   $ 19      $ (2,284   $ 4      $ (2,122
                                                               

 

(a) Accumulated other comprehensive income at June 30, 2010 represents $105 of net foreign currency translation gains, net of tax, $8 of net deferred losses on cash flow hedges and a $78 unrealized loss, net of tax, related to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement plans. Accumulated other comprehensive income at December 31, 2009 represents $196 of net foreign currency translation gains, net of tax, $20 of net deferred losses on cash flow hedges and a $77 unrealized loss, net of tax, related to net actuarial losses and prior service costs for the Company’s defined benefit pension and postretirement benefit plans.

See Notes to Condensed Consolidated Financial Statements

 

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except share and common unit data)

1. Background and Basis of Presentation

Based in Columbus, Ohio, Hexion Specialty Chemicals, 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. Hexion is owned by an affiliate of Apollo Management, L.P. (“Apollo”). Apollo may also be referred to as the Company’s owner.

Basis of Presentation—The unaudited Condensed Consolidated Financial Statements include the accounts of the Company, its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights and variable interest entities (“VIEs”) in which the Company has a controlling financial interest. Intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments, except for the adoption of new accounting standards discussed in Note 2 below, 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.

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 accounting principles generally accepted in the United States of America have been condensed or omitted. These unaudited financial statements should be read in conjunction with the audited financial statements and the accompanying notes included in Hexion’s most recent Annual Report on Form 10-K.

The Company has revised its financial statements for the three and six months ended June 30, 2009 to record approximately $15 of income related to the insurance recoveries by its owner for the costs incurred in connection with the termination of the merger with Huntsman Corporation. The insurance recoveries related to the $200 termination settlement payment made that was pushed down and treated as an expense of the Company in 2008. As previously disclosed, the Company records any related insurance recoveries as a non-cash reduction to expenses in the period when the insurance settlement is reached. In August 2010, the Company became aware that its owner had received insurance recoveries of approximately $15 and $7 in the second and third quarters of 2009, respectively, that should have been reported as a reduction to expenses (income) in those periods with an offsetting reduction in Paid-in capital. The revision had no impact on the Company’s revenues, total assets, total liabilities, total debt, total equity, net worth, liquidity, cash flows, or Segment EBITDA. The impacts of correcting the financial statements for the three and six months ended June 30, 2009 presented elsewhere herein are as follows:

 

     As Previously
Reported
    Adjustments     As Revised  

Condensed consolidated statement of operations for the three months ended June 30, 2009:

      

Terminated merger and settlement expense (income), net

   $ 3      $ (15   $ (12

Operating loss

     (24     15        (9

Loss before income tax, earnings from unconsolidated entities

     (75     15        (60

Loss before earnings from unconsolidated entities

     (72     15        (57

Net loss

     (71     15        (56

Net loss attributable to Hexion Specialty Chemicals, Inc.

     (71     15        (56

Condensed consolidated statement of operations for the six months ended June 30, 2009:

      

Terminated merger and settlement income, net

     (27     (15     (42

Operating (loss) income

     (12     15        3   

Income before income tax, earnings from unconsolidated entities

     45        15        60   

Income before earnings from unconsolidated entities

     45        15        60   

Net income

     46        15        61   

Net income attributable to Hexion Specialty Chemicals, Inc.

     45        15        60   

Condensed consolidated statement of cash flows for the six months ended June 30, 2009:

      

Net income

     46        15        61   

Pushdown of recovery of expense paid by owner

     (15     (15     (30

Condensed consolidated balance sheet at December 31, 2009:

      

Paid-in capital

     507        (22     485   

Accumulated deficit

     (2,350     22        (2,328

 

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2. Summary of Significant Accounting Policies

Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. It also requires the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Terminated Merger and Settlement Income, net—The Company recognized Terminated merger and settlement income, net of $27 and $35 for the three and six months ended June 30, 2010, respectively. For the three months ended June 30, 2010, this amount primarily represents the non-cash reduction of expenses of $28 for insurance recoveries by the Company’s owner related to the $200 settlement payment that had been treated as an expense of the Company in 2008. For the six months ended June 30, 2010, the amount also includes $8 in insurance resolutions recorded by the Company related to the settlement of the New York Shareholder Action (see Note 8).

In the third quarter of 2010, the Company’s owner received an additional $20 in insurance recoveries associated with the $200 settlement payment. The amount will be recorded as income by the Company in the three months ended September 30, 2010.

Transfers of Financial Assets—The Company executes factoring and sales agreements with respect to its trade accounts receivable to support its working capital requirements. The Company accounts for these transactions as either sales-type or financing-type transfers of financial assets based on the terms and conditions of each agreement. For the portion of the sales price that is deferred in a reserve account and subsequently collected, the Company’s policy is to classify the cash in-flows as cash flows from operating activities as the predominant source of the cash flows pertains to the Company’s trade accounts receivable. When the Company retains the servicing rights on the transfers of accounts receivable, it measures these rights at fair value, if material. See Note 5.

Subsequent Events—The Company has evaluated events and transactions subsequent to June 30, 2010 through the time that it files its unaudited Condensed Consolidated Financial Statements.

Reclassifications —Certain prior period balances have been reclassified to conform with current presentations.

Recently Issued Accounting Standards

Newly Adopted Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 166, Accounting for Transfers of Financial Assets which was codified in December 2009 as Accounting Standards update No. 2009-16: Accounting for Transfers of Financial Assets (“ASU 2009-16”). ASU 2009-16 removes the concept of a qualifying special-purpose entity (“QSPE”) and as a result eliminates the scope exception for QSPE’s. ASU 2009-16 also changes the criteria for a transfer of financial assets to qualify as a sales-type transfer. The Company adopted ASU 2009-16 on January 1, 2010. The adoption of ASU 2009-16 did not have a material impact on the Company’s unaudited Condensed Consolidated Financial Statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R) which was codified in December 2009 as Accounting Standards Update No. 2009-17: Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities (“ASU 2009-17”). ASU 2009-17 amends current guidance requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a VIE. The Company adopted ASU 2009-17 on January 1, 2010. The Company does not have the power to direct the activities that most significantly impact two of its VIEs’ economic performance, and therefore, the Company does not have a controlling financial interest in these VIEs. As a result of the adoption of this guidance, the Company deconsolidated these two VIEs from its unaudited Condensed Consolidated Financial Statements, including its foundry joint venture between the Company and Delta-HA, Inc (“HAI”). The deconsolidation resulted in a net decrease in assets of $19, liabilities of $8 and noncontrolling interest of $10 and an increase to Accumulated deficit of $1 for the cumulative effect of adoption on January 1, 2010.

3. Productivity Program

At June 30, 2010, the Company has $70 of in-process productivity savings to properly align its cost structure, previously announced in response to the then challenging economic environment. The Company estimates that the remainder of these cost reduction activities will occur over the next fifteen months. The net costs to achieve these productivity savings is estimated at $44, including remaining restructuring costs described below and expected capital expenditures related to productivity savings programs.

