Momentive 03.31.2013 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, 2013
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, 2013: 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 4.
 
 
 
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,
2013
 
December 31,
2012
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents (including restricted cash of $3 and $18, respectively)
$
400

 
$
419

Short-term investments
6

 
5

Accounts receivable (net of allowance for doubtful accounts of $16 and $17, respectively)
613

 
527

Inventories:
 
 
 
Finished and in-process goods
307

 
262

Raw materials and supplies
122

 
105

Other current assets
90

 
81

Total current assets
1,538

 
1,399

Investment in unconsolidated entities
54

 
42

Deferred income taxes
383

 
348

Other assets, net
135

 
109

Property and equipment:
 
 
 
Land
89

 
90

Buildings
301

 
305

Machinery and equipment
2,372

 
2,384

 
2,762

 
2,779

Less accumulated depreciation
(1,618
)
 
(1,612
)
 
1,144

 
1,167

Goodwill
167

 
169

Other intangible assets, net
89

 
91

Total assets
$
3,510

 
$
3,325

Liabilities and Deficit
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
503

 
$
418

Debt payable within one year
61

 
76

Interest payable
90

 
63

Income taxes payable
7

 
4

Accrued payroll and incentive compensation
48

 
40

Other current liabilities
124

 
129

Total current liabilities
833

 
730

Long-term liabilities:
 
 
 
Long-term debt
3,727

 
3,419

Long-term pension and post employment benefit obligations
304

 
309

Deferred income taxes
19

 
18

Other long-term liabilities
169

 
166

Total liabilities
5,052

 
4,642

Commitments and contingencies (See Note 7)
 
 
 
Deficit
 
 
 
Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at March 31, 2013 and December 31, 2012
1

 
1

Paid-in capital
520

 
752

Treasury stock, at cost—88,049,059 shares
(296
)
 
(296
)
Note receivable from parent

 
(24
)
Accumulated other comprehensive loss
(90
)
 
(77
)
Accumulated deficit
(1,677
)
 
(1,673
)
Total deficit
(1,542
)
 
(1,317
)
Total liabilities and deficit
$
3,510

 
$
3,325

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)
2013
 
2012
Net sales
$
1,192

 
$
1,236

Cost of sales
1,049

 
1,064

Gross profit
143

 
172

Selling, general and administrative expense
92

 
85

Asset impairments

 
23

Business realignment costs
9

 
15

Other operating (income) expense, net
(3
)
 
5

Operating income
45

 
44

Interest expense, net
74

 
65

Loss on extinguishment of debt
6

 

Other non-operating expense, net
5

 
2

Loss before income tax and earnings from unconsolidated entities
(40
)
 
(23
)
Income tax benefit
(32
)
 
(2
)
Loss before earnings from unconsolidated entities
(8
)
 
(21
)
Earnings from unconsolidated entities, net of taxes
4

 
5

Net loss
$
(4
)
 
$
(16
)
See Notes to Condensed Consolidated Financial Statements



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

 
Three Months Ended March 31,
(In millions)
2013

2012
Net loss
$
(4
)
 
$
(16
)
Other comprehensive (loss) income, net of tax:
 
 
 
Foreign currency translation adjustments
(18
)
 
29

Gain recognized from pension and postretirement benefits
4

 

Net losses on cash flow hedges reclassified to earnings
1

 

Other comprehensive (loss) income
(13
)
 
29

Comprehensive (loss) income
$
(17
)
 
$
13

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)
2013
 
2012
Cash flows (used in) provided by operating activities
 
 
 
Net loss
$
(4
)
 
$
(16
)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
38

 
38

Deferred tax (benefit) expense
(41
)
 
5

Non-cash asset impairments and accelerated depreciation

 
29

Loss on extinguishment of debt
6

 

Unrealized foreign currency (gains) losses
(28
)
 
15

Other non-cash adjustments

 
3

Net change in assets and liabilities:
 
 
 
Accounts receivable
(96
)
 
(106
)
Inventories
(67
)
 
(65
)
Accounts payable
94

 
135

Income taxes payable
4

 
(2
)
Other assets, current and non-current
12

 
(1
)
Other liabilities, current and long-term
49

 
(17
)
Net cash (used in) provided by operating activities
(33
)
 
18

Cash flows used in investing activities
 
 
 
Capital expenditures
(27
)
 
(30
)
(Purchases of) proceeds from the sale of debt securities, net
(1
)
 
4

Change in restricted cash
15

 

Investment in unconsolidated affiliates, net
(14
)
 
(2
)
Net cash used in investing activities
(27
)
 
(28
)
Cash flows provided by (used in) financing activities
 
 
 
Net short-term debt borrowings (repayments)
1

 
(12
)
Borrowings of long-term debt
1,125

 
450

Repayments of long-term debt
(1,034
)
 
(463
)
Long-term debt and credit facility financing fees
(34
)
 
(12
)
Capital contribution from parent

 
16

Common stock dividends paid

 
(1
)
Net cash provided by (used in) financing activities
58

 
(22
)
Effect of exchange rates on cash and cash equivalents
(2
)
 
3

Decrease in cash and cash equivalents
(4
)
 
(29
)
Cash and cash equivalents (unrestricted) at beginning of period
401

 
416

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

 
$
387

Supplemental disclosures of cash flow information
 
 
 
Cash paid for:
 
 
 
Interest, net
$
44

 
$
77

Income taxes, net of cash refunds

 
7

Non-cash financing activities:
 
 
 
Non-cash issuance of debt in exchange for loans of parent (See Note 6)
$
200

 
$

Non-cash distribution declared to parent (See Note 3)
208

 

Settlement of note receivable from parent (See Note 3)
24

 

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
Loss (a)
 
