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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 September 30, 2016
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
 
  HEXION 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 November 1, 2016: 82,556,847


Table of Contents

HEXION INC.
INDEX
 
 
 
Page
PART I – FINANCIAL INFORMATION
 
 
 
 
Item 1.
Hexion Inc. Condensed Consolidated Financial Statements (Unaudited)
 
 
 
 
 
Condensed Consolidated Balance Sheets at September 30, 2016 and December 31, 2015
 
 
 
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Comprehensive (Loss) Income for the three and nine months ended September 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015
 
 
 
 
Condensed Consolidated Statement of Deficit for the nine months ended September 30, 2016
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
PART II – OTHER INFORMATION
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.

2

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HEXION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
(In millions, except share data)
September 30,
2016
 
December 31,
2015
Assets
 
 

Current assets:
 
 

Cash and cash equivalents (including restricted cash of $19 and $8, respectively)
$
145

 
$
236

Accounts receivable (net of allowance for doubtful accounts of $14 and $15, respectively)
498

 
450

Inventories:
 
 

Finished and in-process goods
221

 
218

Raw materials and supplies
98

 
90

Other current assets
80

 
53

Total current assets
1,042

 
1,047

Investment in unconsolidated entities
17

 
36

Deferred income taxes
10

 
13

Other long-term assets
43

 
48

Property and equipment:
 
 

Land
80

 
84

Buildings
277

 
296

Machinery and equipment
2,368

 
2,406


2,725

 
2,786

Less accumulated depreciation
(1,833
)
 
(1,735
)

892

 
1,051

Goodwill
124

 
122

Other intangible assets, net
56

 
65

Total assets
$
2,184

 
$
2,382

Liabilities and Deficit
 
 

Current liabilities:
 
 

Accounts payable
$
311

 
$
386

Debt payable within one year
69

 
80

Interest payable
96

 
82

Income taxes payable
24

 
15

Accrued payroll and incentive compensation
58

 
78

Other current liabilities
160

 
123

Total current liabilities
718

 
764

Long-term liabilities:
 
 

Long-term debt
3,475

 
3,698

Long-term pension and post employment benefit obligations
224

 
224

Deferred income taxes
14

 
12

Other long-term liabilities
164

 
161

Total liabilities
4,595

 
4,859

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 September 30, 2016 and December 31, 2015
1

 
1

Paid-in capital
526

 
526

Treasury stock, at cost—88,049,059 shares
(296
)
 
(296
)
Accumulated other comprehensive loss
(8
)
 
(15
)
Accumulated deficit
(2,633
)
 
(2,692
)
Total Hexion Inc. shareholder’s deficit
(2,410
)
 
(2,476
)
Noncontrolling interest
(1
)
 
(1
)
Total deficit
(2,411
)
 
(2,477
)
Total liabilities and deficit
$
2,184

 
$
2,382

See Notes to Condensed Consolidated Financial Statements

3

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016

2015
 
2016
 
2015
Net sales
$
819


$
1,065


$
2,680


$
3,231

Cost of sales
701


905


2,357


2,753

Gross profit
118


160


323


478

Selling, general and administrative expense
69


71


235


229

Gain on dispositions




(240
)


Business realignment (income) costs
(3
)

3


42


11

Other operating expense, net
7


12


6


22

Operating income
45


74


280


216

Interest expense, net
76


84


235


245

Gain on extinguishment of debt
(3
)

(14
)

(47
)

(14
)
Other non-operating expense (income), net
2




1


(1
)
(Loss) income before income tax and (losses) earnings from unconsolidated entities
(30
)

4


91


(14
)
Income tax expense
16


1


40


28

(Loss) income before (losses) earnings from unconsolidated entities
(46
)

3


51


(42
)
(Losses) earnings from unconsolidated entities, net of taxes
(1
)

4


8


13

Net (loss) income
$
(47
)

$
7


$
59


$
(29
)
See Notes to Condensed Consolidated Financial Statements

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)