 

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A reconciliation of in-process productivity savings at December 31, 2009 to in-process productivity savings at June 30, 2010 follows:

 

In-process productivity savings at December 31, 2009

   $ 125   

Incremental productivity savings achieved in 2010

     (57

Additional productivity initiatives identified in 2010

     2   
        

In-process productivity savings at June 30, 2010

   $ 70   
        

The following table summarizes restructuring information by type of cost:

 

     Workforce
reductions
    Site closure
costs
    Other
projects
    Total  

Restructuring costs expected to be incurred

   $ 67      $ 21      $ 14      $ 102   

Cumulative restructuring costs incurred at June 30, 2010

     53        10        3        66   

Accrued liability at December 31, 2009

   $ 22      $ —        $ —        $ 22   

Restructuring charges

     7        1        1        9   

Payments

     (13     (1     (1     (15

Foreign currency translation

     (1     —          —          (1
                                

Accrued liability at June 30, 2010

   $ 15      $ —        $ —        $ 15   
                                

Workforce reduction costs primarily relate to employee termination costs and are accounted for under the guidance for nonretirement postemployment benefits or as exit and disposal costs, as applicable. Restructuring charges are recorded in Other operating expense, net on the unaudited Condensed Consolidated Statements of Operations. Restructuring charges were $4 and $17, for the three months ended June 30, 2010 and 2009, respectively, and $9 and $31, for the six months ended June 30, 2010 and 2009, respectively. At June 30, 2010 and December 31, 2009, the Company had accrued $15 and $22, respectively, for restructuring liabilities in Other current liabilities in the unaudited Condensed Consolidated Balance Sheets.

The following table summarizes restructuring information by reporting segment:

 

     Epoxy and
Phenolic
Resins
    Formaldehyde
and Forest
Products
    Coatings
and Inks
    Corporate
and Other
    Total  

Restructuring costs expected to be incurred

   $ 43      $ 6      $ 46      $ 7      $ 102   

Cumulative restructuring costs incurred at June 30, 2010

     26        4        29        7        66   

Accrued liability at December 31, 2009

   $ 15      $ 2      $ 2      $ 3      $ 22   

Restructuring charges

     4        —          5        —          9   

Payments

     (9     (1     (4     (1     (15

Foreign currency translation

     (1     —          —          —          (1
                                        

Accrued liability at June 30, 2010

   $ 9      $ 1      $ 3      $ 2      $ 15   
                                        

4. Related Party Transactions

Management Consulting Agreement

The Company is subject to a seven-year Amended and Restated Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) that terminates on May 31, 2012 under which 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.

During the three and six months ended June 30, 2010 the Company recognized expense under the Management Consulting Agreement of less than $1 and $2, respectively. This amount is included in Other operating expense, net in the Company’s unaudited Condensed Consolidated Statements of Operations.

Financing Agreements

In connection with the terminated Huntsman merger and related litigation settlement agreement and release among the Company, Huntsman and other parties entered into on December 14, 2008, the Company paid Huntsman $225. The settlement

 

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payment was funded to the Company by an advance from Apollo, while reserving all rights with respect to reallocation of the payments to other affiliates of Apollo. Under the provisions of the settlement agreement and release, the Company is contractually obligated to reimburse Apollo for any insurance recoveries on the $225 settlement payment, net of expense incurred in obtaining such recoveries. Apollo has agreed that the payment of any such insurance recoveries will satisfy the Company’s obligation to repay amounts received under the $225 advance. The Company has recorded the $225 settlement payment advance as a long-term liability at June 30, 2010. As of June 30, 2010 the Company has not recovered any insurance proceeds related to the $225 settlement payment.

Certain affiliates of Apollo have entered into a commitment letter with the Company and Hexion LLC, the Company’s parent, pursuant to which they committed to purchase $200 in preferred units and warrants of Hexion LLC by December 31, 2011. Prior to the purchase of all the preferred units and warrants, certain affiliates of Apollo have committed to provide liquidity facilities to Hexion LLC or the Company on an interim basis. The aggregate liquidity facilities outstanding, together with the purchase price for any purchased preferred units and warrants, will at no time exceed $200. In connection therewith, in 2009, certain affiliates of Apollo extended a $100 term loan to the Company. In addition, in June 2010 the Company sold $100 of trade accounts receivable to affiliates of Apollo for net cash of $90 ($10 remains held in a reserve account at June 30, 2010). See Note 5 for a description of the Company’s sale of trade accounts receivable. See Note 7 for a description of the Company’s affiliated financing activities. The available borrowings under these liquidity facilities at June 30, 2010 were $10. This amount will increase on a dollar for dollar basis as the $100 of sold receivables are collected.

Purchase of Hexion LLC debt

In 2009, the Company purchased $180 in face value of the outstanding LLC PIK Facility for $24, including accrued interest. The loan receivable from Hexion LLC has been recorded at its acquisition value of $24 as a reduction in the unaudited Condensed Consolidated Statement of Deficit and Comprehensive Loss as Hexion LLC is the Company’s parent. In addition, at June 30, 2010 the Company has not recorded accretion of the purchase discount or interest income as ultimate receipt of these cash flows is under the control of Hexion LLC. The Company will continue to assess the collectibility of these cash flows to determine future amounts to record, if any.

Other Transactions

The Company sells products to certain Apollo affiliates. These sales were $1 and less than $1 for the three months ended June 30, 2010 and 2009, respectively, and $1 for the six months ended June 30, 2010 and 2009. Accounts receivable from these affiliates were less than $1 at June 30, 2010 and December 31, 2009. The Company also purchases raw materials and services from certain Apollo affiliates. These purchases were $5 and less than $1 for the three months ended June 30, 2010 and 2009, respectively, and $7 and $1 for the six months ended June 30, 2010 and 2009, respectively. The Company had accounts payable to Apollo and affiliates of $1 and $2 at June 30, 2010 and December 31, 2009, respectively.

The Company sells finished goods to and purchases raw materials from HAI. The Company also provides toll-manufacturing and other services to HAI. Prior to 2010 and the adoption of ASU 2009-17, HAI was consolidated in the Company’s unaudited Condensed Consolidated Financial Statements and these transactions were eliminated in consolidation. Beginning in 2010, the Company’s investment in HAI is recorded under the equity method of accounting and the related sales and purchases are not eliminated from the Company’s unaudited Condensed Consolidated Financial Statements. However, any profit on these transactions is eliminated in the Company’s unaudited Condensed Consolidated Financial Statements to the extent of the Company’s 50% interest in HAI. Sales to and services provided to HAI were $24 and $45 for the three and six months ended June 30, 2010, respectively. Purchases from HAI were $36 and $46 for the three and six months ended June 30, 2010, respectively. The Company had accounts receivable from HAI of $11 and accounts payable to HAI of $12 at June 30, 2010. HAI declared a dividend of $4, of which the Company has received $3 as of June 30, 2010.

The Company’s purchase contracts with HAI represent a significant portion of HAI’s total revenue. In addition, the Company has pledged its member interest in HAI as collateral on HAI’s revolving line of credit. These factors result in the Company absorbing the majority of the risk to potential losses or gains from a majority of the expected returns. However, the Company does not have the power to direct the activity’s that most significantly impact HAI, and therefore, does not have a controlling financial interest. As of June 30, 2010 the carrying value of HAI’s assets and liabilities were $45 and $24, respectively.

The Company has a loan receivable from its unconsolidated forest products joint venture in Russia of $4 as of June 30, 2010.

 

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5. Transfers of Financial Assets

In June 2010, the Company entered into accounts receivable purchase and sale agreements to sell $100 of its trade accounts receivable to affiliates of Apollo on terms which management believes were more favorable to the Company than could have been obtained from an independent third party. Under the terms of the agreements, the receivables are sold at a discount relative to their carrying value in exchange for all interests in such receivables. The Company retains the obligation to service the collection of the receivables on the purchasers’ behalf for which the Company is paid a fee, and the purchasers defer payment of a portion of the receivable purchase price and establish a reserve account with the proceeds. The reserve account is used to reimburse the purchasers for credit and collection risk. The remaining amounts are paid to the Company after receipt of all collections on the purchased receivables. Other than amounts held in the reserve account, the purchasers bear all credit risk on the purchased receivables.