Accumulated
Deficit
 
Total
Balance at December 31, 2012
$
1

 
$
752

 
$
(296
)
 
$
(24
)
 
$
(77
)
 
$
(1,673
)
 
$
(1,317
)
Net loss

 

 

 

 

 
(4
)
 
(4
)
Other comprehensive loss

 

 

 

 
(13
)
 

 
(13
)
Settlement of note receivable from parent (See Note 3)

 
(24
)
 

 
24

 

 

 

Non-cash distribution declared to parent ($2.52 per share)

 
(208
)
 

 

 

 

 
(208
)
Balance at March 31, 2013
$
1

 
$
520

 
$
(296
)
 
$

 
$
(90
)
 
$
(1,677
)
 
$
(1,542
)
 
(a)
Accumulated other comprehensive loss at March 31, 2013 represents $125 of net foreign currency translation gains, net of tax and a $215 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. Accumulated other comprehensive loss at December 31, 2012 represents $143 of net foreign currency translation gains, net of tax, $1 of net deferred losses on cash flow hedges and a $219 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 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, 2013, 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. 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.” Momentive Holdings is controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company’s owner.
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.
The Company revised the unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2012 to correct for the classification of accelerated depreciation of $6 that was originally classified in “Other operating (income) expense, net.” The amount has now been properly classified in “Cost of sales.”
The Company also revised the unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2012 to correct for the classification of certain outstanding checks that were originally classified as “Accounts payable.” The amounts have now been properly classified as a reduction to “Cash and cash equivalents.” Management does not believe these revisions were material to the Company’s unaudited Condensed Consolidated Financial Statements. The impacts of correcting the unaudited Condensed Consolidated Statement of Cash Flows for the specified period are as follows:
Consolidated Statement of Cash Flows:
 
As Previously Reported
 
Adjustments
 
As Revised
Net cash provided by operating activities
 
$
16

 
$
2

 
$
18

Cash and cash equivalents (unrestricted) at beginning of period
 
428

 
(12
)
 
416

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

 
(10
)
 
387

Footnotes contained herein have been revised, where applicable, for the revisions discussed above.
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, and also requires the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
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 long-lived 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 these assets in its Epoxy, Phenolic and Coating Resins and Forest Products Resins segments, respectively.

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As a result of market weakness and the loss of a customer, resulting in lower future cash flows associated with certain long-lived assets within the Company’s European forest products business, the Company recorded impairments of $2 on these assets in its Forest Products Resins segment.
In addition, the Company recorded accelerated depreciation of less than $1 and $6 related to closing facilities during the three months ended March 31, 2013 and 2012, respectively.
Subsequent Events—The Company has evaluated events and transactions subsequent to March 31, 2013 through May 14, 2013, 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 Issued and Adopted Accounting Standards
On February 5, 2013, the Company adopted the provisions of Accounting Standards Update No. 2013-02: Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 amended existing comprehensive income guidance and is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. ASU 2013-02 requires entities to disclose additional detail about the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. ASU 2013-02 allows an entity to provide information about the effects on net income of significant amounts reclassified out of each component of accumulated other comprehensive income on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. The adoption of ASU 2013-02 did not have a material impact on the Company’s unaudited Condensed Consolidated Financial Statements. See Note 12 for the disclosures required by ASU 2013-02.
3. Related Party Transactions
Administrative Service, Management and Consulting Arrangement
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 charges of any portion of the annual management fee due in excess of $3 for the calendar year 2013.
During both of the three months ended March 31, 2013 and 2012, the Company recognized expense under the Management Consulting Agreement of $1. This amount is included in “Other operating (income) expense, net” in the Company’s unaudited Condensed Consolidated Statements of Operations.
Shared Services Agreement
On October 1, 2010, in conjunction with the Momentive Combination, the Company entered into a shared services agreement with MPM, as amended on March 17, 2011 (the “Shared Services Agreement”). Under this agreement, the Company provides to MPM, and MPM provides to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, technology development, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between the Company and MPM. Pursuant to this agreement, during the three months ended March 31, 2013 and 2012, the Company incurred approximately $33 and $41, respectively, of net costs for shared services and MPM incurred approximately $23 and $39, respectively, of net costs for shared services. Included in the net costs incurred during the three months ended March 31, 2013 and 2012, were estimated or initial billings from the Company to MPM of $6 and $5, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable allocation percentage. The allocation percentage is currently under review and subject to adjustment by the Shared Service Committee in accordance with the terms of the Shared Services Agreement. During the three months ended March 31, 2013 and 2012, the Company realized approximately $3 and $7, respectively, in cost savings as a result of the Shared Services Agreement. The Company had accounts receivable from MPM of $1 and less than $1 as of March 31, 2013 and December 31, 2012, respectively, and accounts payable to MPM of less than $1 at both March 31, 2013 and December 31, 2012.
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 was recorded at its acquisition value of $24 as a reduction of equity in the unaudited Condensed Consolidated Balance Sheets, as MSC Holdings is the Company’s parent. In addition, the Company has not recorded accretion of the purchase discount or interest income, as ultimate receipt of these cash flows was under the control of MSC Holdings.