 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(In millions)
2016

2015
 
2016
 
2015
Net (loss) income
$
(47
)
 
$
7

 
$
59

 
$
(29
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
7

 
(24
)
 
8

 
(73
)
Loss recognized from pension and postretirement benefits

 

 
(1
)
 

Other comprehensive income (loss)
7

 
(24
)
 
7

 
(73
)
Comprehensive (loss) income
$
(40
)
 
$
(17
)
 
$
66

 
$
(102
)
See Notes to Condensed Consolidated Financial Statements

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Nine Months Ended September 30,
(In millions)
2016

2015
Cash flows (used in) provided by operating activities

 

Net income (loss)
$
59

 
$
(29
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

 

Depreciation and amortization
101

 
102

Accelerated depreciation
127

 

Deferred tax expense
3

 
2

Gain on step acquisition

 
(5
)
Gain on dispositions (see Notes 12 and 13)
(240
)
 

Gain on extinguishment of debt (see Note 6)
(47
)
 
(14
)
Unrealized foreign currency (gains) losses
(40
)
 
19

Other non-cash adjustments
3

 
3

Net change in assets and liabilities:

 
 
Accounts receivable
(88
)
 
(30
)
Inventories
(32
)
 
14

Accounts payable
(35
)
 
(25
)
Income taxes payable
26

 
10

Other assets, current and non-current
(27
)
 
13

Other liabilities, current and long-term
59

 
6

Net cash (used in) provided by operating activities
(131
)
 
66

Cash flows provided by (used in) investing activities

 

Capital expenditures
(91
)
 
(122
)
Capitalized interest
(1
)
 

Purchase of business, net of cash acquired

 
(7
)
Proceeds from dispositions, net
281

 

Cash received on buyer’s note (see Note 12)
45

 

Proceeds from sale of assets, net
1

 
1

Proceeds from sale of investments, net

 
6

Change in restricted cash
(11
)
 
8

Investment in affiliate
(1
)
 

Net cash provided by (used in) investing activities
223

 
(114
)
Cash flows (used in) provided by financing activities

 

Net short-term debt repayments
(13
)
 
(1
)
Borrowings of long-term debt
461

 
492

Repayments of long-term debt
(643
)
 
(393
)
Long-term debt and credit facility financing fees

 
(10
)
Net cash (used in) provided by financing activities
(195
)
 
88

Effect of exchange rates on cash and cash equivalents
1

 
(9
)
(Decrease) increase in cash and cash equivalents
(102
)
 
31

Cash and cash equivalents (unrestricted) at beginning of period
228

 
156

Cash and cash equivalents (unrestricted) at end of period
$
126

 
$
187

Supplemental disclosures of cash flow information

 

Cash paid for:

 

Interest, net
$
210

 
$
214

Income taxes, net
20

 
12

Non-cash investing activity:


 


Non-cash assumption of debt on step acquisition
$

 
$
18

Acceptance of buyer’s note (see Note 12)
$
75

 
$

See Notes to Condensed Consolidated Financial Statements

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HEXION INC.
CONDENSED CONSOLIDATED STATEMENT OF DEFICIT (Unaudited)

(In millions)
Common
Stock
 
Paid-in
Capital
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
Total Hexion Inc. Deficit
 
Noncontrolling Interest
 
Total
Balance at December 31, 2015
$
1

 
$
526

 
$
(296
)
 
$
(15
)
 
$
(2,692
)
 
$
(2,476
)
 
$
(1
)
 
$
(2,477
)
Net income

 

 

 

 
59

 
59

 

 
59

Other comprehensive income

 

 

 
7

 

 
7

 

 
7

Balance at September 30, 2016
$
1

 
$
526

 
$
(296
)
 
$
(8
)
 
$
(2,633
)
 
$
(2,410
)
 
$
(1
)
 
$
(2,411
)

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, Hexion Inc. (“Hexion” or the “Company”) serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. The Company’s business is organized based on the products offered and the markets served. At September 30, 2016, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins.
The Company’s direct parent is Hexion LLC, a holding company and wholly owned subsidiary of Hexion Holdings LLC (“Hexion Holdings”), the ultimate parent entity of Hexion. Hexion 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 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 (“U.S. GAAP”).
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 U.S. GAAP 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 U.S. GAAP 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.
Subsequent Events—The Company has evaluated events and transactions subsequent to September 30, 2016 through the date of issuance of its unaudited Condensed Consolidated Financial Statements.
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Board Update No. 2014-09: Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The effective date for ASU 2014-09 is for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted for annual and interim periods beginning on or after December 15, 2016. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09. The Company is currently assessing the potential impact of ASU 2014-09 on its financial statements.