These accounts receivable purchase and sale agreements were accounted for as sales-type transfers. The losses recorded on these sales were less than $1 for the three and six months ended June 30, 2010 and are included in Other operating expense, net in the unaudited Condensed Consolidated Statements of Operations. Servicing fees were less than $1 for the three and six months ended June 30, 2010.

6. Fair Value and Financial Instruments

Fair Value

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, for example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Recurring Fair Value Measurements

Following is a summary of assets and liabilities measured at fair value on a recurring basis as of June 30, 2010 and December 31, 2009:

 

     Fair Value Measurements Using    Total  
     Quoted
Prices in
Active
Markets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
    Unobservable
Inputs
(Level 3)
  

June 30, 2010

          

Derivative liabilities

   $ —      $ (17   $ —      $ (17

December 31, 2009

          

Derivative liabilities

     —        (35     —        (35

Level 1 primarily consists of financial instruments traded on exchange or futures markets. Level 2 includes those derivative instruments transacted primarily in over the counter markets.

The Company calculates the fair value of its derivative liabilities using quoted market prices whenever available. When quoted market prices are not available, the Company uses 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 June 30, 2010 and December 31, 2009, the Company reduced its derivative liabilities by $0 and $1, respectively, for its nonperformance risk. As a significant portion of the Company’s derivative liabilities are cash flow hedges, $0 and $1 was recognized in Accumulated other comprehensive income at June 30, 2010 and December 31, 2009, respectively.

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.

 

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Derivative Financial Instruments

The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange risk, interest rate risk and commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes.

Foreign Exchange Rate Swaps

International operations account for a significant portion of the Company’s revenue and operating income. The Company’s policy is to reduce foreign currency cash flow exposure from exchange rate fluctuations by hedging anticipated and firmly committed transactions when it is economically feasible. The Company periodically enters into forward contracts to buy and sell foreign currencies to reduce foreign exchange exposure and protect the U.S. dollar value of certain transactions to the extent of the amount under contract. The counter-parties to our forward contracts are financial institutions with investment grade ratings. The Company does not apply hedge accounting to these derivative instruments.

Interest Rate Swaps

The Company periodically uses interest rate swaps to alter interest rate exposures between fixed and floating rates on certain long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated using an agreed-upon notional principal amount. The counter-parties to the interest rate swap agreements are financial institutions with investment grade ratings.

In January 2007, the Company entered into an interest rate swap agreement. This swap is designed to offset the cash flow variability that results from interest rate fluctuations on the Company’s variable rate debt. The Company accounts for the swap as a qualifying cash flow hedge.

In February 2007, the Company entered into interest rate swap agreements to offset the cash flow variability that results from interest rate fluctuations on the Company’s Australian variable rate debt. The Company has not applied hedge accounting to this derivative instrument.

In July 2010, the Company entered into a two-year interest rate swap agreement (the “July 2010 Swap”). This swap is designed to offset the cash flow variability that results from interest rate fluctuations on the Company’s variable rate debt. This swap will become effective on January 4, 2011 upon the expiration of the January 2007 interest rate swap. The initial notional amount of the swap is $350, and will subsequently be amortized down to $325. The Company pays a fixed rate of 1.032% and will receive a variable one month LIBOR rate.

Commodity Contracts

The Company hedges a portion of its electricity purchases for certain North American plants. The Company enters into forward contracts with fixed prices to hedge electricity pricing at these plants. Any unused electricity is net settled for cash each month based on the market electricity price versus the contract price. The Company also hedges a portion of its natural gas purchases for certain North American plants. The Company uses futures contracts to hedge natural gas pricing at these plants. The natural gas contracts are settled for cash each month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. The Company does not apply hedge accounting to these electricity or natural gas future contracts.

 

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The following tables summarize the Company’s derivative financial instruments:

 

          June 30, 2010     December 31, 2009  

Liability Derivatives

  

Balance Sheet Location

   Notional
Amount
   Fair  Value
Liability
    Notional
Amount
   Fair  Value
Liability
 

Derivatives designated as hedging instruments

             

Interest Rate Swaps

             

Interest swap – 2007

   Other current liabilities      500      (15     650      (28
                         

Total derivatives designated as hedging instruments

         $ (15      $ (28
                         

Derivatives not designated as hedging instruments

             

Foreign Exchange and Interest Rate Swaps

             

Cross-Currency and Interest Rate Swap

   Other current liabilities    $ 25    $ (1   $ 25    $ (5

Interest Rate Swap

             

Interest swap – Australia Multi-Currency Term

   Other current liabilities      20      —          23      (1

Commodity Contracts

             

Electricity contracts

   Other current liabilities      5      (1     3      (1

Natural gas contracts

   Other current liabilities      1      —          1      —     

Natural gas futures

   Other current liabilities      1      —          3      —     
                         

Total derivatives not designated as hedging instruments

         $ (2      $ (7
                         

 

Derivatives in Cash Flow

Hedging Relationship

   Amount of Loss
Recognized in OCI on Derivative

for the three months ended:
    Location of Loss
Reclassified from
Accumulated OCI into
Income
   Amount of Loss Reclassified
from Accumulated OCI into
Income for the three months

ended:
 
   June 30, 2010     June 30, 2009        June 30, 2010     June 30, 2009  

Interest Rate Swaps

           

Interest swap – 2006

   $ —        $ —        Interest expense, net    $ —        $ (4

Interest swap – 2007

     —          (8   Interest expense, net      (6     (4
                                   

Total

   $ —        $ (8      $ (6   $ (8
                                   

Derivatives in Cash Flow

Hedging Relationship

   Amount of Loss
Recognized in OCI on Derivative

for the six months ended:
    Location of Loss
Reclassified from
Accumulated OCI into
Income
   Amount of Loss Reclassified
from Accumulated OCI into
Income for the six months

ended:
 
   June 30, 2010     June 30, 2009        June 30, 2010     June 30, 2009  

Interest Rate Swaps

           

Interest swap – 2006

   $ —        $ —        Interest expense, net    $ —        $ (8

Interest swap – 2007

     (1     (9   Interest expense, net      (13     (7
                                   

Total

   $ (1   $ (9      $ (13   $ (15
                                   

 

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Derivatives Not Designated as Derivative Instruments

   Amount of Gain (Loss)
Recognized in Income on
Derivative for  the three months

ended:
   

Location of Gain (Loss) Recognized in

Income on Derivative

   June 30, 2010     June 30, 2009    

Foreign Exchange and Interest Rate Swaps

      

Cross-Currency and Interest Rate Swap

   $ 2      $ (2  

Other non-operating expense, net

Interest Rate Swap

      

Interest swap – Australia Multi-Currency Term

     1        —       

Other non-operating expense, net

Commodity Contracts

      

Electricity contracts

     1        —       

Cost of sales

Natural gas contracts

     —          (1  

Cost of sales

Natural gas futures

     —          (1  

Cost of sales

                  

Total

   $ 4      $ (4  
                  

Derivatives Not Designated as Derivative Instruments

   Amount of Gain (Loss)
Recognized in Income on
Derivative for  the six months

ended:
   

Location of Gain (Loss) Recognized in

Income on Derivative

   June 30, 2010     June 30, 2009    

Foreign Exchange and Interest Rate Swaps

      

Cross-Currency and Interest Rate Swap

   $ 4      $ (1  

Other non-operating expense, net

Interest Rate Swap

      

Interest swap – Australia Multi-Currency Term

     1        —       

Other non-operating expense, net

Commodity Contracts

      

Electricity contracts

     1        (1  

Cost of sales

Natural gas contracts

     —          (1  

Cost of sales

Natural gas futures

     (1     (2  

Cost of sales

                  

Total

   $ 5      $ (5  
                  

Non-derivative Financial Instruments

The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:

