Momentive 03.31.2012 10Q
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 March 31, 2012
OR
 
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number 1-71
 
  MOMENTIVE 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)
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
o
  
Accelerated filer
 
o
 
 
 
 
Non-accelerated filer
 
x
  
Smaller reporting company
 
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o No  x.
Number of shares of common stock, par value $0.01 per share, outstanding as of the close of business on May 1, 2012: 82,556,847


Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.
INDEX
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Momentive Specialty Chemicals Inc. Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4T.
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

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MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) 
(In millions, except share data)
March 31,
2012
 
December 31,
2011
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents (including restricted cash of $3)
$
400

 
$
431

Short-term investments
4

 
7

Accounts receivable (net of allowance for doubtful accounts of $19)
700

 
592

Inventories:
 
 
 
Finished and in-process goods
302

 
254

Raw materials and supplies
126

 
103

Other current assets
79

 
72

Total current assets
1,611

 
1,459

Other assets, net
175

 
169

Property and equipment
 
 
 
Land
90

 
88

Buildings
307

 
298

Machinery and equipment
2,358

 
2,300

 
2,755

 
2,686

Less accumulated depreciation
(1,559
)
 
(1,477
)
 
1,196

 
1,209

Goodwill
169

 
167

Other intangible assets, net
101

 
104

Total assets
$
3,252

 
$
3,108

Liabilities and Deficit
 
 
 
Current liabilities
 
 
 
Accounts and drafts payable
$
535

 
$
393

Debt payable within one year
74

 
117

Affiliated debt payable within one year
2

 
2

Interest payable
47

 
61

Income taxes payable
12

 
15

Accrued payroll and incentive compensation
63

 
57

Other current liabilities
142

 
132

Total current liabilities
875

 
777

Long-term liabilities
 
 
 
Long-term debt
3,444

 
3,420

Long-term pension and post employment benefit obligations
224

 
223

Deferred income taxes
78

 
72

Other long-term liabilities
158

 
156

Advance from affiliates
225

 
225

Total liabilities
5,004

 
4,873

Commitments and contingencies (See Note 9)
 
 
 
Deficit
 
 
 
Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at March 31, 2012 and December 31, 2011
1

 
1

Paid-in capital
533

 
533

Treasury stock, at cost—88,049,059 shares
(296
)
 
(296
)
Note receivable from parent
(24
)
 
(24
)
Accumulated other comprehensive income
46

 
17

Accumulated deficit
(2,013
)
 
(1,997
)
Total Momentive Specialty Chemicals Inc. shareholder’s deficit
(1,753
)
 
(1,766
)
Noncontrolling interest
1

 
1

Total deficit
(1,752
)
 
(1,765
)
Total liabilities and deficit
$
3,252

 
$
3,108

See Notes to Condensed Consolidated Financial Statements



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MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended March 31,
(In millions)
2012
 
2011
Net sales
$
1,236

 
$
1,294

Cost of sales
1,058

 
1,085

Gross profit
178

 
209

Selling, general and administrative expense
85

 
84

Asset impairments
23

 

Business realignment costs
15

 
3

Other operating expense, net
11

 
3

Operating income
44

 
119

Interest expense, net
65

 
64

Other non-operating expense (income), net
2

 
(3
)
(Loss) income from continuing operations before income tax and earnings from unconsolidated entities
(23
)
 
58

Income tax (benefit) expense
(2
)
 
3

(Loss) income from continuing operations before earnings from unconsolidated entities
(21
)
 
55

Earnings from unconsolidated entities, net of taxes
5

 
3

Net (loss) income from continuing operations
(16
)
 
58

Net income from discontinued operations, net of taxes

 
5

Net (loss) income
$
(16
)
 
$
63

See Notes to Condensed Consolidated Financial Statements



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MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)

 
Three Months Ended March 31,
(In millions)
2012
 
2011
Net (loss) income
$
(16
)
 
$
63

Other comprehensive income (loss), net of tax:
 
 
 
Foreign currency translation adjustments
29

 
30

Loss recognized from pension and postretirement benefits

 
(1
)
Net losses on cash flow hedges reclassified to earnings

 
1

Other comprehensive income
29

 
30

Comprehensive income
$
13

 
$
93

See Notes to Condensed Consolidated Financial Statements

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MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Three Months Ended March 31,
(In millions)
2012
 
2011
Cash flows provided by (used in) operating activities
 
 
 
Net (loss) income
$
(16
)
 
$
63

Adjustments to reconcile net (loss) income to net cash provided by (used in) operating activities:
 
 
 
Depreciation and amortization
38

 
42

Deferred tax expense (benefit)
5

 
(4
)
Non-cash asset impairments and accelerated depreciation
29

 

Other non-cash adjustments
18

 

Net change in assets and liabilities:
 
 
 
Accounts receivable
(106
)
 
(253
)
Inventories
(65
)
 
(108
)
Accounts and drafts payable
133

 
151

Income taxes payable
(2
)
 
5

Other assets, current and non-current
(1
)
 
6

Other liabilities, current and long-term
(17
)
 
(37
)
Net cash provided by (used in) operating activities
16

 
(135
)
Cash flows (used in) provided by investing activities
 
 
 
Capital expenditures
(30
)
 
(27
)
Proceeds from matured debt securities, net
4

 

Change in restricted cash

 
2

Funds remitted to unconsolidated affiliates
(2
)
 
(5
)
Proceeds from sale of business, net of cash transferred

 
124

Net cash (used in) provided by investing activities
(28
)
 
94

Cash flows used in financing activities
 
 
 
Net short-term debt repayments
(12
)
 
(4
)
Borrowings of long-term debt
450

 
226

Repayments of long-term debt
(463
)
 
(260
)
Capital contribution from parent
16

 

Long-term debt and credit facility financing fees
(12
)
 