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During the three months ended March 31, 2013, in conjunction with the 2013 Refinancing Transactions (see Note 6), the loan receivable from MSC Holdings was settled for no consideration at the direction of MSC Holdings. As a result, the Company accounted for the settlement of the loan as a distribution to MSC Holdings of $24, which was recognized in “Paid-in Capital.” Additionally, during the three months ended March 31, 2013, the Company declared a distribution to MSC Holdings of $208 in connection with the retirement of the outstanding $247 aggregate principal amount of the LLC PIK Facility held by an unaffiliated third party, in conjunction with the 2013 Refinancing Transactions.
Purchases and Sales of Products and Services with MPM
The Company also sells products to, and purchase products from, MPM pursuant to a Master Buy/Sell Agreement dated as of September 6, 2012 (the “Master Buy/Sell Agreement”). Prices under the agreement are determined by a formula based upon certain third party sales of the applicable product, or in the event that no qualifying third party sales have taken place, based upon the average contribution margin generated by certain third party sales of products in the same or a similar industry. The standard terms and conditions of the seller in the applicable jurisdiction apply to transactions under the Master Buy/Sell Agreement. A subsidiary of MPM also acts as a non-exclusive distributor in India for certain of the Company’s subsidiaries pursuant to Distribution Agreements dated as of September 6, 2012 (the “Distribution Agreements”). Prices under the Distribution Agreements are determined by a formula based on the weighted average sales price of the applicable product less a margin. The Master Buy/Sell Agreement and Distribution Agreements have initial terms of 3 years and may be terminated for convenience by either party thereunder upon 30 days’ prior notice in the case of the Master/Buy Sell Agreement and upon 90 days’ prior notice in the case of the Distribution Agreements. Pursuant to these agreements and other purchase orders, during the three months ended March 31, 2013 and 2012, the Company sold less than $1 and less than $1 of products to MPM and purchased $1 and less than $1, respectively, of products from MPM. As of both March 31, 2013 and December 31, 2012, the Company had less than $1 of accounts receivable from MPM and less than $1 of accounts payable to MPM related to these agreements.
Purchases and Sales of Products and Services with Affiliates Other than MPM
The Company sells products to various Apollo affiliates other than MPM. These sales were $30 and $1 for the three months ended March 31, 2013 and 2012, respectively. Accounts receivable from these affiliates were $11 and $26 at March 31, 2013 and December 31, 2012, respectively. The Company also purchases raw materials and services from various Apollo affiliates other than MPM. These purchases were $34 and $7 for the three months ended March 31, 2013 and 2012, respectively. The Company had accounts payable to these affiliates of less than $1 and $4 at March 31, 2013 and December 31, 2012, respectively.
Participation of Apollo Global Securities in Refinancing Transactions
During the three months ended March 31, 2013, AGS acted as one of the initial purchasers and received approximately $1 in connection with the sale of an additional $1,100 aggregate principal amount of the Company’s 6.625% First-Priority Senior Secured Notes due 2020. AGS also received $1 in structuring fees in connection with the 2013 Refinancing Transactions.
During the three months ended March 31, 2012, Apollo Global Securities, LLC (“AGS”), an affiliate of Apollo, acted as one of the initial purchasers and received approximately $1 in connection with the sale of $450 aggregate principal amount of the Company’s 6.625% First-Priority Senior Secured Notes due 2020.
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, 2013 or 2012. The Company had accounts payable to Momentive Holdings of $0 and $4 under these arrangements at March 31, 2013 and December 31, 2012, 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 $27 and $28 for the three months ended March 31, 2013 and 2012, respectively. Accounts receivable from HAI were $18 and $16 at March 31, 2013 and December 31, 2012, respectively. Purchases from HAI were $21 and $10 for the three months ended March 31, 2013 and 2012, respectively. The Company had accounts payable to HAI of $4 and $6 at March 31, 2013 and December 31, 2012, respectively. Additionally, HAI declared dividends to the Company of $8 and $10 during the three months ended March 31, 2013 and 2012, respectively. No amounts remain outstanding related to these previously declared dividends as of March 31, 2013.
The Company’s purchase contracts with HAI represent a significant portion of HAI’s total revenue, and this factor results in the Company absorbing the majority of the risk from potential losses or the majority of the gains from potential returns. However, the Company does not have the power to direct the activities that most significantly impact HAI, and therefore, does not consolidate HAI. The carrying value of HAI’s assets were $47 and $52 at March 31, 2013 and December 31, 2012, respectively. The carrying value of HAI’s liabilities were $23 and $18 at March 31, 2013 and December 31, 2012, respectively.

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In February 2013, the Company and HAI resolved a dispute regarding raw material pricing. As part of the resolution, the Company will provide discounts to HAI on future purchases of dry and liquid resins totaling $16 over a period of three years. The $16 settlement was recorded net of $8 of income during the year ended December 31, 2012, which represented the Company’s benefit from the discounts due to its 50% ownership interest in HAI.
The Company had a loan receivable from its unconsolidated forest products joint venture in Russia of less than $1 as of both March 31, 2013 and December 31, 2012. The Company also had royalties receivable from its unconsolidated forest products joint venture in Russia of $5 as of both March 31, 2013 and December 31, 2012.
4. Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:
Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
Level 3: Unobservable inputs that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.
Recurring Fair Value Measurements
Following is a summary of assets and liabilities measured at fair value on a recurring basis as of March 31, 2013 and December 31, 2012:
 
 
Fair Value Measurements Using
 
Total
 
 
Level 1
 
Level 2
 
Level 3
 
March 31, 2013
 
 
 
 
 
 
 
 
Derivative liabilities
 
$

 
$

 
$

 
$

December 31, 2012
 
 
 
 
 
 
 
 
Derivative liabilities
 
$

 
$
(1
)
 