 

     June 30, 2010    December 31, 2009
     Carrying
Amount
   Fair Value    Carrying
Amount
   Fair Value

Debt

   $ 3,637    $ 3,288    $ 3,510    $ 3,059

Fair values of debt are determined from quoted, observable market prices, where available, 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. The carrying amounts of cash and cash equivalents, accounts receivable, accounts and drafts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

 

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7. Debt Obligations

Debt outstanding at June 30, 2010 and December 31, 2009 is as follows:

 

     June 30, 2010    December 31, 2009
     Long-
Term
   Due Within
One Year
   Long-
Term
   Due Within
One Year

Non-affiliated debt:

           

Senior Secured Credit Facilities:

           

Revolving facility due 2011

   $ —      $ —      $ 36    $ —  

Floating rate term loans due 2013

     455      7      2,211      23

Floating rate term loans due 2015

     930      16      —        —  

Senior Secured Notes:

           

8.875% senior secured notes due 2018 (includes $7 of unamortized debt discount)

     993      —        —        —  

Floating rate second-priority senior secured notes due 2014

     120      —        120      —  

9.75% second-priority senior secured notes due 2014

     533      —        533      —  

Debentures:

           

9.2% debentures due 2021

     74      —        74      —  

7.875% debentures due 2023

     189      —        189      —  

8.375% sinking fund debentures due 2016

     62      —        62      —  

Other Non-affiliated Borrowings:

           

Australia Multi-Currency Term / Working Capital Facility due 2011

     38      9      46      8

Brazilian bank loans

     34      40      30      35

Capital leases

     13      1      14      1

Other

     7      12      13      11
                           

Total non-affiliated debt

     3,448      85      3,328      78

Affiliated debt:

           

Affiliated borrowings due on demand

     —        4      —        4

Affiliated term loan due 2011

     100      —        100      —  
                           

Total affiliated debt

     100      4      100      4
                           

Total debt

   $ 3,548    $ 89    $ 3,428    $ 82
                           

Refinancing Transactions

In late December 2009 and January 2010, the Company extended $200 of its revolving facility commitments from lenders under the Senior Secured Credit Facility, which will take effect upon the May 31, 2011 maturity of the existing revolving facility commitments. The new commitments will extend the availability of the revolving facility to February 2013.

In January 2010, through the Company’s wholly owned finance subsidiaries, Hexion U.S. Finance Corp. and Hexion Nova Scotia Finance, ULC, the Company sold $1,000 aggregate principal amount of 8.875% senior secured notes due 2018. The Company used the net proceeds of $993 ($1,000 less original issue discount of $7) from the issuance to repay $800 of its U.S. term loans under the Senior Secured Credit Facility, pay certain related transaction costs and expenses and provide incremental liquidity of $162. The 8.875% senior secured notes are secured by the same collateral as the Company’s existing second-priority senior secured notes, but the priority of the collateral liens securing the 8.875% senior secured notes is senior to the collateral liens securing the existing second-priority senior secured notes, and is junior to the collateral liens securing the Company’s Senior Secured Credit Facility.

In addition to, and in connection with the issuance of the $1,000 aggregate principal amount of 8.875% notes, the Company entered into an amendment of its Senior Secured Credit Facilities. Under the amendment and restatement, the Company extended the maturity of approximately $959 of its Senior Secured Credit Facility term loans from May 5, 2013 to May 5, 2015 and increased the interest rate with respect to such term loans from LIBOR plus 2.25% to LIBOR plus 3.75%. Collectively, both the issuance of the $1,000 aggregate principal amount 8.875% senior secured notes and the amendment of the Senior Secured Facilities are referred to as the “January Refinancing Transactions.”

 

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In the first quarter of 2010 the Company incurred $31 in fees related to the January Refinancing Transactions, of which $29 were deferred and are recorded in Other assets, net in the unaudited Condensed Consolidated Balance Sheets. The deferred fees will be amortized over the contractual life of the respective debt obligations. The remaining $2 in fees were expensed as incurred and are included in Other operating expense, net in the unaudited Condensed Consolidated Statements of Operations. Additionally, $7 in unamortized deferred financing fees were written-off related to the $800 of U.S. term loans under the Senior Secured Credit Facility that were repaid and extinguished. These fees are included in Other non-operating expense, net in the unaudited Condensed Consolidated Statements of Operations.

Senior Secured Credit Facilities

The terms of the amended Senior Secured Credit Facilities include a term loan facility with maturities in 2013 and 2015, a $50 synthetic letter of credit facility (“LOC”), access to a $225 revolving credit facility through May 2011 and access to a $200 revolving credit facility from May 2011 through February 2013.

The facilities are subject to an earlier maturity date, on any date that more than $200 in the aggregate principal amount of certain of the Company’s debt will mature within 91 days of that date. Repayment of 1% total per year of the term loan and LOCs must be made (in the case of the term loan facility, quarterly, and in the case of the LOC, annually) with the balance payable at the final maturity date. Further, the Company may be required to make additional repayments on the term loan, upon specific events, or if excess cash flow is generated. The terms of the Senior Secured Credit Facilities also include $200 in available incremental term loan borrowings.

The interest rates for term loans to the Company under the amended Senior Secured Credit Facilities are based on, at the Company’s option, (a) adjusted LIBOR plus 2.25% for term loans maturing 2013 and 3.75% for term loans maturing 2015 or (b) the higher of (i) JPMorgan Chase Bank, N.A.’s (JPMCB) prime rate or (ii) the Federal Funds Rate plus 0.50%, in each case plus 0.75% for term loans maturing 2013 and 2.25% for term loans maturing 2015. Term loans to the Company’s Netherlands subsidiary are at the Company’s option; (a) EURO LIBOR plus 2.25% for term loans maturing 2013 or 3.75% for term loans maturing 2015 or (b) the rate quoted by JPMCB as its base rate for those loans plus 0.75% for term loans maturing 2013 and 2.25% for term loans maturing 2015.

The amended Senior Secured Credit Facilities have commitment fees (other than with respect to the LOC) equal to 0.50% per year of the unused line plus a fronting fee of 0.25% of the aggregate face amount of outstanding letters of credit. The LOC has a commitment fee of 0.10% per year.

The interest rate for the revolving credit facility through May 2011 bears interest at adjusted LIBOR plus 2.50%. The extended revolving loans will bear interest at a rate of LIBOR plus 4.50%. The Company is also required to pay a 2% ticking fee on committed amounts for the extended revolver, payable quarterly through May 2011. Available borrowings under the amended Senior Secured Credit Facilities were $218 at June 30, 2010.

Pursuant to the terms of our Senior Secured Credit Facilities, intercompany indebtedness of any borrower thereunder to any of our subsidiaries is subordinated to the prior payment of the senior indebtedness obligations under the Senior Secured Credit Facility. Certain Company subsidiaries guarantee obligations under the amended Senior Secured Credit Facilities. The amended Senior Secured Credit Facilities and certain notes are secured by certain assets of the Company and the subsidiary guarantors, subject to certain exceptions.

The credit agreement contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Payment of borrowings under the Amended Senior Secured Credit Facilities may be accelerated if there is an event of default. Events of default include the failure to pay principal and interest when due, a material breach of representation or warranty, covenant defaults, events of bankruptcy and a change of control. The Senior Secured Credit Facilities also contain cross-acceleration and cross default provisions. Accordingly, events of default under certain other foreign debt agreements could result in the Company’s outstanding debt becoming immediately due and payable.