Distribution paid to parent
(1
)
 

Net cash used in financing activities
(22
)
 
(38
)
Effect of exchange rates on cash and cash equivalents
3

 
1

Decrease in cash and cash equivalents
(31
)
 
(78
)
Cash and cash equivalents (unrestricted) at beginning of period
428

 
180

Cash and cash equivalents (unrestricted) at end of period
$
397

 
$
102

Supplemental disclosures of cash flow information
 
 
 
Cash paid for:
 
 
 
Interest, net
$
77

 
$
83

Income taxes, net of cash refunds
7

 
2

See Notes to Condensed Consolidated Financial Statements

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MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED STATEMENT OF DEFICIT (Unaudited)
(In millions)
Common
Stock
 
Paid-in
Capital
 
Treasury
Stock
 
Note
Receivable
From Parent
 
Accumulated
Other
Comprehensive
Income (a)
 
Accumulated
Deficit
 
Total Momentive Specialty Chemicals Inc. Deficit
 
Non-controlling Interest
 
Total
Balance at December 31, 2011
$
1

 
$
533

 
$
(296
)
 
$
(24
)
 
$
17

 
$
(1,997
)
 
$
(1,766
)
 
$
1

 
$
(1,765
)
Net loss

 

 

 

 

 
(16
)
 
(16
)
 

 
(16
)
Other comprehensive income

 

 

 

 
29

 

 
29

 

 
29

Stock-based compensation expense

 
1

 

 

 

 

 
1

 

 
1

Distribution declared to parent ($0.02 per share)

 
(1
)
 

 

 

 

 
(1
)
 

 
(1
)
Balance at March 31, 2012
$
1

 
$
533

 
$
(296
)
 
$
(24
)
 
$
46

 
$
(2,013
)
 
$
(1,753
)
 
$
1

 
$
(1,752
)
 
(a)
Accumulated other comprehensive income at March 31, 2012 represents $159 of net foreign currency translation gains, net of tax, $1 of net deferred losses on cash flow hedges and a $112 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, 2011 represents $130 of net foreign currency translation gains, net of tax, $1 of net deferred losses on cash flow hedges and a $112 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, Momentive Specialty Chemicals Inc., (which may be referred to as “MSC” or the “Company”) serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. The Company's business is organized based on the products offered and the markets served. At March 31, 2012, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins.
The Company's direct parent is Momentive Specialty Chemicals Holdings LLC (“MSC Holdings”), a holding company and wholly owned subsidiary of Momentive Performance Materials Holdings LLC (“Momentive Holdings”), the ultimate parent entity of MSC. Momentive Holdings is controlled by investment funds (the “Apollo Funds”) managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company's owner.
During the first quarter of 2012, the Company recorded an out of period loss of approximately $3 related to the disposal of long-lived assets. As a result of this adjustment, the Company’s Loss from continuing operations before income tax and Net loss increased by $3 and $2, respectively, for the three months ended March 31, 2012. Of the $3 increase to Loss from continuing operations before income tax, approximately $1 and $2 should have been recorded in the years ended December 31, 2011 and 2010, respectively. Management does not believe that this out of period error is material to the unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2012, or to any prior periods.
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 is the primary beneficiary. Intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement have been included. Results for the interim periods are not necessarily indicative of results for the entire year.
Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.
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 Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes included in the Company's most recent Annual Report on Form 10-K.
2. Summary of Significant Accounting Policies
Use of Estimates—The preparation of financial statements in conformity with 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.
Impairment—The Company reviews long-lived definite-lived assets for recoverability whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows. Measurement of the loss, if any, is based on the difference between the carrying value and fair value.
During the three months ended March 31, 2012, the Company recorded the following asset impairments:
As a result of the likelihood that certain assets would be disposed of before the end of their estimated useful lives resulting in lower future cash flows associated with these assets, the Company recorded impairments of $15 and $6 on certain of its long-lived assets in its Epoxy, Phenolic and Coating Resins and Forest Products Resins segments, respectively.
As a result of market weakness and the loss of a customer resulting in lower future cash flows associated with certain assets within the Company's European forest products business, the Company recorded impairments of $2 on these long-lived assets in its Forest Products Resins segment.
In addition, the Company recorded accelerated depreciation of $6 related to closing facilities during the three months ended March 31, 2012.
Subsequent Events—The Company has evaluated events and transactions subsequent to March 31, 2012 through May 8, 2012, the date of issuance of 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
On January 1, 2012, the Company adopted the provisions of Accounting Standards Update No. 2011-05: Comprehensive Income (“ASU 2011-05”), which was issued by the FASB in June 2011 and amended by Accounting Standards Update No. 2011-12: Comprehensive

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Income (“ASU 2011-12”) issued in December 2011. ASU 2011-05 amended presentation guidance by eliminating the option for an entity to present the components of comprehensive income as part of the statement of changes in stockholders' equity and required presentation of comprehensive income in a single continuous financial statement or in two separate but consecutive financial statements. ASU 2011-12 deferred the effective date for amendments to the presentation of reclassifications of items out of accumulated other comprehensive income in ASU 2011-05. The amendments in ASU 2011-05 did not change the items that must be reported in other comprehensive income or when an item of comprehensive income must be reclassified to net income. The Company has presented comprehensive income in a separate and consecutive statement entitled, “Condensed Consolidated Statements of Comprehensive Income”.
Newly Issued Accounting Standards
There were no newly issued accounting standards in the first quarter of 2012 applicable to the Company's unaudited Condensed Consolidated Financial Statements.
3. Discontinued Operations