$

 
$
(1
)
Level 1 derivative liabilities primarily consist of financial instruments traded on exchange or futures markets. Level 2 derivative liabilities consist of derivative instruments transacted primarily in over the counter markets.
There were no transfers between Level 1, Level 2 or Level 3 measurements during the three months ended March 31, 2013 or 2012.
The Company calculates the fair value of its Level 1 derivative liabilities using quoted market prices. The Company calculates the fair value of its Level 2 derivative liabilities using standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At both March 31, 2013 and December 31, 2012, 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
The Company recorded losses of $23 as a result of measuring assets at fair value on a non-recurring basis during the three months ended March 31, 2012, all of which were valued using Level 3 inputs. There were no significant assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2013.
During the three months ended March 31, 2012, as a result of the likelihood that certain long-lived 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 within its Epoxy, Phenolic and Coating Resins and Forest Products Resins segments, respectively. These assets were valued by using a discounted cash flow analysis based on assumptions that market participants would use. Significant unobservable inputs in the model included projected short-term future cash flows, projected growth rates and discount rates associated with these long-lived assets. Future projected short-term cash flows and growth rates were derived from probability-weighted forecast models based upon budgets prepared by the Company’s management. These projected future cash flows were discounted using rates ranging from 2% to 3%.
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 long-lived assets, the Company wrote-down 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 assets were valued using a discounted cash flow analysis based

11

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on assumptions that market participants would use and incorporated probability-weighted cash flows based on the likelihood of various possible scenarios. Significant unobservable inputs in the model included projected future cash flows, projected growth rates and discount rates associated with these long-lived assets. Future projected cash flows and growth rates were derived from probability-weighted forecast models based upon budgets prepared by the Company’s management. These projected future cash flows were discounted using rates ranging from 2% to 10%.
Non-derivative Financial Instruments
The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:
 
 
Carrying Amount
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2013
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,788

 
$

 
$
3,748

 
$
11

 
$
3,759

December 31, 2012
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,495

 
$

 
$
3,410

 
$
11

 
$
3,421

Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Level 3 amounts represent capital leases whose fair value is determined through the use of present value and specific contract terms. The carrying amounts of cash and cash equivalents, short term investments, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.
5. 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, which matured on January 2, 2013. This swap was designed to offset the cash flow variability that resulted from interest rate fluctuations on the Company’s variable rate debt. This swap became effective on January 4, 2011 and had an initial notional amount of $350, which was subsequently amortized down to $325. The Company paid a fixed rate of 1.032% and received a variable one month LIBOR rate. The Company accounted 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 is exposed to price fluctuations associated with raw materials purchases, most significantly with methanol, phenol, urea, acetone, propylene, and chlorine. For these commodity raw materials, the Company has purchase contracts in place that contain periodic price adjustment provisions. The Company also adds selling price provisions to certain customer contracts that are indexed to publicly available indices for the associated commodity raw materials. The board of directors approves all commodity futures and commodity commitments based on delegation of authority documents.
The Company hedges a portion of its electricity purchases for certain manufacturing 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 using futures contracts. 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, which are recorded as “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets:
 
 
March 31, 2013
 
December 31, 2012
Liability Derivatives
 
Notional
Amount
 
Fair Value
Liability
 
Notional
Amount
 
Fair Value
Liability
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest Rate Swaps
 
 
 
 
 
 
 
 
Interest swap – 2010
 
$

 
$

 
$
325

 
$

Total
 
 
 
$

 
 
 
$

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
Interest Rate Swap
 
 
 
 
 
 
 
 
Australian dollar interest swap
 
$
6

 
$

 
$
6

 
$

Commodity Contracts
 
 
 
 
 
 
 
 
Electricity contracts
 
3

 

 
3

 
(1
)
Natural gas futures
 
2

 

 
3

 

Total
 
 
 
$

 
 
 
$
(1
)
Derivatives in Cash Flow Hedging Relationship
 
Loss Recognized in OCI on Derivative for the Three Months Ended:
 
Location of Loss Reclassified from Accumulated OCI into Income
 
Loss Reclassified from Accumulated OCI into Income for the Three Months Ended:
 
March 31, 2013
 
March 31, 2012
March 31, 2013
 
March 31, 2012
Interest Rate Swaps
 
 
 
 
 
 
 
 
 
 
Interest swap – 2010
 
$

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

 
$
(1
)
 
 
 
$
(1
)
 
$
(1
)
As of March 31, 2013, there are no losses recognized in “Accumulated other comprehensive loss” which will be reclassified to earnings over the next twelve months.
Derivatives Not Designated as Hedging Instruments
 
Gain (Loss) Recognized in Income on Derivative for the Three Months Ended:
 
Location of Gain (Loss) Recognized in Income on Derivative
 
March 31, 2013
 
March 31, 2012
 
Commodity Contracts
 
 
 
 
 
 
Electricity contracts
 
$

 
$
1

 
Cost of sales
Natural gas futures
 

 
(2
)
 
Cost of sales
Total
 
$

 
$
(1
)
 
 


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6. Debt Obligations
Debt outstanding at March 31, 2013 and December 31, 2012 is as follows:
 
 
March 31, 2013
 
December 31, 2012
 
 
Long-Term
 
Due Within
One Year
 
Long-Term
 
Due Within
One Year
Non-affiliated debt:
 
 
 
 
 
 
 
 
Senior Secured Credit Facilities:
 
 
 
 
 
 
 
 
Floating rate term loans due 2015
 
$

 
$

 
$
895

 
$
15

Senior Secured Notes:
 
 
 
 
 
 
 
 
6.625% First-Priority Senior Secured Notes due 2020 (includes $8 of unamortized debt premium at March 31, 2013)
 
1,558

 

 
450

 

8.875% Senior Secured Notes due 2018 (includes $5 and $6 of unamortized debt discount at March 31, 2013 and December 31, 2012, respectively)
 
1,195

 

 
994

 

Floating rate Second-Priority Senior Secured Notes due 2014
 

 

 
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
 
60

 
2

 
60

 
2

Other Borrowings:
 
 
 
 
 
 
 