Affiliated Debt

In 2009, the Company borrowed $100 in term loans from affiliates of Apollo which will mature on December 31, 2011 with interest at adjusted LIBOR plus 2.25%. In 2009, the Company borrowed $4 from an affiliate of Apollo which is due upon demand. The weighted average interest rate of affiliated borrowings at June 30, 2010 was 2.8%. Proceeds from the loans were used for general corporate purposes.

 

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8. 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 June 30, 2010 and December 31, 2009:

 

     Number of Sites    Liability    Range of
Reasonably
Possible Costs

Site Description

   June 30,
2010
   December 31,
2009
   June 30,
2010
   December 31,
2009
   Low    High

Geismar, LA

   1    1    $ 17    $ 17    $ 10    $ 25

Superfund and offsite landfills – allocated share:

                 

Less than 1%

   28    27      1      1      1      2

Equal to or greater than 1%

   12    12      7      7      5      13

Currently-owned

   21    22      9      11      5      17

Formerly-owned:

                 

Remediation

   10    10      2      2      1      12

Monitoring only

   7    7      1      1      1      2
                                     
   79    79    $ 37    $ 39    $ 23    $ 71
                                     

These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At June 30, 2010 and December 31, 2009, $12 and $13, respectively, has been included in Other current liabilities in the unaudited Condensed Consolidated Balance Sheets with the remaining amount included in Other long-term liabilities.

Following is a discussion of the Company’s environmental liabilities and the related assumptions at June 30, 2010:

Geismar, LA Site—The Company formerly owned a basic chemicals and polyvinyl chloride business that was taken public as Borden Chemicals and Plastics Operating Limited Partnership (“BCPOLP”) in 1987. The Company retained a 1% interest, the general partner interest and the liability for certain environmental matters after BCPOLP’s formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the District of Delaware among the Company, BCPOLP, the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality, the Company agreed to perform certain of BCPOLP’s obligations for soil and groundwater contamination at BCPOLP’s Geismar, Louisiana site. The Company bears the sole responsibility for these obligations because there are no other potentially responsible parties (“PRP”) or third parties from whom the Company could seek reimbursement.

A groundwater pump and treat system to remove contaminants is operational, and natural attenuation studies are proceeding. If closure procedures and remediation systems prove to be inadequate, or if additional contamination is discovered, costs that would approach the higher end of the range of possible outcomes could result.

Due to the long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, a portion of this liability was recorded at its net present value, assuming a 3% discount rate and a time period of 28 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 28 years, is approximately $24. Over the next five years, the Company expects to make ratable payments totaling $6.

 

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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 eight sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The Company expects to pay approximately $8 of these liabilities within the next five years, with the remainder over the next ten years. The factors influencing the ultimate outcome include the methods of remediation elected, the conclusions and assessment of site studies remaining to be completed, and the time period required to complete the work. No other parties are responsible for remediation at these sites.

Formerly-Owned Sites—The Company is conducting environmental remediation at a number of locations that it formerly owned. The final costs to the Company will depend on the method of remediation chosen and the level of participation of third parties.

In addition, 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 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 has reserves of $11 and $29 at June 30, 2010 and December 31, 2009, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At June 30, 2010 and December 31, 2009, $6 and $26, respectively, has been included in Other current liabilities in the unaudited Condensed Consolidated Balance Sheets with the remaining amount included in Other long-term liabilities.

Following is a discussion of significant non-environmental legal proceedings:

Matters Related to the Terminated Merger Agreement with Huntsman Corporation—

On July 17, 2008, an individual Huntsman shareholder filed suit against the Company, Craig O. Morrison, President and Chief Executive Officer, and Joshua J. Harris, Director, in the United States District Court in the Southern District of New York related to matters arising out of the Huntsman Agreement (the “New York Shareholder Action”). The plaintiff in the New York Shareholder Action sought to represent a class of purchasers of Huntsman common stock between May 14, 2008 and June 18, 2008 (the “Class Period”). The complaint alleged that the defendants disseminated false and misleading statements and failed to disclose material facts regarding the merger during the Class Period in violation of U.S. securities laws. In October 2009, the parties reached a settlement agreement which includes payment by the Company of $18 which the Company had accrued as of December 31, 2009 and has subsequently paid in 2010. In 2010, the Company negotiated and subsequently received an $8 resolution payment from its director and officer liability insurance carrier related to the settlement agreement. The amount is included in Terminated merger and settlement income, net in the unaudited Condensed Consolidated Statements of Operations.

 

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On September 30, 2009, Hexion received a letter from counsel for affiliates of Credit Suisse and Deutsche Bank which demanded payment of the Banks’ legal fees claimed to be in excess of $60 incurred in various litigations associated with the terminated merger of Hexion and Huntsman. Hexion has rejected the Banks’ demand citing not only the Banks’ material breach of their commitment to fund the merger, but among other things, the Banks’ failure to obtain Hexion’s approval of its settlement with Huntsman, the failure to provide a release for any and all liabilities in favor of Hexion and the unreasonable amount of the fees sought. At this time, there is inadequate information from which to estimate a potential range of liability, if any.

Brazil Tax Claim—In 1992, the State of Sao Paulo Administrative Tax Bureau issued an assessment against the Company’s Brazilian subsidiary claiming that excise taxes were owed on certain intercompany loans made for centralized cash management purposes. These loans were characterized by the Tax Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions and the subsidiary filed an administrative appeal seeking cancellation of the assessment. The Administrative Court upheld the assessment in December 2001. In 2002, the subsidiary filed a second appeal with the highest-level Administrative Court, again seeking cancellation of the assessment. In February 2007, the highest-level Administrative Court upheld the assessment. The Company requested a review of this decision. On April 23, 2008, the Brazilian Administrative Tax Tribunal issued its final decision upholding the assessment against the subsidiary. The Company filed an Annulment action in the Brazilian Judicial Courts in May 2008 along with a request for an injunction to suspend the tax collection. The injunction was denied but the Annulment action is being pursued. The Company has pledged certain properties and assets in Brazil during the pendency of the Annulment action in lieu of paying the assessment. The Court appointed expert has filed a report asserting that the transactions in question were intercompany loans. The Company is awaiting the Court’s decision and believes it has a strong defense against the assessment and does not believe a loss contingency is probable. At June 30, 2010, the amount of the assessment, including tax, penalties, monetary correction and interest, is 65 Brazilian reais, or approximately $36.

Formosa Plant—Several lawsuits were filed in Sangamon County, Illinois in May 2006 against the Company on behalf of individuals injured or killed in an explosion at a Formosa Plastics Corporation (“Formosa”) plant in Illiopolis, Illinois that occurred on April 23, 2004. The Company sold the facility in 1987. The facility was operated by BCPOLP until it was sold to Formosa out of BCPOLP’s bankrupt estate in 2002. In March 2007, an independent federal agency found that operator errors caused the explosion, but that current and former owners could have implemented systems to minimize the impacts from these errors. In March 2008, the Company filed a motion for summary judgment, which is still pending. At this time there is inadequate information from which to estimate a potential range of liability, if any.

Hillsborough County—The Company is named in a lawsuit filed on July 12, 2004 in Hillsborough County, Florida Circuit Court, for an animal feed supplement processing site formerly operated by the Company and sold in 1980. The lawsuit is filed on behalf of multiple residents of Hillsborough County living near the site and it alleges various injuries from exposure to toxic chemicals. The Company does not have adequate information from which to estimate a potential range of liability, if any. The court dismissed a similar lawsuit brought on behalf of a class of plaintiffs in November 2005.