North American Coatings and Composites Resins Business
On May 31, 2011, the Company sold its North American coatings and composites resins business (“CCR Business”) to PCCR USA, Inc. (“PCCR”), a subsidiary of Investindustrial, a European investment group. The CCR Business is engaged in the production of coating resins for architectural and original equipment manufacturers, alkyd resins, as well as composite resins for construction, transportation, consumer goods, marine and other applications and includes four manufacturing facilities in the United States.
For the three months ended March 31, 2011, the CCR Business had net sales of $65 and pre-tax income of $0. The CCR Business is reported as a discontinued operation for all periods presented.
Global Inks and Adhesive Resins Business
On January 31, 2011, the Company sold its global inks and adhesive resins business (“IAR Business”) to Harima Chemicals Inc. The IAR Business had net sales for the three months ended March 31, 2011 of $31 and pretax income of $6. The IAR Business is reported as a discontinued operation for all periods presented.
4. Restructuring
In 2012, in response to softening demand in certain of its businesses in the second half of 2011, the Company initiated significant restructuring programs with the intent to optimize its cost structure and bring manufacturing capacity in line with demand. At March 31, 2012, the Company had $22 of in-process cost reduction programs savings expected to be achieved over the remaining life of the projects. The Company estimates that these restructuring cost activities will occur over the next 12 to 15 months. As of March 31, 2012, the costs expected to be incurred on restructuring activities are estimated at $39, consisting mainly of workforce reduction and site closure-related costs.
The following table summarizes restructuring information by type of cost:
 
Workforce reductions
 
Site closure costs
 
Other projects
 
Total
Restructuring costs expected to be incurred
$
25

 
$
12

 
$
2

 
$
39

Cumulative restructuring costs incurred through March 31, 2012
$
17

 
$
1

 
$

 
$
18

 
 
 
 
 
 
 
 
Accrued liability at December 31, 2011
$
6

 
$

 
$

 
$
6

Restructuring charges
11

 
1

 

 
12

Payments
(2
)
 
(1
)
 

 
(3
)
Accrued liability at March 31, 2012
$
15

 
$

 
$

 
$
15

Workforce reduction costs primarily relate to non-voluntary employee termination benefits and are accounted for under the guidance for nonretirement postemployment benefits or as exit and disposal costs, as applicable. During the three months ended March 31, 2012 charges of $12 were recorded in “Business realignment costs” in the unaudited Condensed Consolidated Statements of Operations. At March 31, 2012 and December 31, 2011, the Company had accrued $15 and $6, respectively, for restructuring liabilities in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.
The following table summarizes restructuring information by reporting segment:

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Epoxy, Phenolic and Coating Resins
 
Forest Products Resins
 
Corporate and Other
 
Total
Restructuring costs expected to be incurred
$
16

 
$
21

 
$
2

 
$
39

Cumulative restructuring costs incurred through March 31, 2012
$
5

 
$
11

 
$
2

 
$
18

 
 
 
 
 
 
 
 
Accrued liability at December 31, 2011
$
1

 
$
2

 
$
3

 
$
6

Restructuring charges (release)
4

 
9

 
(1
)
 
12

Payments
(1
)
 
(2
)
 

 
(3
)
Accrued liability at March 31, 2012
$
4

 
$
9

 
$
2

 
$
15


5. Related Party Transactions
Administrative Service, Management and Consulting Arrangements
The Company is subject to an Amended and Restated Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) that renews on an annual basis, unless notice to the contrary is given by either party. Under the Management Consulting Agreement, the Company receives certain structuring and advisory services from Apollo and its affiliates. The Management Consulting Agreement provides indemnification to Apollo, its affiliates and their directors, officers and representatives for potential losses arising from these services. Apollo is entitled to an annual fee equal to the greater of $3 or 2% of the Company's Adjusted EBITDA. Apollo elected to waive payment of any portion of the annual management fee due in excess of $3 for the calendar year 2012.
During each of the three months ended March 31, 2012 and 2011 the Company recognized expense under the Management Consulting Agreement of $1. This amount is included in “Other operating expense, net” in the Company’s unaudited Condensed Consolidated Statements of Operations.
Apollo Notes Registration Rights Agreement
On November 5, 2010, in connection with the issuance of the Company's 9.00% Second-Priority Senior Secured Notes due 2020, the Company entered into a separate registration rights agreement with Apollo. The registration rights agreement gives Apollo the right to make three requests by written notice to the Company specifying the maximum aggregate principal amount of notes to be registered. The agreement requires the Company to file a registration statement with respect to the notes it issued to Apollo as promptly as possible following receipt of each such notice. There are no cash or additional penalties under the registration rights agreement resulting from delays in registering the notes.
In September 2011, the Company filed a registration statement on Form S-1 with the SEC to register the resale of $134 of Second-Priority Senior Secured Notes due 2020 held by Apollo.
Shared Services Agreement
On October 1, 2010, MSC Holdings and Momentive Performance Materials Holdings Inc. (“MPM Holdings”), the parent company of Momentive Performance Materials Inc. (“MPM”), became subsidiaries of Momentive Holdings. This transaction is referred to as the “Momentive Combination.”
In conjunction with the Momentive Combination, the Company entered into a shared services agreement, as amended on March 17, 2011, with MPM. Pursuant to the shared services agreement, the Company will provide to MPM, and MPM will provide to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, technology development, legal and procurement services. The shared services agreement establishes certain criteria upon which the costs of such services will be allocated between the Company and MPM. Allocation of service costs not demonstrably attributable to either the Company or MPM will initially be 51% to the Company and 49% to MPM, except to the extent that 100% of any cost was demonstrably attributable to or for the benefit of either MPM or the Company, in which case the total cost will be allocated 100% to such party. The Shared Services Agreement remains in effect until terminated according to its terms. MPM or the Company may terminate the agreement for convenience, without cause, by giving written notice not less than 30 days prior to the effective date of termination. It is also anticipated that the Company and MPM will cooperate to achieve favorable pricing with respect to purchases of raw materials and logistics services.
Pursuant to this agreement, during the three months ended March 31, 2012 and 2011, the Company incurred approximately $41 and $44, respectively, of costs for shared services and MPM incurred approximately $39 and $41, respectively, of costs for shared services (excluding, in each case, costs allocated 100% to one party), including estimates for shared service true-up billings. During the three months ended March 31, 2012, the Company realized approximately $7 in cost savings as a result of the Shared Services Agreement. During the three months ended March 31, 2012 and 2011, the Company billed MPM approximately $5 and $1, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to 51% for the Company and 49% for MPM, as well as costs allocated 100% to one party. The true-up amount is included in “Selling, general and administrative expense” in the unaudited Condensed Consolidated Statements of Operations. The Company had accounts receivable from MPM of $7 and $15 as of March 31, 2012 and December 31, 2011, respectively, and accounts payable to MPM of $0 and $3 at March 31, 2012 and December 31, 2011, respectively.