 
Australia Facility due 2014
 
45

 
5

 
31

 
5

Brazilian bank loans
 
19

 
37

 
18

 
41

Capital Leases
 
10

 
1

 
10

 
1

Other
 
3

 
16

 
4

 
12

Total
 
$
3,727

 
$
61

 
$
3,419

 
$
76

2013 Refinancing Activities
In January 2013, the Company issued $1,100 aggregate principal amount of 6.625% First-Priority Senior Secured Notes due 2020 at an issue price of 100.75% (the “New First-Priority Senior Secured Notes”). The Company used the net proceeds of $1,108 ($1,100 plus a premium of $8) to (i) repay approximately $910 of term loans under the Company’s senior secured credit facilities, (ii) purchase $89 aggregate principal amount of the Company’s Floating Rate Second-Priority Senior Secured Notes due 2014 (the “Floating Rate Notes”) in a tender offer, (iii) satisfy and discharge the remaining $31 aggregate principal amount of the Floating Rate Notes, which were redeemed on March 2, 2013 at a redemption price equal to 100% plus accrued and unpaid interest to the redemption date, (iv) pay related transaction costs and expenses and (v) provide incremental liquidity of $54. The New First-Priority Senior Secured Notes were issued as additional notes under the indenture governing the Company’s existing 6.625% First-Priority Senior Secured Notes due 2020 and have the same terms as such notes.
In January 2013, the Company also issued $200 aggregate principal amount of 8.875% Senior Secured Notes due 2018 at an issue price of 100% (the “New Senior Secured Notes”). The New Senior Secured Notes were issued to lenders in exchange for loans of MSC Holdings, which were retired in full. The Company did not receive any cash proceeds from the issuance of the New Senior Secured Notes. The New Senior Secured Notes were issued as additional notes under the indenture governing the Company’s existing 8.875% Senior Secured Notes due 2018 and have the same terms as such notes.
Additionally, in March 2013, the Company entered into a new $400 asset-based revolving loan facility, subject to a borrowing base (the “ABL Facility”). The ABL Facility replaced the $171 revolving credit facility and the $47 synthetic letter of credit facility under the Company's senior secured credit facilities. Collectively, we refer to these transactions as the “2013 Refinancing Transactions.”
The Company incurred approximately $34 in fees associated with the 2013 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, $6 in unamortized deferred financing fees were written-off related to the debt that was repaid and extinguished. These fees are included in “Loss on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations.
The ABL Facility has a five-year term unless, on the date that is 91 days prior to the scheduled maturity of the 8.875% Senior Secured Notes due 2018, more than $50 aggregate principal amount of 8.875% Senior Secured Notes due 2018 is outstanding, in which case the ABL Facility will mature on such earlier date. Availability under the ABL Facility is $400, subject to a borrowing base that will be based on a specified percentage of eligible accounts receivable and inventory. The borrowers under the ABL Facility include the Company and Momentive Specialty Chemicals Canada Inc., Momentive Specialty Chemicals B.V., Momentive Specialty Chemicals UK Limited and Borden Chemical UK Limited, each a wholly-owned subsidiary of the Company. The ABL Facility bears interest at a floating rate based on, at the Company's option, an adjusted

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LIBOR rate plus an initial applicable margin of 2.25% or an alternate base rate plus an initial applicable margin of 1.25%. From and after the date of delivery of the Company's financial statements for the first fiscal quarter ended after the effective date of the ABL Facility, the applicable margin for such borrowings will be adjusted depending on the availability under the ABL Facility. In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to pay a commitment fee to the lenders in respect of the unutilized commitments at an initial rate equal to 0.50% per annum, subject to adjustment depending on the usage. The ABL Facility does not have any financial maintenance covenants, other than a fixed charge coverage ratio of 1.0 to 1.0 that only applies if availability under the ABL Facility is less than the greater of (a) $40 and (b) 12.5% of the lesser of the borrowing base and the total ABL Facility commitments at such time. The fixed charge coverage ratio under the credit agreement governing the ABL Facility is generally defined as the ratio of (a) Adjusted EBITDA minus non-financed capital expenditures and cash taxes to (b) debt service plus cash interest expense plus certain restricted payments, each measured on a last twelve months, or LTM, basis. The ABL Facility is secured by, among other things, first-priority liens on most of the inventory and accounts receivable and related assets of the Company, its domestic subsidiaries and certain of its foreign subsidiaries (the “ABL Priority Collateral”), and by second-priority liens on certain collateral that generally includes most of the Company’s, its domestic subsidiaries’ and certain of its foreign subsidiaries’ assets other than the ABL Priority Collateral, in each case subject to certain exceptions and permitted liens. Available borrowings under the ABL Facility were $301 as of March 31, 2013.
7. Commitments and Contingencies
Environmental Matters
The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
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 had denied the Company’s appeal. The Company continues to believe that the assessment is invalid, and on June 4, 2012 it filed appeals to the Superior Court of Justice and the Supreme Court of Brazil. The Company continues to believe it has strong defenses against the validity of the assessment, and does not believe that a loss is probable. At March 31, 2013, the amount of the assessment, including tax, penalties, monetary correction and interest, is 31 Brazilian reais, or approximately $15.
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.
The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at March 31, 2013 and December 31, 2012:
 
Number of Sites
 
Liability
 
Range of Reasonably Possible Costs
Site Description
March 31, 2013
 
December 31, 2012
 
March 31, 2013
 
December 31, 2012
 
Low
 
High
Geismar, LA
1
 
1
 
$
16

 
$
17

 
$
10

 
$
24

Superfund and offsite landfills – allocated share:
 
 
 
 
 
 
 
 
 
 
 
Less than 1%
17
 
22
 
1

 
1

 
1

 
2

Equal to or greater than 1%
12
 
12
 
7

 
6

 
5

 
14

Currently-owned
13
 
13
 
7

 
7

 
5

 
13

Formerly-owned:
 