Environmental Institution of Paraná IAP—On August 25, 2009, Governo Do Paraná and the Environmental Institution of Paraná IAP, an environmental agency of the Brazilian government, provided Hexion Quimica Industria, our Brazilian subsidiary, with notice of a potential fine of up to $11 in connection with alleged environmental damages to the Port of Paranagua caused in November 2004 by an oil spill from a shipping vessel carrying methanol purchased by Hexion. The investigation as to the cause of the accident has not been finalized. In early October 2009, Hexion was granted an injunction precluding the imposition of any fines or penalties by the Paraná IAP. Should the injunction be appealed, the Company believes it has a strong defense and does not believe a loss contingency is probable.

Other Legal Matters—The Company is involved in various other product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings in addition to those described above, including actions that allege harm caused by products the Company has allegedly made or used, containing silica, vinyl chloride monomer and asbestos. The Company does not believe that it has a material exposure for these claims and believes it has adequate reserves and insurance to cover pending and foreseeable future claims.

 

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9. Pension and Postretirement Expense

Following are the components of net pension and postretirement expense (benefit) recognized by the Company for the three and six months ended June 30, 2010 and 2009:

 

     Pension Benefits     Non-Pension Postretirement Benefits
     Three months ended June 30,     Three months ended June 30,
     2010     2009     2010    2009
     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      $ 2      $ 1      $ 2      $ —        $ —      $ —        $ —  

Interest cost on projected benefit obligation

     3        4        4        4        —          —        —          —  

Expected return on assets

     (4     (3     (3     (3     —          —        —          —  

Amortization of prior service cost

     —          1        —          1        (2     —        (2     —  

Recognized actuarial loss

     2        —          2        —          —          —        —          —  

Curtailment (gain) loss

     —          —          (1     1        —          —        —          —  
                                                             

Net expense (benefit)

   $ 2      $ 4      $ 3      $ 5      $ (2   $ —      $ (2   $ —  
                                                             
     Pension Benefits     Non-Pension Postretirement Benefits
     Six months ended June 30,     Six months ended June 30,
     2010     2009     2010    2009
     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      $ 4      $ 3      $ 4      $ —        $ —      $ —        $ —  

Interest cost on projected benefit obligation

     7        8        8        8        —          —        —          —  

Expected return on assets

     (8     (6     (7     (5     —          —        —          —  

Amortization of prior service cost

     —          1        —          1        (5     —        (5     —  

Recognized actuarial loss

     4        —          5        —          —          —        —          —  

Curtailment loss

     —          —          —          1        —          —        —          —  
                                                             

Net expense (benefit)

   $ 5      $ 7      $ 9      $ 9      $ (5   $ —      $ (5   $ —  
                                                             

The curtailment loss recognized in 2009 relates to the Company’s productivity program described in Note 3.

10. Segment Information

Effective January 1, 2010, the Company made certain changes to its internal reporting structure. Additionally, on January 1, 2010, upon the adoption of new accounting guidance related to the consolidation of variable interest entities, the Company deconsolidated HAI, its foundry applications joint venture between the Company and Delta-HA, Inc., from its unaudited Condensed Consolidated Financial Statements. These changes caused the Company to re-evaluate its reportable segments. Effective in the first quarter of 2010, the results of the Company’s oil field products applications and the equity earnings in its HAI joint venture are included within its Epoxy and Phenolic Resins segment. Previously the results of these businesses were reported in the Performance Products segment.

The Company’s business segments are based on the products that the Company offers and the markets that it serves. At June 30, 2010, the Company had three reportable segments: Epoxy and Phenolic Resins, Formaldehyde and Forest Products Resins and Coatings and Inks. A summary of the major products of the Company’s reportable segments follows:

 

   

Epoxy and Phenolic Resins: epoxy specialty resins, oil field products, versatic acids and derivatives, basic epoxy resins and intermediates and phenolic specialty resins and molding compounds

 

   

Formaldehyde and Forest Products Resins: forest products resins and formaldehyde applications

 

   

Coatings and Inks: polyester resins, alkyds resins, acrylic resins, vinylic resins and ink resins and additives

 

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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 to exclude certain non-cash and certain non-recurring expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs not allocated to continuing segments.

 

     Three months ended June 30,     Six months ended June 30,  
     2010     2009     2010     2009  

Net Sales to Unaffiliated Customers(1)(2):

        

Epoxy and Phenolic Resins

   $ 613      $ 444      $ 1,169      $ 893   

Formaldehyde and Forest Product Resins

     422        272        808        543   

Coatings and Inks

     269        231        501        425   
                                
   $ 1,304      $ 947      $ 2,478      $ 1,861   
                                

Segment EBITDA(2):

        

Epoxy and Phenolic Resins

   $ 102      $ 63      $ 178      $ 109   

Formaldehyde and Forest Product Resins

     50        22        92        44   

Coatings and Inks

     27        22        42        23   

Corporate and Other

     (15     (17     (27     (25

 

  (1)

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

  (2)

The Company changed its segment reporting in the first quarter of 2010. Prior period balances have been recast to conform to the Company’s current reportable segments.

Reconciliation of Segment EBITDA to Net Income (Loss):

 

     Three months ended June 30,     Six months ended June 30,  
     2010     2009     2010     2009  

Segment EBITDA:

        

Epoxy and Phenolic Resins

   $ 102      $ 63      $ 178      $ 109   

Formaldehyde and Forest Product Resins

     50        22        92        44   

Coatings and Inks

     27        22        42        23   

Corporate and Other

     (15     (17     (27     (25

Reconciliation:

        

Items not included in Segment EBITDA

        

Terminated merger and settlement income, net

     27        12        35        42   

Non-cash charges

     (2     (3     (11     1   

Unusual items:

        

Gain/(loss) on divestiture of assets

     2        2        2        (1

Business realignments

     (3     (22     (11     (38

Asset impairments

     —          (44     —          (47

Other

     (8     (8     (16     (22
                                

Total unusual items

     (9     (72     (25     (108
                                

Total adjustments

     16        (63     (1     (65

Interest expense, net

     (72     (56     (135     (120

Gain on extinguishment of debt

     —          14        —          182   

Income tax (expense) benefit

     (13     3        (18     —     

Depreciation and amortization

     (43     (44     (86     (88
                                

Net income (loss) attributable to Hexion Specialty Chemicals, Inc.

     52        (56     45        60   

Net income attributable to noncontrolling interest

     —          —          —          1   
                                

Net income (loss)

   $ 52      $ (56   $ 45      $ 61   
                                

 

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Items not included in Segment EBITDA

For the three and six months ended June 30, 2010, Terminated merger and settlement income, net includes the pushdown of the recovery of $28 in insurance proceeds related to the $200 settlement payment made by the Company’s owner that was treated as a pushdown of owner expense in 2008. For the six months ended June 30, 2010, Terminated merger and settlement income, net also represents $8 in insurance settlements related to the New York Shareholder Action. For the three and six months ended June 30, 2009, Terminated merger and settlement income, net primarily reflects the pushdown of $15 and $30, respectively, in insurance proceeds related to the $200 settlement payment, as well as discounts on certain of the Company’s merger related service provider liabilities. This income was partially offset by legal and consulting costs and legal contingency accruals related to the New York Shareholder Action.

Non-cash charges primarily represent stock-based compensation expense, accelerated depreciation on closing facilities and unrealized derivative and foreign exchange gains and losses. For the three and six months ended June 30, 2010, non-cash charges also include the write-off of unamortized deferred financing fees associated with the January Refinancing Transactions.

Not included in Segment EBITDA are certain non-cash and certain non-recurring income or expenses that are deemed by management to be unusual in nature. For the three and six months ended June 30, 2010, these items consisted of business realignment costs primarily related to expenses from the Company’s productivity program, realized foreign exchange gains and losses, retention program costs and financing fees incurred as part of the January Refinancing Transactions. For the three and six months ended June 30, 2009, these items consisted of business realignment costs primarily related to expenses from the Company’s productivity program, realized foreign exchange gains and losses, retention program costs and impairment of property and equipment. For the six months ended June 30, 2009, these items also consisted of a gain on the settlement of certain legacy company acquisition claims.