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Apollo Advance
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 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 only 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 March 31, 2012. As of March 31, 2012, the Company has not recovered any insurance proceeds related to the $225 settlement payment.
In April 2012, the Company agreed to a settlement with its insurers to recover $10 in proceeds associated with the $225 settlement payment paid to Huntsman in 2008.

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Preferred Equity Commitment and Issuance
In December, 2011, in conjunction with a previous commitment, Momentive Holdings issued 28,785,935 preferred units and 28,785,935 warrants to purchase common units of Momentive Holdings to affiliates of Apollo for a purchase price of $205 (the “Preferred Equity Issuance”), representing the initial $200 face amount, plus amounts earned from the interim liquidity facilities, less related fees and expenses. Momentive Holdings contributed $189 of the proceeds from the Preferred Equity Issuance to MSC Holdings and MSC Holdings contributed the amount to the Company. As of December 31, 2011, the Company had recognized a capital contribution of $204, representing the total proceeds from the Preferred Equity Issuance, less related fees and expenses. The remaining $16 was held in a reserve account at December 31, 2011 by Momentive Holdings to redeem any additional preferred units from Apollo equal to the aggregate number of preferred units and warrants subscribed for by all other members of Momentive Holdings. In January 2012, the remaining $16 of proceeds held in the reserve account were contributed to the Company.
Purchase of MSC Holdings debt
In 2009, the Company purchased $180 in face value of the outstanding MSC Holdings LLC PIK Debt Facility for $24, including accrued interest. The loan receivable from MSC Holdings has been recorded at its acquisition value of $24 as a reduction of equity in the unaudited Condensed Consolidated Statement of Deficit as MSC Holdings is the Company’s parent. In addition, at March 31, 2012 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 MSC Holdings. The Company will continue to assess the collectibility of these cash flows to determine future amounts to record, if any.
Purchases and Sales of Products and Services with Apollo Affiliates and Other Related Parties
The Company sells products to certain Apollo affiliates, members of Momentive Holdings and other related parties. These sales were $1 for each of the three months ended March 31, 2012 and 2011. Accounts receivable from these affiliates were $1 at both March 31, 2012 and December 31, 2011. The Company also purchases raw materials and services from certain Apollo affiliates. These purchases were $7 and $6 for the three months ended March 31, 2012 and 2011, respectively. The Company had accounts payable to Apollo affiliates of $2 and $1 at March 31, 2012 and December 31, 2011, respectively.
Other Transactions and Arrangements
Momentive Holdings purchases insurance policies which also cover the Company and MPM. Amounts are billed to the Company based on the Company's relative share of the insurance premiums. No amounts were billed to the Company from Momentive Holdings for the three months ended March 31, 2012. The Company had accounts payable to Momentive Holdings of less than $1 and $3, under these arrangements at March 31, 2012 and December 31, 2011, respectively.
The Company sells finished goods to and purchases raw materials from its foundry joint venture between the Company and Delta-HA, Inc. (“HAI”). The Company also provides toll-manufacturing and other services to HAI. 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 and services provided to HAI were $28 and $29 for the three months ended March 31, 2012 and 2011, respectively. Accounts receivable from HAI were $11 and $14 at March 31, 2012 and December 31, 2011, respectively. Purchases from HAI were $10 and $14 for the three months ended March 31, 2012 and 2011, respectively. The Company had accounts payable to HAI of $8 and $4 at March 31, 2012 and December 31, 2011, respectively. Additionally, HAI declared dividends of $10 and $0 during the three months ended March 31, 2012 and 2011, respectively. Dividends of $5 remain outstanding related to these previously declared dividends as of March 31, 2012.
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 activities that most significantly impact HAI, and therefore, does not consolidated HAI. The carrying value of HAI’s assets were $49 and $48 at March 31, 2012 and December 31, 2011, respectively. The carrying value of HAI’s liabilities were $33 and $21 at March 31, 2012 and December 31, 2011, respectively.
The Company had a loan receivable from its unconsolidated forest products joint venture in Russia of $4 and $3 as of March 31, 2012 and December 31, 2011, respectively. The Company had royalties receivable from its unconsolidated forest products joint venture in Russia of $3 and $2 as of March 31, 2012 and December 31, 2011, respectively.
6. 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.

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Table of Contents

Recurring Fair Value Measurements
Following is a summary of assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011:
 
 
Fair Value Measurements Using
 
Total
 
 
Quoted Prices in Active Markets (Level 1)
 
Significant Other Observable Inputs (Level 2)
 
Unobservable Inputs (Level 3)
 
March 31, 2012
 
 
 
 
 
 
 
 
Derivative liabilities
 
$
(2
)
 
$
(2
)
 
$

 
$
(4
)
December 31, 2011
 
 
 
 
 
 
 
 
Derivative liabilities
 

 
(3
)
 

 
(3
)
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 March 31, 2012 and December 31, 2011, no adjustment was made by the Company to reduce its derivative liabilities for nonperformance risk.
When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.
 