In July 2015, the FASB issued Accounting Standards Board Update No. 2015-11: Simplifying the Measurement of Inventory (Topic 330) (“ASU 2015-11”) as part of the FASB simplification initiative. ASU 2015-11 replaces the existing concept of market value of inventory (where market was defined as replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin) with the single measurement of net realizable value. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The requirements of ASU 2015-11 are not expected to have a significant impact on the Company’s financial statements.

In February 2016, the FASB issued Accounting Standards Board Update No. 2016-02: Leases (Topic 842) (“ASU 2016-02”). ASU 2016-02 supersedes the existing lease guidance in Topic 840. According to the new guidance, all leases, with limited scope exceptions, will be recorded on the balance sheet in the form of a liability to make lease payments (lease liability) and a right-of-use asset representing the right to use the underlying asset for the lease term. The guidance is effective for annual and interim periods beginning on or after December 15, 2018, and early adoption is permitted. Entities will be required to adopt ASU 2016-02 using a modified retrospective approach, whereby leases will be recognized and measured at the beginning of the earliest period presented. The Company is currently assessing the potential impact of ASU 2016-02 on its financial statements.


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In March 2016, the FASB issued Accounting Standards Board Update No. 2016-07: Simplifying the Transition to the Equity Method of Accounting (Topic 323) (“ASU 2016-07”) as part of the FASB simplification initiative. ASU 2016-07 eliminates the requirement that when an existing investment qualifies for use of the equity method, an investor adjust the investment, results of operations and retained earnings retroactively as if the equity method has been in effect in all previous periods that the investment had been held. Under the new guidance, the equity method investor is only required to adopt the equity method as of the date the investment qualifies for the equity method, with no retrospective adjustment required. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is permitted. The requirements of ASU 2016-07 are not expected to have a significant impact on the Company’s financial statements.

In March 2016, the FASB issued Accounting Standards Board Update No. 2016-09: Improvements to Employee Share-Based Payment Accounting (Topic 718) (“ASU 2016-09”) as part of the FASB simplification initiative. ASU 2016-09 simplifies various aspects of share-based payment accounting, including the income tax consequences, classification of equity awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period, and early adoption is permitted. The requirements of ASU 2016-09 are not expected to have a significant impact on the Company’s financial statements.

In August 2016, the FASB issued Accounting Standards Board Update No. 2016-15: Statement of Cash Flows (Topic 230) (“ASU 2016-15”) as part of the FASB simplification initiative. ASU 2016-15 provides guidance on treatment in the statement of cash flows for eight specific cash flow topics, with the objective of reducing existing diversity in practice. Of the eight cash flow topics addressed in the new guidance, the topics expected to have an impact on the Company include debt prepayment or debt extinguishment costs, proceeds from the settlement of insurance claims, treatment of restricted cash and distributions received from equity method investees. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2016-15 on its financial statements.
3. Business Realignment Costs
    
Norco

In the first quarter of 2016, the Company announced a planned rationalization at its Norco, LA manufacturing facility within its Epoxy, Phenolic and Coating Resins segment, and production was ceased at this facility during the second quarter of 2016. During the three months ended June 30, 2016, Company recorded costs of $25 related to the early termination of certain contracts for utilities, site services, raw materials and other items related to this facility rationalization. During the three months ended September 30, 2016, these costs were reduced by $2 based on updated cost estimates and negotiations with vendors, resulting in total costs of $23 for these items during the nine months ended September 30, 2016. These costs are included in “Business realignment (income) costs” in the unaudited Condensed Consolidated Statements of Operations. As of September 30, 2016, $19 of these costs were included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets and $2 were included in “Other long-term liabilities.”