11. Summarized Financial Information of Unconsolidated Affiliates

Summarized financial information of the unconsolidated affiliate HAI for the three and six months ended June 30, 2010 is as follows:

 

     Three months ended
June 30, 2010
   Six months ended
June 30, 2010

Net sales

   $ 36    $ 66

Gross profit

     9      15

Pre-tax income

     4      7

Net income

     4      7

The comparative data for the three and six months ended June 30, 2009 has been omitted, as HAI was consolidated within the Company’s unaudited Condensed Consolidated Financial Statements during this period.

12. Guarantor/Non-Guarantor Subsidiary Financial Information

The Company and certain of its U.S. subsidiaries guarantee debt issued by its wholly owned subsidiaries Hexion Nova Scotia, ULC and Hexion U.S. Finance Corporation (together, the “Subsidiary Issuers”), which includes the 8.875% first priority senior secured notes due 2018, the 9.75% second-priority senior secured notes due 2014 and the floating rate second-priority senior secured notes due 2014.

The following information contains the condensed consolidating financial information for Hexion (the parent), the Subsidiary Issuers, the combined subsidiary guarantors (Borden Chemical Investments, Inc., Borden Chemical Foundry, LLC, Lawter International, Inc., HSC Capital Corporation, Borden Chemical International, Inc., Hexion CI Holding Company, NL COOP Holdings LLC and Oilfield Technology Group, Inc.) and the combined non-guarantor subsidiaries, which includes all of the Company’s foreign subsidiaries and HAI (prior to the deconsolidation of this entity).

The Subsidiary Issuers and all of the subsidiary guarantors are 100% owned by Hexion. 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.

This information includes allocations of corporate overhead to the combined non-guarantor subsidiaries based primarily on net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates. All other tax expense is reflected in the parent.

 

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HEXION SPECIALTY CHEMICALS, INC.

THREE MONTHS ENDED JUNE 30, 2010

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 

     Hexion
Specialty
Chemicals,
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
   Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 615      $ —        $ —      $ 810      $ (121   $ 1,304   

Cost of sales

     525        —          —        699        (121     1,103   
                                               

Gross profit

     90        —          —        111        —          201   

Selling, general and administrative expense

     34        —          —        60        —          94   

Terminated merger and settlement income, net

     (27     —          —        —          —          (27

Other operating income, net

     —          —          —        (4     —          (4
                                               

Operating income

     83        —          —        55        —          138   

Interest expense, net

     22        38        —        12        —          72   

Intercompany interest expense (income)

     34        (44     —        10        —          —     

Other non-operating (income) expense, net

     (3     2        —        5        —          4   
                                               

Income before income tax, earnings from unconsolidated entities

     30        4        —        28        —          62   

Income tax expense

     2        1        —        10        —          13   
                                               

Income before earnings from unconsolidated entities

     28        3        —        18        —          49   

Earnings from unconsolidated entities, net of taxes

     24        —          12      —          (33     3   
                                               

Net income

     52        3        12      18        (33     52   
                                               

 

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HEXION SPECIALTY CHEMICALS, INC.

THREE MONTHS ENDED JUNE 30, 2009

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 

     Hexion
Specialty
Chemicals,
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 395      $ —        $ —        $ 624      $ (72   $ 947   

Cost of sales

     355        —          —          540        (72     823   
                                                

Gross profit

     40        —          —          84        —          124   

Selling, general and administrative expense

     32        —          —          53        —          85   

Terminated merger and settlement (income) expense, net

     (13     —          —          1        —          (12

Asset impairments

     38        —          —          6        —          44   

Other operating expense (income), net

     8        —          (1     9        —          16   
                                                

Operating (loss) income

     (25     —          1        15        —          (9

Interest expense, net

     35        14        —          7        —          56   

Gain on extinguishment of debt

     (14     —          —          —          —          (14

Intercompany interest expense (income)

     19        (20     —          1        —          —     

Other non-operating (income) expense, net

     (1     1        1        8        —          9   
                                                

(Loss) income before income tax, earnings from unconsolidated entities

     (64     5        —          (1     —          (60

Income tax (benefit) expense

     (17     —          —          14        —          (3
                                                

(Loss) income before earnings from unconsolidated entities

     (47     5        —          (15     —          (57

Earnings from unconsolidated entities, net of taxes

     (9     —          —          1        9        1   
                                                

Net (loss) income

     (56     5        —          (14     9        (56
                                                

 

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HEXION SPECIALTY CHEMICALS, INC.

SIX MONTHS ENDED JUNE 30, 2010

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 

     Hexion
Specialty
Chemicals,
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
   Combined
Non-Guarantor
Subsidiaries
   Eliminations     Consolidated  

Net sales

   $ 1,141      $ —        $ —      $ 1,560    $ (223   $ 2,478   

Cost of sales

     988        —          —        1,364      (223     2,129   
                                              

Gross profit

     153        —          —        196      —          349   

Selling, general and administrative expense

     63        —          —        112      —          175   

Terminated merger and settlement income, net

     (35     —          —        —        —          (35

Other operating expense, net

     4        —          —        —        —          4   
                                              

Operating income

     121        —          —        84      —          205   

Interest expense, net

     47        68        —        20      —          135   

Intercompany interest expense (income)

     63        (81     —        18      —          —     

Other non-operating expense, net

     2        5        —        4      —          11   
                                              

Income before income tax, earnings from unconsolidated entities

     9        8        —        42      —          59   

Income tax expense

     3        1        —        14      —          18   
                                              

Income before earnings from unconsolidated entities

     6        7        —        28      —          41   

Earnings from unconsolidated entities, net of taxes

     39        —          13      —        (48     4   
                                              

Net income

     45        7        13      28      (48     45   
                                              

 

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HEXION SPECIALTY CHEMICALS, INC.

SIX MONTHS ENDED JUNE 30, 2009

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

 

     Hexion
Specialty
Chemicals,
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 800      $ —        $ —        $ 1,214      $ (153   $ 1,861   

Cost of sales

     716        —          —          1,084        (153     1,647   
                                                

Gross profit

     84        —          —          130        —          214   

Selling, general and administrative expense

     61        —          —          107        —          168   

Terminated merger and settlement (income) expense, net

     (43     —          —          1        —          (42

Asset impairments

     39        —          —          8        —          47   

Other operating expense (income), net

     18        —          (1     21        —          38   
                                                

Operating income (loss)

     9        —          1        (7     —          3   

Interest expense, net

     70        33        —          17        —          120   

Gain on extinguishment of debt

     (35     (147     —          —          —          (182

Intercompany interest expense (income)

     39        (40     —          1        —          —     

Other non-operating (income) expense, net

     (1     1        1        4        —          5   
                                                

(Loss) income before income tax, earnings from unconsolidated entities

     (64     153        —          (29     —          60   

Income tax (benefit) expense

     (12     —          —          12        —          —     
                                                

(Loss) income before earnings from unconsolidated entities

     (52     153        —          (41     —          60   

Earnings from unconsolidated entities, net of taxes

     113        —          —          1        (113     1   
                                                

Net income (loss)

     61        153        —          (40     (113     61   

Net income attributable to noncontrolling interest

     (1     —          —          —          —          (1
                                                

Net income (loss) attributable to Hexion Specialty Chemicals, Inc.

   $ 60      $ 153      $ —        $ (40   $ (113   $ 60   
                                                

 

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Table of Contents

HEXION SPECIALTY CHEMICALS, INC.