Non-recurring Fair Value Measurements
Following is a summary of losses as a result of the Company measuring assets at fair value on a non-recurring basis during the three months ended March 31, 2012:
 
 
 
Three Months Ended March 31, 2012
Long-lived assets held and used
 
$
22

During the three months ended March 31, 2012, as a result of the likelihood that certain assets would be disposed of before the end of their estimated useful lives resulting in lower future cash flows associated with these assets, the Company wrote down long-lived assets with a carrying value of $26 to fair value of $5, resulting in impairment charges of $15 and $6 on certain assets within its Epoxy, Phenolic and Coating Resins and Forest Products Resins and segments, respectively. These long-lived assets were valued by using a discounted cash flow analysis based on assumptions that market participants would use. Key inputs in the model included projected revenues, manufacturing costs and operating expenses and selling price associated with these long-lived assets.
During the three months ended March 31, 2012, as a result of market weakness and the loss of a customer resulting in lower future cash flows associated with certain assets, the Company wrote-down long-lived assets with a carrying value of $22 to a fair value of $20, resulting in an impairment charge of $2 within its Forest Products Resins segment. These long-lived assets were valued using a discounted cash flow analysis based on assumptions that market participants would use and incorporates probability-weighted cash flows based on the likelihood of various possible scenarios. Key inputs in the model included projected revenues, manufacturing costs, operating expenses and selling price associated with these long-lived assets.
Non-derivative Financial Instruments
The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:
 
 
March 31, 2012
 
December 31, 2011
 
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Debt
 
$
3,520

 
$
3,449

 
$
3,539

 
$
3,226

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, short term investments, 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.


13

Table of Contents

7. Derivative Instruments and Hedging Activities

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 July 2010, the Company entered into a two-year 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. This swap became 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. The Company accounts for the swap as a qualifying cash flow hedge.
In December 2011, the Company entered into a three-year interest rate swap agreement with a notional amount of AUD $6, which became effective on January 3, 2012 and will mature on December 5, 2014. The Company pays a fixed rate of 4.140% and receives a variable rate based on the 3 month Australian Bank Bill Rate. The Company has not applied hedge accounting to this derivative instrument.
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.

The following tables summarize the Company’s derivative financial instruments:
 
 
 
 
March 31, 2012
 
December 31, 2011
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 – 2010
 
Other current liabilities
 
$
325

 
$
(2
)
 
$
350

 
$
(2
)
Total derivatives designated as hedging instruments
 
 
 
 
 
$
(2
)
 
 
 
$
(2
)
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
 
 
Interest Rate Swap
 
 
 
 
 
 
 
 
 
 
Australian dollar interest swap
 
Other current liabilities
 
$
6

 
$

 
$
6

 
$

Commodity Contracts
 
 
 
 
 
 
 
 
 
 
Electricity contracts
 
Other current liabilities
 
3

 

 
3

 
(1
)
Natural gas futures
 
Other current liabilities
 
4

 
(2
)
 
5

 

Total derivatives not designated as hedging instruments
 
 
 
 
 
$
(2
)
 
 
 
$
(1
)

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Table of Contents

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:
 
March 31, 2012
 
March 31, 2011
March 31, 2012
 
March 31, 2011
Interest Rate Swaps
 
 
 
 
 
 
 
 
 
 
Interest swap – 2010
 
$
(1
)
 
$

 
Interest expense, net
 
$
(1
)
 
$
(1
)
Total
 
$
(1
)
 
$

 
 
 
$
(1
)
 
$
(1
)
As of March 31, 2012, the Company expects to reclassify $1 of losses recognized in Accumulated other comprehensive income to earnings over the next twelve months.
Derivatives Not Designated as Hedging Instruments
 
Amount of (Loss) Gain Recognized in Income on Derivative for the Three Months Ended:
 
Location of (Loss) Gain Recognized in Income on Derivative
 
March 31, 2012
 
March 31, 2011
 
Foreign Exchange and Interest Rate Swaps
 
 
 
 
 
 
Cross-Currency and Interest Rate Swap
 
$

 
$
(2
)
 
Other non-operating expense, net
Commodity Contracts
 
 
 
 
 
 
Electricity contracts
 
1

 

 
Cost of sales
Natural gas futures
 
(2
)
 

 
Cost of sales
Total
 
$
(1
)
 
$
(2
)
 
 

8. Debt Obligations
Debt outstanding at March 31, 2012 and December 31, 2011 is as follows:
 
 
March 31, 2012
 
December 31, 2011
 
 
Long-Term
 
Due Within
One Year
 
Long-Term
 
Due Within
One Year
Non-affiliated debt:
 
 
 
 
 
 
 
 
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
 
Floating rate term loans due May 2013
 
$

 
$

 
$
446

 
$
8

Floating rate term loans due May 2015
 
907

 
16

 
910

 
15

Senior Secured Notes:
 
 
 
 
 
 
 
 
6.625% First Priority Senior Notes due 2020
 
450

 

 

 

8.875 % senior secured notes due 2018 (includes $6 of unamortized debt discount at March 31, 2012 and December 31, 2011)
 
994

 

 
994

 

Floating rate second-priority senior secured notes due 2014
 
120

 

 
120

 

9.00% Second-priority senior secured notes due 2020
 
574

 

 
574

 

Debentures:
 
 
 
 
 
 
 
 
9.2% debentures due 2021
 
74

 

 
74

 

7.875% debentures due 2023
 
189

 

 
189

 

8.375% sinking fund debentures due 2016
 
62

 

 
62

 

Other Borrowings:
 
 
 
 
 
 
 
 
Australia Facility due 2014
 
35

 
5

 
36

 
5

Brazilian bank loans
 
24

 
38

 