 
 
 
 
 
 
 
 
 
 
Remediation
11
 
11
 
5

 
2

 
5

 
15

Monitoring only
4
 
4
 
1

 
1

 

 
1

Total
58
 
63
 
$
37

 
$
34

 
$
26

 
$
69

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, 2013 and December 31, 2012,

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$10 and $9, 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, 2013:
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 25 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 25 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 ten sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The Company expects to pay approximately $5 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, or has been identified as a PRP in connection with, environmental remediation at a number of locations that it formerly owned and/or operated. Remediation costs at these former sites, such as those associated with our former phosphate mining and processing operations, could be material. The final costs to the Company will depend on the method of remediation chosen and the level of participation of third parties.
Monitoring Only Sites—The Company is responsible for a number of sites that require monitoring where no additional remediation is expected. The Company has established reserves for costs related to these sites. Payment of these liabilities is anticipated to occur over the next ten or more years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.
Indemnifications—In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.
Non-Environmental Legal Matters
The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $22 at both March 31, 2013 and December 31, 2012, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At both March 31, 2013 and December 31, 2012, $8 has been included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets with the remaining amount included in “Other long-term liabilities.”

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Table of Contents

Following is a discussion of significant non-environmental legal proceedings:
Brazil Tax Claim— On October 15, 2012, the Appellate Court for the State of Sao Paulo rendered a unanimous decision in favor of the Company on this claim, which has been pending since 1992. 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 and other internal flows of funds were characterized by the Tax Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions and the Company filed an administrative appeal seeking cancellation of the assessment. The Administrative Court upheld the assessment in December 2001. In 2002, the Company 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 Company. 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 granted upon the Company pledging certain properties and assets in Brazil during the pendency of the Annulment action in lieu of depositing an amount equivalent to the assessment with the Court. 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 and other legal transactions. The State Tax Bureau appealed this decision in December 2010, and the Appellate Court ruled in the Company’s favor on October 15, 2012, as described above. On January 7, 2013, the State Tax Bureau appealed the decision to the Superior Court of Justice. The Company has replied to the appeal, and continues to believe that a loss contingency is not probable. At March 31, 2013, the amount of the assessment, including tax, penalties, monetary correction and interest, is 70 Brazilian reais, or approximately $35.
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.
8. 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, 2013 and 2012:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended March 31,
 
Three Months Ended March 31,
 
2013
 
2012
 
2013
 
2012
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
 
U.S.
Plans
 
Non-U.S.
Plans
Service cost
$
1

 
$
4

 
$
1

 
$
2

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
3

 
4

 
3

 
4

 

 

 

 

Expected return on assets
(4
)
 
(2
)
 
(4
)
 
(3
)
 

 

 

 

Amortization of prior service cost (benefit)

 

 
2

 

 

 

 
(2
)
 

Amortization of actuarial loss
2

 
2

 

 

 

 

 

 

Net expense (benefit)
$
2

 
$
8

 
$
2

 
$
3

 
$

 
$

 
$
(2
)
 
$

9. 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, 2013, 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, phenolic encapsulated substrates, 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

Reportable Segments
Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs not allocated to continuing segments.

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Table of Contents

Net Sales (1):
 
Three Months Ended March 31,
 
2013
 
2012
Epoxy, Phenolic and Coating Resins
$
765

 
$
794

Forest Products Resins
427

 
442

Total
$
1,192

 
$
1,236

(1)
Intersegment sales are not significant and, as such, are eliminated within the selling segment.
Segment EBITDA:
 
Three Months Ended March 31,
 
2013
 
2012
Epoxy, Phenolic and Coating Resins
$
68

 
$
114

Forest Products Resins
55

 
46

Corporate and Other (2)
(18
)
 
(14
)
(2)
For the three months ended March 31, 2012, the Company has reclassified approximately $3 of costs into Corporate and Other Segment EBITDA which were previously excluded.
Reconciliation of Segment EBITDA to Net Loss:
 
Three Months Ended March 31,
 
2013
 
2012
Segment EBITDA:
 
 
 
Epoxy, Phenolic and Coating Resins
$
68

 
$
114

Forest Products Resins
55

 
46

Corporate and Other
(18
)
 
(14
)
 
 
 
 
Reconciliation:
 
 
 
Items not included in Segment EBITDA:
 
 
 
Asset impairments

 
(23
)
Business realignment costs
(9
)
 
(15
)
Integration costs
(3
)
 
(5
)
Other
(11
)
 
(18
)
Total adjustments
(23
)
 
(61
)
Interest expense, net
(74
)
 
(65
)
Loss on extinguishment of debt
(6
)
 

Income tax benefit
32

 
2

Depreciation and amortization
(38
)
 
(38
)
Net loss
$
(4
)
 
$
(16
)
 Items Not Included in Segment EBITDA
Business realignment costs for the three months ended March 31, 2013 primarily relate to expenses from minor restructuring programs and costs for environmental remediation at certain formerly owned locations. Business realignment costs for the three months ended March 31, 2012 primarily include expenses from the Company’s restructuring and cost optimization programs. Integration costs for the three months ended March 31, 2013 and 2012 primarily represent integrations costs associated with the Momentive Combination.
Not included in Segment EBITDA are certain non-cash items and other income and expenses. For the three months ended March 31, 2013, these items primarily include expenses from retention programs, partially offset by net realized and unrealized foreign exchange transaction gains. For the three months ended March 31, 2012, these items primarily include accelerated depreciation recorded on closing facilities, net realized and unrealized foreign exchange transaction losses, stock-based compensation expense and losses on the disposal of assets.