As a result of the Norco, LA facility rationalization, the estimated useful lives of certain long-lived assets related to this facility were shortened, and consequently, during the nine months ended September 30, 2016, the Company incurred $76 of accelerated depreciation related to these assets, which is included in “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations.

In addition, at June 30, 2016 the Company recorded a conditional asset retirement obligation (“ARO”) of $30 related to certain contractually obligated future demolition, decontamination and repair costs associated with this facility rationalization. During the nine months ended September 30, 2016, the Company recorded an additional $30 of accelerated depreciation related to this ARO, which is also included in “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations. During the three months ended September 30, 2016, this ARO liability was reduced by $11 as a result of revised cost estimates, primarily due to a reduction in the scope of expected future demolition. This $11 reduction in costs is included in “Business realignment (income) costs” in the unaudited Condensed Consolidated Statements of Operations for both the three and nine months ended September 30, 2016. As of September 30, 2016, $14 of the ARO liability was included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets and $2 was included in “Other long-term liabilities.”
    
Lastly, during the three and nine months ended September 30, 2016, the Company incurred additional costs of $3 and $13, respectively, related to abnormal production overhead, severance and other expenses to the facility closure. These costs are included in “Business realignment (income) costs” in the unaudited Condensed Consolidated Statements of Operations.

Oilfield

In addition, during the third quarter of 2016, the Company indefinitely idled two oilfield manufacturing facilities within its Epoxy, Phenolic and Coating Resins segment, and production was ceased at these facilities. As a result, the estimated useful lives of certain long-lived assets related to these facilities were shortened, and consequently, during the three months ended September 30, 2016, the Company incurred $21 of accelerated depreciation related to these assets, which is included in “Cost of sales” in the unaudited Condensed Consolidated Statements of Operations.


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Other

Also included within “Business realignment (income) costs” in the unaudited Condensed Consolidated Statements of Operations for both the three and nine months ended September 30, 2016 are miscellaneous severance, environmental and other costs related to certain in-process cost reduction programs.
4. Related Party Transactions
Administrative Service, Management and Consulting Arrangement
The Company is subject to a 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 2016.
During the three months ended September 30, 2016 and 2015 and during the nine months ended September 30, 2016 and 2015, the Company recognized expense under the Management Consulting Agreement of $1 and $2, respectively. This amount is included in “Other operating expense, net” in the unaudited Condensed Consolidated Statements of Operations.
Transactions with MPM
Shared Services Agreement
On October 1, 2010, the Company entered into a shared services agreement with Momentive Performance Materials Inc. (“MPM”) (which, from October 1, 2010 through October 24, 2014, was a subsidiary of Hexion Holdings) (the “Shared Services Agreement”). Under this agreement, the Company provides to MPM, and MPM provides to the Company, certain services. The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between the Company and MPM. The Shared Services Agreement was renewed for one year starting October 2016 and is subject to termination by either the Company or MPM, without cause, on not less than 30 days’ written notice, and expires in October 2017 (subject to one-year renewals every year thereafter; absent contrary notice from either party).
On October 24, 2014, the Shared Services Agreement was amended to, among other things, (i) exclude the services of certain executive officers, (ii) provide for a transition assistance period at the election of the recipient following termination of the Shared Services Agreement of up to 12 months, subject to one successive renewal period of an additional 60 days and (iii) provide for the use of an independent third-party firm to assist the Shared Services Steering Committee with its annual review of billings and allocations.
Pursuant to the Shared Services Agreement, during the nine months ended September 30, 2016 and 2015, the Company incurred approximately $50 and $58, respectively, of net costs for shared services and MPM incurred approximately $38 and $49, respectively, of net costs for shared services. Included in the net costs incurred during the nine months ended September 30, 2016 and 2015, were net billings from the Company to MPM of $23 and $30, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable agreed upon allocation percentage. The Company had accounts receivable from MPM of $5 and $7 as of September 30, 2016 and December 31, 2015, respectively, and no accounts payable to MPM.
Sales and Purchases of Products with MPM
The Company also sells products to, and purchases products from, MPM. During the three months ended September 30, 2016 and 2015, the Company sold less than $1 of products to MPM and purchased less than $1 of products from MPM. During the nine months ended September 30, 2016 and 2015, the Company sold less than $1 of products to MPM and purchased $1 and $3, respectively. As of both September 30, 2016 and December 31, 2015, the Company had less than $1 of accounts receivable from MPM and less than $1 of accounts payable to MPM.
Other Transactions with MPM
In April 2014, the Company purchased 100% of the interests in MPM’s Canadian subsidiary for a purchase price of approximately $12. As a part of the transaction the Company also entered into a non-exclusive distribution agreement with a subsidiary of MPM, whereby the Company acts as a distributor of certain MPM products in Canada. The agreement has a term of 10 years, and is cancelable by either party with 180 days’ notice. The Company is compensated for acting as distributor at a rate of 2% of the net selling price of the related products sold. During both the three months ended September 30, 2016 and 2015, the Company purchased approximately $7 of products from MPM under this distribution agreement, and earned less than $1 from MPM as compensation for acting as distributor of the products. During both the nine months ended September 30, 2016 and 2015, the Company purchased approximately $21 of products from MPM under this distribution agreement, and earned less than $1 from MPM as compensation for acting as distributor of the products. As of both September 30, 2016 and December 31, 2015, the Company had $2 of accounts payable to MPM related to the distribution agreement.