 
65

Capital Leases
 
10

 
1

 
11

 
1

Other
 
5

 
14

 
4

 
23

Total non-affiliated debt
 
3,444

 
74

 
3,420

 
117

Affiliated debt:
 
 
 
 
 
 
 
 
Affiliated borrowings due on demand
 

 
2

 

 
2

Total affiliated debt
 

 
2

 

 
2

Total debt
 
$
3,444

 
$
76

 
$
3,420

 
$
119



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Table of Contents

2012 Refinancing Activities
In March 2012, the Company issued $450 aggregate principal amount of 6.625% First-Priority Senior Secured Notes due 2020 at an issue price of 100%. The Company used the net proceeds, together with cash on hand to repay approximately $454 aggregate principal amount of existing term loans maturing May 5, 2013 under the Company’s senior secured credit facilities, effectively extending these maturities by an additional seven years. In conjunction with the Offering Transaction, the Company extended $171 of its $200 revolving line of credit facility commitments from lenders from February 2013 to December 2014. In connection with the refinancing activities, the lender commitments to the revolving line of credit facility were decreased to approximately $192 in the aggregate. The interest rate for loans made under the extended revolver commitments was increased to adjusted LIBOR plus 4.75% from adjusted LIBOR plus 4.50%. The commitment fee for the extended revolver commitments was decreased to 0.5% of the unused line from 4.5% of the unused line. Collectively, these transactions are referred to as the “March Refinancing Transactions.” The priority of the liens securing the collateral for the 6.625% Senior Secured Notes is pari passu to the liens in such collateral securing the Company's senior secured credit facilities.
The Company incurred approximately $13 in fees associated with the March Refinancing Transactions, which have been 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 on an effective interest basis. Additionally, $1 in unamortized deferred financing fees were written-off related to the $454 of term loans under the Company's 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.
Covenant Compliance
Two of the Company’s wholly-owned international subsidiaries expect to not be in compliance with a financial covenant under their respective loan agreements when they deliver their audited financial statements for the year ended December 31, 2011 in the second quarter of 2012. As of December 31, 2011, outstanding debt of approximately $31 was classified as “Debt payable within one year” in the unaudited Condensed Consolidated Balance Sheets. In March 2012, the Company subsequently obtained a covenant waiver from one of the respective banks, representing approximately $25 of the $31. As of March 31, 2012, the Company has reclassified $25 of the respective debt to “Long-term debt” in the unaudited Condensed Consolidated Balance Sheets. If a waiver is not obtained for the remaining portion, the Company has sufficient cash to repay such debt. Non-compliance with these covenants would not result in a cross-default under the Company’s amended senior secured credit facilities or the indentures that govern its notes.
9. Commitments and Contingencies
Environmental Matters
The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
Environmental Institution of Paraná IAP—On August 10, 2005, the Environmental Institute of Paraná (IAP), an environmental agency in the State of Paraná, provided Hexion Quimica Industria, the Company’s Brazilian subsidiary, with notice of an environmental assessment in the amount of 12 Brazilian reais. The assessment related to alleged environmental damages to the Paranagua Bay caused in November 2004 from an explosion on a shipping vessel carrying methanol purchased by the Company. The investigations performed by the public authorities have not identified any actions of the Company that contributed to or caused the accident. The Company responded to the assessment by filing a request to have it cancelled and by obtaining an injunction precluding execution of the assessment pending adjudication of the issue. In November 2010, the Court denied the Company’s request to cancel the assessment and lifted the injunction that had been issued. The Company responded to the ruling by filing an appeal in the State of Paraná Court of Appeals. In March 2012, the Company was informed that the Court of Appeals has denied the Company’s appeal. The Company continues to believe that the assessment is invalid and it plans to appeal the Appellate Court’s decision to the federal appellate system in Brazil. Because the Company continues to believe it has strong defenses against the validity of the assessment, it does not believe that a loss is probable. At March 31, 2012, the amount of the assessment, including tax, penalties, monetary correction and interest, is 27 Brazilian reais, or approximately $15.

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Table of Contents

The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at March 31, 2012 and December 31, 2011:
 
Number of Sites
 
Liability
 
Range of Reasonably Possible Costs
Site Description
March 31, 2012
 
December 31, 2011
 
March 31, 2012
 
December 31, 2011
 
Low
 
High
Geismar, LA
1

 
1

 
$
17

 
$
17

 
$
10

 
$
24

Superfund and offsite landfills – allocated share:
 
 
 
 
 
 
 
 
 
 
 
Less than 1%
24

 
31

 
1

 
1

 
1

 
2

Equal to or greater than 1%
12

 
12

 
6

 
7

 
5

 
12

Currently-owned
12

 
12

 
6

 
5

 
4

 
11

Formerly-owned:
 
 
 
 
 
 
 
 
 
 
 
Remediation
10

 
10

 
2

 
1

 
1

 
12

Monitoring only
4

 
5

 

 
1

 

 
1

 
63

 
71

 
$
32

 
$
32

 
$
21

 
$
62

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 March 31, 2012 and December 31, 2011, $7 and $6, 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 March 31, 2012:
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.
 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 $5 of these liabilities within the next five years, with the remainder over the next five 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.