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Table of Contents

10. Share Based Compensation
On March 8, 2013, the Compensation Committee of the Board of Managers of Momentive Holdings approved grants of unit options and restricted deferred units under the Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan (the “2011 Equity Plan”). The unit options are rights to purchase common units of Momentive Holdings at a fixed price. The restricted deferred units are rights to receive a common unit of Momentive Holdings. The awards contain restrictions on transferability and other typical terms and conditions.
The following is a summary of key terms of the stock-based awards granted to MSC employees under the 2011 Equity Plan on March 8, 2013:
Award
 
Units Granted
 
Vesting Terms
 
Option/Unit Term
Unit Options
 
3,971,667

 
Time-vest ratably over 4 years; Accelerated vesting six months after a change of control event as defined by the 2011 Equity Plan
 
10 years
 
 
 
 
 
 
 
Restricted Deferred Units (“RDUs”)
 
3,136,150

 
Performance-based: Vest upon the earlier of 1) one year from the achievement of the targeted common unit value and a realization event or 2) six months from the achievement of the targeted common unit value and a change in control event, as such terms are defined by the 2011 Equity Plan
 
N/A
Unit Options
On March 8, 2013, the Company granted Unit Options with an aggregate grant date fair value of approximately $2. The fair value was estimated at the grant date using a Monte Carlo valuation method. The Monte Carlo valuation method requires the use of a range of assumptions. The range of risk-free interest rates was 0.11% to 2.06%, expected volatility rates ranged from 28.1% to 35.5% and the dividend rate was 0%. The expected life assumption is not used in the Monte Carlo valuation method, but the output of the model indicated a weighted-average expected life of 6.2 years.
Restricted Deferred Units
On March 8, 2013, the Company granted RDUs with performance and market conditions with an aggregate grant date fair value of approximately $4. The fair value was estimated at the grant date using the same Monte Carlo valuation method and assumptions used for the Unit Options. The RDUs have an indefinite life, thus the term used in the valuation model was 30 years, which resulted in a weighted-average expected life of 22 years. As of March 31, 2013, it is not probable the related RDUs will vest. Compensation cost will be recognized over the service period once the satisfaction of the performance condition is probable.
Although the 2011 Equity Plan, under which the above awards were granted, was issued by Momentive Holdings, the underlying compensation cost represents compensation costs paid for by Momentive Holdings on MSC’s behalf, as a result of the employees’ services to MSC. All compensation cost is recorded over the requisite service period on a graded-vesting basis.
11. Summarized Financial Information of Unconsolidated Affiliate
Summarized financial information of the unconsolidated affiliate HAI as of March 31, 2013 and December 31, 2012 and for the three months ended March 31, 2013 and 2012 is as follows:
 
March 31,
2013
 
December 31,
2012
Current assets
$
36

 
$
40

Non-current assets
11

 
12

Current liabilities
23

 
18

Non-current liabilities

 

 
Three Months Ended March 31,
 
2013
 
2012
Net sales
$
45

 
$
50

Gross profit
11

 
13

Pre-tax income
7

 
9

Net income
7

 
9



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Table of Contents

Note 12. Changes in Accumulated Other Comprehensive Loss
Following is a summary of amounts reclassified from “Accumulated other comprehensive loss” for the three months ended March 31, 2013 and 2012:
 
Three Months Ended March 31, 2013
 
Three Months Ended March 31, 2012
 
Gains and (Losses) on Cash Flow Hedges
 
Defined Benefit Pension and Postretirement Items
 
Foreign Currency Translation Gains (Losses)
 
Total
 
Gains and (Losses) on Cash Flow Hedges
 
Defined Benefit Pension and Postretirement Items
 
Foreign Currency Translation Gains (Losses)
 
Total
Beginning balance
$
(1
)
 
$
(219
)
 
$
143

 
$
(77
)
 
$
(1
)
 
$
(112
)
 
$
130

 
$
17

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

 

 
(18
)
 
(18
)
 
(1
)
 

 
29

 
28

Amounts reclassified from Accumulated other comprehensive loss, net of tax
1

 
4

 

 
5

 
1

 

 

 
1

Net other comprehensive income (loss)
1

 
4

 
(18
)
 
(13
)
 

 

 
29

 
29

Ending balance
$

 
$
(215
)
 
$
125

 
$
(90
)
 
$
(1
)
 
$
(112
)
 
$
159

 
$
46

 
 
Amount Reclassified From Accumulated Other Comprehensive Loss for the Three Months Ended:
 
 
Amount Reclassified From Accumulated Other Comprehensive Loss
 
March 31, 2013
 
March 31, 2012
 
Location of Reclassified Amount in Income
Gains and losses on cash flow hedges:
 
 
 
 
 
 
Interest rate swaps
 
$

 
$
1

 
Interest expense, net
Total before income tax
 

 
1

 
 
Income tax expense
 
1

 

 
Income tax benefit
Total
 
$
1

 
$
1

 
 
 
 
 
 
 
 
 
Amortization of defined benefit pension and other postretirement benefit items:
 
 
 
 
 
 
Prior service costs
 
$

 
$

 
(1) 
Actuarial losses
 
5

 

 
(1) 
Total before income tax
 
5

 

 
 
Income tax benefit
 
(1
)
 

 
Income tax benefit
Total
 
4

 

 
 
Total
 
$
5

 
$
1

 
 
(1)
These accumulated other comprehensive income components are included in the computation of net pension and postretirement benefit expense (see Note 8).
13. Income Taxes
In January 2013, the American Taxpayer Relief Act of 2012 (the “Act”) was signed into law. The Act retroactively reinstated and extended the controlled foreign corporation look-through rule, which provides for the exclusion of certain foreign earnings from U.S. federal taxation from January 1, 2012 through December 31, 2013. The impact of the Act has been accounted for in the period of enactment. As a result, the Company recognized a related discrete tax benefit of $29 during the three months ended March 31, 2013.