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Table of Contents

Purchases and Sales of Products and Services with Apollo Affiliates Other than MPM
The Company sells products to various Apollo affiliates other than MPM. These sales were less than $1 and $8 for the three months ended September 30, 2016 and 2015, respectively, and $6 and $55 for the nine months ended September 30, 2016 and 2015, respectively. Accounts receivable from these affiliates were less than $1 at both September 30, 2016 and December 31, 2015. The Company also purchases raw materials and services from various Apollo affiliates other than MPM. These purchases were less than $1 and $1 for the three months ended September 30, 2016 and 2015, respectively, and less than $1 and $2 for the nine months ended September 30, 2016 and 2015, respectively. The Company had accounts payable to these affiliates of less than $1 at December 31, 2015.
Other Transactions and Arrangements
The Company sells finished goods to, and purchases raw materials from, a former foundry joint venture between the Company and HA-USA Inc. (“HAI”). The Company also provides toll-manufacturing and other services to HAI. On May 31, 2016, the Company sold its 50% investment in HAI to HA-USA Inc. (see Note 12), and as of June 1, 2016, HAI is no longer a related party. Previous to this sale, the Company’s investment in HAI was recorded under the equity method of accounting, and the related sales and purchases were not eliminated from the unaudited Condensed Consolidated Financial Statements. However, any profit on these transactions was eliminated in the unaudited Condensed Consolidated Financial Statements to the extent of the Company’s 50% interest in HAI.
Through the date of the sale of the Company’s investment in HAI to HA-USA Inc., sales and services provided to HAI were $26 and $56 for the nine months ended September 30, 2016 and 2015, respectively, and $17 for the three months ended September 30, 2015. There was $1 of accounts receivable from HAI at December 31, 2015. Purchases from HAI were $4 and $12 for the nine months ended September 30, 2016 and 2015, respectively, and $3 for the three months ended September 30, 2015. The Company had accounts payable to HAI of $1 at December 31, 2015. Additionally, HAI declared dividends to the Company of $4 and $14 for the nine months ended September 30, 2016 and 2015, respectively, and $5 for the three months ended September 30, 2015. No amounts remained outstanding related to these previously declared dividends at September 30, 2016.
The Company sells products and provides services to, and purchases products from, its other joint ventures which are recorded under the equity method of accounting. These sales were $4 and $9 for the three months ended September 30, 2016 and 2015, respectively, and $12 and $31 for the nine months ended September 30, 2016 and 2015, respectively. Accounts receivable from these joint ventures were $5 and $10 at September 30, 2016 and December 31, 2015, respectively. These purchases were $4 and less than $1 for the three months ended September 30, 2016 and 2015, respectively, and $10 and $25 for the nine months ended September 30, 2016 and 2015, respectively. The Company had accounts payable to these joint ventures of $1and $2 at September 30, 2016 and December 31, 2015, respectively.
The Company had a loan receivable of $6 and royalties receivable of $2 as of both September 30, 2016 and December 31, 2015 from its unconsolidated forest products joint venture in Russia.
5. 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
As of September 30, 2016, the Company had derivative liabilities related to electricity, natural gas and foreign exchange contracts of $1, which were measured using Level 2 inputs, and 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 nine months ended September 30, 2016 or 2015.
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 September 30, 2016 and December 31, 2015, 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.