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Table of Contents

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 or more years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.
Indemnifications —In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.
Non-Environmental Legal Matters
The Company is involved in various legal proceedings in the ordinary course of business and has reserves of $10 and $7 at March 31, 2012 and December 31, 2011, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At March 31, 2012 and December 31, 2011, $6 and $3, 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:
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. In September 2010, in the Company's favor, the Court adopted its appointed expert's report finding that the transactions in question were intercompany loans. The State Tax Bureau filed an appeal of this decision in December 2010, which is still pending. The Company continues to believe that a loss contingency is not probable. At March 31, 2012, the amount of the assessment, including tax, penalties, monetary correction and interest, is 69 Brazilian reais, or approximately $38.
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.
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 believes it has adequate reserves and that it is not reasonably possible that a loss exceeding amounts already reserved would be material. Furthermore, the Company has insurance to cover claims of these types.
10. Pension and Postretirement Expense
Following are the components of net pension and postretirement expense (benefit) recognized by the Company for the three months ended March 31, 2012 and 2011:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2012
 
2011
 
2012
 
2011
 
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

 
3

 
4

 

 

 

 

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

 

 

 

Amortization of prior service cost (benefit)
2

 

 

 

 
(2
)
 

 
(3
)
 

Recognized actuarial loss

 

 
2

 

 

 

 

 

Net expense (benefit)
$
2

 
$
3

 
$
2

 
$
3

 
$
(2
)
 
$

 
$
(3
)
 
$


18

Table of Contents

11. Segment Information
The Company's business segments are based on the products that the Company offers and the markets that it serves. At March 31, 2012, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins. A summary of the major products of the Company's reportable segments follows:
 
Epoxy, Phenolic and Coating Resins: epoxy specialty resins, oil field products, versatic acids and derivatives, basic epoxy resins and intermediates, phenolic specialty resins and molding compounds, polyester resins, acrylic resins and vinylic resins
 
Forest Products Resins: forest products resins and formaldehyde applications
The Company's organizational structure continues to evolve. It is also continuing to refine its operating structure to more closely link similar products, minimize divisional boundaries and improve the Company's ability to serve multi-dimensional common customers. These refinements may result in future changes to the Company's reportable segments.

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, other income and expenses and discontinued operations. 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.
Net Sales to Unaffiliated Customers(1)(2):
 
Three Months Ended March 31,
 
2012
 
2011
Epoxy, Phenolic and Coating Resins
$
794

 
$
846

Forest Products Resins
442

 
448

Total
$
1,236

 
$
1,294


Segment EBITDA(2):
 
Three Months Ended March 31,
 
2012
 
2011
Epoxy, Phenolic and Coating Resins
$
114

 
$
150

Forest Products Resins
46

 
45

Corporate and Other
(11
)
 
(17
)
(1)
Intersegment sales are not significant and, as such, are eliminated within the selling segment.
(2)
Prior period balances have been recast to exclude the results of the CCR Business, which is reported as a discontinued operation

19

Table of Contents

Reconciliation of Segment EBITDA to Net (Loss) Income:
 
Three Months Ended March 31,
 
2012
 
2011
Segment EBITDA:
 
 
 
Epoxy, Phenolic and Coating Resins
$
114

 
$
150

Forest Products Resins
46

 
45

Corporate and Other
(11
)
 
(17
)
 
 
 
 
Reconciliation:
 
 
 
Items not included in Segment EBITDA:
 
 
 
Asset impairments and other non-cash charges
(48
)
 
1

Business realignment costs
(15
)
 
(3
)
Integration costs
(8
)
 
(5
)
Net income from discontinued operations

 
5

Other
7

 
(5
)
Total adjustments
(64
)
 
(7
)
Interest expense, net
(65
)
 
(64
)
Income tax benefit (expense)
2

 
(3
)
Depreciation and amortization
(38
)
 
(41
)
Net (loss) income
$
(16
)
 
$
63

 Items not included in Segment EBITDA
Non-cash charges primarily represent asset impairments, stock-based compensation expense, accelerated depreciation on closing facilities and unrealized derivative and foreign exchange gains and losses. Business realignment costs for the three months ended March 31, 2012 primarily include expenses from the Company's restructuring and cost optimization programs. Business realignment costs for the three months ended March 31, 2011 primarily relate to expenses from minor restructuring programs. Integration costs relate primarily to the Momentive Combination. Net income from discontinued operations represents the results of the IAR and CCR businesses.
Not included in Segment EBITDA are certain non-cash and other income or expenses. For the three months ended March 31, 2012, these items primarily include net realized foreign exchange transaction gains, partially offset by losses on the disposal of assets. For the three months ended March 31, 2011, these items include primarily net foreign exchange transaction losses, losses on disposal of assets and business optimization expenses.
12. Summarized Financial Information of Unconsolidated Affiliate

Summarized financial information of the unconsolidated affiliate HAI as of March 31, 2012 and December 31, 2011 and for the three months ended March 31, 2012 and 2011 is as follows:
 
March 31,
2012
 
December 31,
2011
Current assets
$
37

 
$
35

Non-current assets
12

 
13

Current liabilities
33

 
21

Non-current liabilities

 

 
Three Months Ended March 31,
 
2012
 
2011
Net sales
$
50

 
$
43

Gross profit
13

 
9

Pre-tax income
9

 
6

Net income
9

 
5



20

Table of Contents

13. 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 6.625% first priority notes due 2020, 8.875% senior secured notes due 2018, the floating rate second-priority senior secured notes due 2014 and the 9% second-priority notes due 2020.
The following information contains the condensed consolidating financial information for MSC (the parent), the Subsidiary Issuers, the combined subsidiary guarantors (Momentive Specialty Chemical Investments Inc.; Borden Chemical Foundry; LLC, Lawter International, Inc.; HSC Capital Corporation; Momentive International, Inc.; Momentive 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.
All of the subsidiary issuers and subsidiary guarantors are 100% owned by MSC. 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 on net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates.

21

Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.
THREE MONTHS ENDED MARCH 31, 2012
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
 
 
Momentive
Specialty
Chemicals
Inc.
 