JUNE 30, 2010

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

 

     Hexion
Specialty
Chemicals,
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents (including restricted cash of $0 and $3, respectively)

   $ 13      $ —        $ —        $ 102      $ —        $ 115   

Short-term investments

     —          —          —          12        —          12   

Accounts receivable, net

     147        —          2        524        —          673   

Inventories:

            

Finished and in-process goods

     151        —          —          154        —          305   

Raw materials and supplies

     50        —          —          84        —          134   

Other current assets

     14        —          —          66        —          80   
                                                

Total current assets

     375        —          2        942        —          1,319   
                                                

Other assets

            

Investment in subsidiaries

     238        —          21        —          (259     —     

Other assets

     23        28        15        70        —          136   
                                                
     261        28        36        70        (259     136   

Property and equipment, net

     536        —          —          758        —          1,294   

Goodwill

     93        —          —          68        —          161   

Other intangible assets, net

     65        —          —          75        —          140   
                                                

Total assets

   $ 1,330      $ 28      $ 38      $ 1,913      $ (259   $ 3,050   
                                                

Liabilities and (Deficit) Equity

            

Current liabilities

            

Accounts and drafts payable

   $ 205      $ —        $ —        $ 348      $ —        $ 553   

Intercompany accounts (receivable) payable

     (13     (38     —          51        —          —     

Debt payable within one year

     19        —          —          66        —          85   

Intercompany loans (receivable) payable

     (82     —          —          82        —          —     

Loans payable to affiliates

     4        —          —          —          —          4   

Interest payable

     23        45        —          2        —          70   

Income taxes payable

     10        —          —          31        —          41   

Accrued payroll and incentive compensation

     20        —          —          26        —          46   

Other current liabilities

     78        —          —          70        —          148   
                                                

Total current liabilities

     264        7        —          676        —          947   

Long-term debt

     1,161        1,646        —          641        —          3,448   

Affiliated long-term debt

     80        —          —          20        —          100   

Intercompany loans payable (receivable)

     1,489        (1,835     (15     361        —          —     

Long-term pension and post employment benefit obligations

     97        —          —          115        —          212   

Deferred income taxes

     35        —          —          79        —          114   

Other long-term liabilities

     105        —          —          21        —          126   

Advance from affiliates

     225        —          —          —          —          225   
                                                

Total liabilities

     3,456        (182     (15     1,913        —          5,172   
                                                

Total Hexion Specialty Chemicals, Inc. shareholders (deficit) equity

     (2,126     210        53        (4     (259     (2,126

Noncontrolling interest

     —          —          —          4        —          4   
                                                

Total (deficit) equity

     (2,126     210        53        —          (259     (2,122
                                                

Total liabilities and (deficit) equity

   $ 1,330      $ 28      $ 38      $ 1,913      $ (259   $ 3,050   
                                                

 

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HEXION SPECIALTY CHEMICALS, INC.

DECEMBER 31, 2009

CONDENSED CONSOLIDATING BALANCE SHEET

 

     Hexion
Specialty
Chemicals,
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Assets

            

Current assets

            

Cash and cash equivalents (including restricted cash of $0 and $7, respectively)

   $ 22      $ —        $ —        $ 120      $ —        $ 142   

Short-term investments

     —          —          —          10        —          10   

Accounts receivable, net

     55        —          —          423        —          478   

Inventories:

            

Finished and in-process goods

     129        —          —          135        —          264   

Raw materials and supplies

     40        —          —          75        —          115   

Other current assets

     23        —          —          61        —          84   
                                                

Total current assets

     269        —          —          824        —          1,093   
                                                

Other assets

            

Investment in subsidiaries

     831        —          23        —          (854     —     

Other assets

     33        6        —          65        —          104   
                                                
     864        6        23        65        (854     104   

Property and equipment, net

     549        —          —          891        —          1,440   

Goodwill

     94        —          —          83        —          177   

Other intangible assets, net

     69        —          —          90        —          159   
                                                

Total assets

   $ 1,845      $ 6      $ 23      $ 1,953      $ (854   $ 2,973   
                                                

Liabilities and (Deficit) Equity

            

Current liabilities

            

Accounts and drafts payable

   $ 161      $ —        $ —        $ 320      $ —        $ 481   

Intercompany accounts (receivable) payable

     (13     (4     —          17        —          —     

Debt payable within one year

     22        —          —          56        —          78   

Intercompany loans payable (receivable)

     360        —          (5     (355     —          —     

Loans payable to affiliates

     4        —          —          —          —          4   

Interest payable

     27        7        —          2        —          36   

Income taxes payable

     9        —          —          33        —          42   

Accrued payroll and incentive compensation

     20        —          —          30        —          50   

Other current liabilities

     106        —          —          91        —          197   
                                                

Total current liabilities

     696        3        (5     194        —          888   

Long-term debt

     1,970        653        —          705        —          3,328   

Affiliated long-term debt

     80        —          —          20        —          100   

Intercompany loans payable (receivable)

     683        (868     (14     199        —          —     

Long-term pension and post employment benefit obligations

     102        —          —          131        —          233   

Deferred income taxes

     39        —          —          81        —          120   

Other long-term liabilities

     101        —          —          27        —          128   

Advance from affiliates

     225        —          —          —          —          225   
                                                

Total liabilities

     3,896        (212     (19     1,357        —          5,022   
                                                

Total Hexion Specialty Chemicals, Inc. shareholders (deficit) equity

     (2,063     218        42        594        (854     (2,063

Noncontrolling interest

     12        —          —          2        —          14   
                                                

Total (deficit) equity

     (2,051     218        42        596        (854     (2,049
                                                

Total liabilities and (deficit) equity

   $ 1,845      $ 6      $ 23      $ 1,953      $ (854   $ 2,973   
                                                

 

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Table of Contents

HEXION SPECIALTY CHEMICALS, INC.

SIX MONTHS ENDED JUNE 30, 2010

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

 

     Hexion
Specialty
Chemicals,
Inc.
    Subsidiary
Issuers
    Combined
Subsidiary
Guarantors
    Combined
Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Cash flows (used in) provided by operating activities

   $ (232 )(a)    $ 12      $ (5   $ 117 (a)    $ —        $ (108
                                                

Cash flows provided by (used in) investing activities

            

Capital expenditures

     (23     —          —          (24     —          (47

Capitalized interest

     —          —          —          (1     —          (1

Purchases of investments

     —          —          —          (2     —          (2

Change in restricted cash

     —          —          —          4        —          4   

Proceeds from the return of capital from subsidiary

     190 (a)      —          —          —          (190     —     

Dividend from subsidiary

     11        —          3        —          (11     3   

Deconsolidation of variable interest entities

     —          —          —          (4     —          (4

Proceeds from the sale of assets

     6        —          —          6        —          12   
                                                
     184        —          3        (21     (201     (35
                                                

Cash flows provided by (used in) financing activities

            

Net short-term debt (repayments) borrowings

     (4     —          —          4        —          —     

Borrowings of long-term debt

     130        993        —          256        —          1,379   

Repayments of long-term debt

     (939     —          —          (283     —          (1,222

Return of capital to parent

     —          —          —          (190 )(a)      190        —     

Net intercompany loan borrowings (repayments)

     853        (973     5        115        —          —     

Long-term debt and credit facility financing fees

     (1     (24     —          (8     —          (33

Payments of dividends on common stock

     —          (8     (3     —          11        —     
                                                
     39        (12     2        (106     201        124   
                                                

Effect of exchange rates on cash and cash equivalents

     —          —          —          (4     —          (4
                                                

Decrease in cash and cash equivalents

     (9     —          —          (14     —          (23