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Table of Contents

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
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,585

 
$

 
$
3,089

 
$
9

 
$
3,098

December 31, 2015
 
 
 
 
 
 
 
 
 
 
Debt
 
$
3,829

 
$

 
$
2,560

 
$
10

 
$
2,570

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 amount and fair value of the Company’s debt is exclusive of unamortized deferred financing fees. 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.
6. Debt Obligations
Debt outstanding at September 30, 2016 and December 31, 2015 is as follows:
 
 
September 30, 2016
 
December 31, 2015
 
 
Long-Term
 
Due Within
One Year
 
Long-Term
 
Due Within
One Year
ABL Facility
 
$

 
$

 
$

 
$

Senior Secured Notes:
 
 
 
 
 
 
 
 
6.625% First-Priority Senior Secured Notes due 2020 (includes $4 of unamortized debt premium)
 
1,554

 

 
1,554

 

10.00% First-Priority Senior Secured Notes due 2020
 
315

 

 
315

 

8.875% Senior Secured Notes due 2018 (includes $1 and $2 of unamortized debt discount at September 30, 2016 and December 31, 2015, respectively)
 
760

 

 
995

 

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

 

Other Borrowings:
 
 
 
 
 
 
 
 
Australia Facility due 2017
 
27

 
4

 
29

 
3

Brazilian bank loans
 
15

 
30

 
5

 
42

Capital leases
 
8

 
1

 
9

 
1

Other
 

 
34

 
5

 
34

Unamortized debt issuance costs
 
(41
)
 

 
(51
)
 

Total
 
$
3,475

 
$
69

 
$
3,698

 
$
80


2016 Debt Transactions

During the three and nine months ended September 30, 2016, the Company repurchased $36 and $235, respectively, in face value of its 8.875% Senior Secured Notes due 2018 on the open market for cash of $33 and $187, respectively. These transactions resulted in gains of $3 and $47 for the three and nine months ended September 30, 2016, respectively, which represents the difference between the carrying value of the repurchased debt and the cash paid for the repurchases, less the proportionate amount of unamortized deferred financing fees and debt discounts that were written off in conjunction with the repurchases. These amounts are recorded in “Gain on debt extinguishment” in the unaudited Condensed Consolidated Statements of Operations.