Subsidiary
Issuers
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
538

 
$

 
$

 
$
769

 
$
(71
)
 
$
1,236

Cost of sales
454

 

 

 
675

 
(71
)
 
1,058

Gross profit
84

 

 

 
94

 

 
178

Selling, general and administrative expense
30

 

 

 
55

 

 
85

Asset impairments

 

 

 
23

 

 
23

Business realignment costs
2

 

 

 
13

 

 
15

Other operating expense, net
5

 

 

 
6

 

 
11

Operating income (loss)
47

 

 

 
(3
)
 

 
44

Interest expense, net
16

 
39

 

 
10

 

 
65

Intercompany interest expense (income)
30

 
(42
)
 

 
12

 

 

Other non-operating (income) expense , net
(11
)
 

 
(1
)
 
14

 

 
2

Income (loss) from continuing operations before income tax, earnings from unconsolidated entities
12

 
3

 
1

 
(39
)
 

 
(23
)
Income tax benefit
(1
)
 

 

 
(1
)
 

 
(2
)
Income (loss) from continuing operations before earnings from unconsolidated entities
13

 
3

 
1

 
(38
)
 

 
(21
)
(Losses) earnings from unconsolidated entities, net of taxes
(29
)
 

 
(2
)
 

 
36

 
5

Net (loss) income
$
(16
)
 
$
3

 
$
(1
)
 
$
(38
)
 
$
36

 
$
(16
)
Comprehensive income (loss)
$
13

 
$
4

 
$
(1
)
 
$
(21
)
 
$
18

 
$
13


22

Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.
THREE MONTHS ENDED MARCH 31, 2011
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
 
 
Momentive
Specialty
Chemicals
Inc.
 
Subsidiary
Issuers
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
562

 
$

 
$

 
$
814

 
$
(82
)
 
$
1,294

Cost of sales
467

 

 

 
700

 
(82
)
 
1,085

Gross profit
95

 

 

 
114

 

 
209

Selling, general and administrative expense
28

 

 

 
56

 

 
84

Business realignment costs
1

 

 

 
2

 

 
3

Other operating (income) expense, net
(16
)
 

 

 
19

 

 
3

Operating income
82

 

 

 
37

 

 
119

Interest expense, net
17

 
38

 

 
9

 

 
64

Intercompany interest expense (income)
30

 
(43
)
 

 
13

 

 

Other non-operating (income) expense, net
(28
)
 

 

 
25

 

 
(3
)
Income (loss) from continuing operations before income tax, earnings from unconsolidated entities
63

 
5

 

 
(10
)
 

 
58

Income tax (benefit) expense
(8
)
 

 

 
11

 

 
3

Income (loss) from continuing operations before earnings from unconsolidated entities
71

 
5

 

 
(21
)
 

 
55

Earnings from unconsolidated entities, net of taxes
10

 

 
19

 

 
(26
)
 
3

Net income (loss) from continuing operations
81

 
5

 
19

 
(21
)
 
(26
)
 
58

Net (loss) income from discontinued operations, net of tax
(18
)
 

 

 
23

 

 
5

Net income
$
63

 
$
5

 
$
19

 
$
2

 
$
(26
)
 
$
63

Comprehensive income
$
93

 
$
8

 
$
19

 
$
1

 
$
(28
)
 
$
93

 




23

Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.
MARCH 31, 2012
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
 
 
Momentive
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)
$
266

 
$

 
$

 
$
134

 
$

 
$
400

Short-term investments

 

 

 
4

 

 
4

Accounts receivable, net
231

 

 

 
469

 

 
700

Inventories:
 
 
 
 
 
 
 
 
 
 
 
Finished and in-process goods
135

 

 

 
167

 

 
302

Raw materials and supplies
38

 

 

 
88

 

 
126

Other current assets
18

 

 

 
61

 

 
79

Total current assets
688

 

 

 
923

 

 
1,611

Other assets, net
97

 
46

 
29

 
90

 
(87
)
 
175

Property and equipment, net
498

 

 

 
698

 

 
1,196

Goodwill
93

 

 

 
76

 

 
169

Other intangible assets, net
57

 

 

 
44

 

 
101

Total assets
$
1,433

 
$
46

 
$
29

 
$
1,831

 
$
(87
)
 
$
3,252

Liabilities and (Deficit) Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
Accounts and drafts payable
$
184

 
$

 
$

 
$
351

 
$

 
$
535

Intercompany accounts (receivable) payable
(11
)
 
(37
)
 
1

 
47

 

 

Debt payable within one year
12

 

 

 
62

 

 
74

Intercompany loans (receivable) payable
(83
)
 

 

 
83

 

 

Loans payable to affiliates
2

 

 

 

 

 
2

Interest payable
8

 
36

 

 
3

 

 
47

Income taxes payable
2

 

 

 
10

 

 
12

Accrued payroll and incentive compensation
27

 

 

 
36

 

 
63

Other current liabilities
97

 

 

 
45

 

 
142

Total current liabilities
238

 
(1
)
 
1

 
637

 

 
875

Long-term debt
870

 
2,138

 

 
436

 

 
3,444

Intercompany loans payable (receivable)
1,615

 
(2,343
)
 
(16
)
 
744

 

 

Long-term pension and post employment benefit obligations
95

 

 

 
129

 

 
224

Deferred income taxes
27

 
2

 

 
49

 

 
78

Other long-term liabilities
116

 
6

 

 
36

 

 
158

Advance from affiliates
225

 

 

 

 

 
225

Total liabilities
3,186

 
(198
)
 
(15
)
 
2,031

 

 
5,004

Total Momentive Specialty Chemicals Inc. shareholders (deficit) equity
(1,753
)
 
244

 
44

 
(201
)
 
(87
)
 
(1,753
)
Noncontrolling interest

 

 

 
1

 

 
1

Total (deficit) equity
(1,753
)
 
244

 
44

 
(200
)
 
(87
)
 
(1,752
)
Total liabilities and (deficit) equity
$
1,433

 
$
46

 
$
29

 
$
1,831

 
$
(87
)
 
$
3,252



24