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Table of Contents

14. 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 Senior Secured Notes due 2020, 8.875% Senior Secured Notes due 2018 and the 9.00% Second-Priority Senior Secured 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.
The Company revised its condensed consolidating statements of cash flows for the three months ended March 31, 2012 to correct the classification of intercompany dividends received. The revisions were made to appropriately classify dividends received that represent a return on investment as an operating activity. These amounts were previously classified as cash flows from investing activities. For the three months ended March 31, 2012, in the Momentive Specialty Chemicals Inc. column, the revisions resulted in an increase of $6 to “Cash flows provided by (used in) operating activities” with a corresponding offset to “Cash flows provided by (used in) investing activities.”


21

Table of Contents

MOMENTIVE SPECIALTY CHEMICALS INC.
MARCH 31, 2013
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)
$
262

 
$

 
$

 
$
138

 
$

 
$
400

Short-term investments

 

 

 
6

 

 
6

Accounts receivable, net
195

 

 

 
418

 

 
613

Intercompany accounts receivable
104

 
67

 

 
400

 
(571
)
 

Intercompany loans receivable - current portion
239

 

 

 
357

 
(596
)
 

Inventories:
 
 
 
 
 
 
 
 
 
 
 
Finished and in-process goods
120

 

 

 
187

 

 
307

Raw materials and supplies
42

 

 

 
80

 

 
122

Other current assets
36

 

 

 
54

 

 
90

Total current assets
998

 
67

 

 
1,640

 
(1,167
)
 
1,538

Investment in unconsolidated entities
166

 

 
30

 
34

 
(176
)
 
54

Deferred income taxes
375

 

 

 
8

 

 
383

Other assets, net
34

 
63

 
3

 
35

 

 
135

Intercompany loans receivable
1,144

 
3,383

 
28

 
3,704

 
(8,259
)
 

Property and equipment, net
491

 

 

 
653

 

 
1,144

Goodwill
93

 

 

 
74

 

 
167

Other intangible assets, net
51

 

 

 
38

 

 
89

Total assets
$
3,352

 
$
3,513

 
$
61

 
$
6,186

 
$
(9,602
)
 
$
3,510

Liabilities and (Deficit) Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
175

 
$

 
$

 
$
328

 
$

 
$
503

Intercompany accounts payable
102

 
4

 

 
465

 
(571
)
 

Debt payable within one year
2

 

 

 
59

 

 
61

Intercompany loans payable within one year
199

 

 

 
397

 
(596
)
 

Interest payable
5

 
85

 

 

 

 
90

Income taxes payable
7

 

 

 

 

 
7

Accrued payroll and incentive compensation
17

 

 

 
31

 

 
48

Other current liabilities
67

 

 

 
57

 

 
124

Total current liabilities
574

 
89

 

 
1,337

 
(1,167
)
 
833

Long-term liabilities:
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
329

 
3,327

 

 
71

 

 
3,727

Intercompany loans payable
3,414

 

 
7

 
4,838

 
(8,259
)
 

Accumulated losses of unconsolidated subsidiaries in excess of investment
355

 

 
87

 

 
(442
)
 

Long-term pension and post employment benefit obligations
96

 

 

 
208

 

 
304

Deferred income taxes
4

 
2

 

 
13

 

 
19

Other long-term liabilities
122

 
6

 

 
41

 

 
169

Total liabilities
4,894

 
3,424

 
94

 
6,508

 
(9,868
)
 
5,052

Total (deficit) equity
(1,542
)
 
89

 
(33
)
 
(322
)
 
266

 
(1,542
)
Total liabilities and (deficit) equity
$
3,352

 
$
3,513

 
$
61

 
$
6,186

 
$
(9,602
)
 
$
3,510


22

Table of Contents


MOMENTIVE SPECIALTY CHEMICALS INC.
DECEMBER 31, 2012
CONDENSED CONSOLIDATING BALANCE SHEET
  
 
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 $18, respectively)
$
276

 
$

 
$

 
$
143

 
$

 
$
419

Short-term investments

 

 

 
5

 

 
5

Accounts receivable, net
177

 

 

 
350

 

 
527

Intercompany accounts receivable
126

 
52

 

 
318

 
(496
)
 

Intercompany loans receivable - current portion
162

 

 

 
624

 
(786
)
 

Inventories:
 
 
 
 
 
 
 
 
 
 
 
Finished and in-process goods
109

 

 

 
153

 

 
262

Raw materials and supplies
35

 

 

 
70

 

 
105

Other current assets
38

 

 

 
43

 

 
81

Total current assets
923

 
52

 

 
1,706

 
(1,282
)
 
1,399

Investment in unconsolidated entities
252

 

 
42

 
18

 
(270
)
 
42

Deferred income taxes
337

 

 

 
11

 

 
348

Other assets, net

 
42

 
28

 
39

 

 
109

Intercompany loans receivable
773

 
2,273

 
27

 
3,835

 
(6,908
)
 

Property and equipment, net
493

 

 

 
674

 

 
1,167

Goodwill
93

 

 

 
76

 

 
169

Other intangible assets, net
53

 

 

 
38

 

 
91

Total assets
$
2,924

 
$
2,367

 
$
97

 
$
6,397

 
$
(8,460
)
 
$
3,325

Liabilities and (Deficit) Equity
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
136

 
$

 
$

 
$
282

 
$

 
$
418

Intercompany accounts payable
96

 
4

 
1

 
395

 
(496
)
 

Debt payable within one year
13

 

 

 
63

 

 
76

Intercompany loans payable within one year
197

 

 

 
589

 
(786
)
 

Interest payable
12

 
51