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Table of Contents

Debt Maturities

The Company’s 8.875% Senior Secured Notes come due in full in February 2018. If the outstanding balance of these notes is greater than $50 as of November 2, 2017, the Company’s ABL Facility, which matures in March 2018, will accelerate and become immediately due and payable. While there can be no certainty with respect to timing, the Company expects to address the term of the ABL Facility and the remaining outstanding balance of the 8.875% Senior Secured Notes in advance of the maturity date of these notes and any potential acceleration of the ABL Facility and the Company expects that certain of such actions will be taken prior to the filing of its 2016 Form 10-K. The timing and amount of these transactions is dependent upon the Company’s ability to access the credit markets, conditions in the credit markets, cash generated from operations and the potential execution of additional alternatives the Company has available including the possible sales of certain non-core assets to raise additional funds. While the Company has been successful in accessing the credit markets on terms and in amounts adequate to meet its objectives in the past, and management is confident in its ability to execute these alternatives successfully, there can be no assurance that any of these outcomes will materialize on acceptable terms or at all. If the Company is unable to successfully address the remaining balance of its 8.875% Senior Secured Notes or extend the ABL, the maturing of these obligations could have a material adverse impact.
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, and on June 4, 2012 the Company filed appeals to the Superior Court of Justice and the Supreme Court of Brazil. In September 2016, the Superior Court of Justice decided that strict liability does not apply to administrative fines issued by environmental agencies and reversed the decision of the State of Paraná Court of Appeals. The Superior Court of Justice remanded the case back to the Court of Appeals to determine if the IAP met its burden of proving negligence by the Company. 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 September 30, 2016, the amount of the assessment, including tax, penalties, monetary correction and interest, is 50 Brazilian reais, or approximately $15.
The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at September 30, 2016 and December 31, 2015:
 
Liability
 
Range of Reasonably Possible Costs at September 30, 2016
Site Description
September 30, 2016
 
December 31, 2015
 
Low
 
High
Geismar, LA
$
14

 
$
15

 
$
9

 
$
22

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

 
1

 

 
2

Equal to or greater than 1%
7

 
7

 
5

 
13

Currently-owned
4

 
5

 
4

 
9

Formerly-owned:
 
 
 
 
 
 
 
Remediation
28

 
33

 
25

 
42

Monitoring only
1

 

 

 
1

Total
$
54

 
$
61

 
$
43

 
$
89

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 September 30, 2016 and December 31, 2015, $11 and $13, respectively, have 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 the Company’s environmental liabilities and the related assumptions at September 30, 2016:
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 22 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 22 years, is approximately $20. 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 Company has accrued those costs for formerly-owned sites which are currently probable and reasonably estimable. One such site is the Coronet Industries, Inc. Superfund Alternative Site in Plant City, Florida. The Company entered into a settlement agreement effective February 1, 2016 with Coronet Industries and another former site owner. Pursuant to the agreement, the Company agreed to pay $10 in fulfillment of the contribution claim against the Company for past remediation costs, payable in three annual installments, of which the first was paid during the nine months ended September 30, 2016. Additionally, the Company accepted a 40% allocable share of specified future remediation costs at this site. The Company estimates its allocable share of future remediation costs to be approximately $11. The final costs to the Company will depend on the method of remediation chosen, the amount of time necessary to accomplish remediation and the ongoing financial viability of the other PRPs. Currently, the Company has insufficient information to estimate the range of reasonably possible costs related to this site.
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.

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Table of Contents

Non-Environmental Legal Matters
The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $2 and $4 at September 30, 2016 and December 31, 2015, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At September 30, 2016 and December 31, 2015, $1 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.”
The Company is also involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings, 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 Benefit Plans
Following are the components of net pension and postretirement (benefit) expense recognized by the Company for the three and nine months ended September 30, 2016 and 2015:
 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Three Months Ended September 30,
 
Three Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
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

 
$
4

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
2

 
3

 
2

 
3

 

 

 

 

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

 

 

 

Net (benefit) expense
$
(1
)
 
$
4

 
$
(1
)
 
$
4

 
$

 
$

 
$

 
$


 
Pension Benefits
 
Non-Pension Postretirement Benefits
 
Nine Months Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
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
$
3

 
$
11

 
$
3

 
$
12

 
$

 
$

 
$

 
$

Interest cost on projected benefit obligation
6

 
8

 
7

 
8

 

 
1

 

 
1

Expected return on assets
(11
)
 
(8
)
 
(12
)
 
(9
)
 

 

 

 

Amortization of prior service benefit

 

 

 

 
(1
)
 

 

 

Net (benefit) expense
$
(2
)
 
$
11

 
$
(2
)
 
$
11

 
$
(1
)
 
$
1

 
$

 
$
1

9. Segment Information
The Company’s business segments are based on the products that the Company offers and the markets that it serves. At September 30, 2016, 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 and phenolic specialty resins and molding compounds
 
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 September 30,

Nine Months Ended September 30,
 
2016

2015

2016
 
2015
Epoxy, Phenolic and Coating Resins
$
476


$
669


$
1,664

 
$
2,026

Forest Products Resins
343


396


1,016

 
1,205

Total
$
819


$
1,065


$
2,680

 
$
3,231

(1)     Intersegment sales are not significant and, as such, are eliminated within the selling segment.
Segment EBITDA:
 
Three Months Ended September 30,

Nine Months Ended September 30,
 
2016

2015

2016
 
2015
Epoxy, Phenolic and Coating Resins
$
64


$
92


$
230

 
$
265

Forest Products Resins
65


59


184

 
182

Corporate and Other
(17
)

(18
)

(50
)
 
(54
)
Total
$
112


$
133


$
364

 
$
393

Reconciliation of Segment EBITDA to Net (Loss) Income:
 
Three Months Ended September 30,

Nine Months Ended September 30,
 
2016

2015

2016

2015
Segment EBITDA:







Epoxy, Phenolic and Coating Resins
$
64


$
92


$
230


$
265

Forest Products Resins
65


59


184


182

Corporate and Other
(17
)

(18
)

(50
)

(54
)
Total
$
112


$
133


$
364


$
393









Reconciliation:







Items not included in Segment EBITDA:







Business realignment income (costs)
$
3


$
(3
)

$
(42
)

$
(11
)
Gain on dispositions




240



Gain on extinguishment of debt
3


14


47


14

Realized and unrealized foreign currency (losses) gains
(6
)

(14
)

3


(17
)
Other
(16
)

(4
)

(50
)

(33
)
Total adjustments
(16
)

(7
)

198


(47
)
Interest expense, net
(76
)

(84
)

(235
)

(245
)
Income tax expense
(16
)

(1
)

(40
)

(28
)
Depreciation and amortization
(30
)

(34
)

(101
)

(102
)
Accelerated depreciation
(21
)



(127
)


Net (loss) income
$
(47
)

$
7


$
59


$
(29
)

Items Not Included in Segment EBITDA
Not included in Segment EBITDA are certain non-cash items and other income and expenses. For the three and nine months ended September 30, 2016, these items primarily include certain professional fees related to strategic projects and expenses from retention programs. For the three and nine months ended September 30, 2015, these items primarily include expenses from retention programs, losses on the disposal of assets, certain professional fees related to strategic projects and a gain on a step acquisition. Business realignment costs for the three and nine months ended September 30, 2016 primarily include costs related to the planned facility rationalizations within the Epoxy, Phenolic and Coating Resins segment and costs related to certain in-process cost reduction programs. Business realignment costs for the three and nine months ended September 30, 2015 include costs related to certain in-process cost reduction programs.


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Table of Contents

10. Summarized Financial Information of Unconsolidated Affiliate
Summarized financial information of the unconsolidated affiliate HAI for the nine months ended September 30, 2016 and 2015 is as follows:
 
 
Nine Months Ended September 30,
 
 
2016 (1)
 
2015
Net sales
 
$
59

 
$
120

Gross profit
 
25

 
47

Pre-tax income
 
14

 
26

Net income
 
14

 
25

(1)
Amounts for the nine months ended September 30, 2016 represent activity through May 31, 2016, the date on which the Company sold its 50% interest in HAI (see Note 12).
11. Changes in Accumulated Other Comprehensive Loss
Following is a summary of changes in “Accumulated other comprehensive loss” for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended September 30, 2016
 
Three Months Ended September 30, 2015
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
3

 
$
(18
)
 
$
(15
)
 
$
4

 
$
20

 
$
24

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

 
7

 
7

 

 
(24
)
 
(24
)
Ending balance
$
3

 
$
(11
)
 
$
(8
)
 
$
4

 
$
(4
)
 
$

 
Nine Months Ended September 30, 2016
 
Nine Months Ended September 30, 2015
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
 
Defined Benefit Pension and Postretirement Plans
 
Foreign Currency Translation Adjustments
 
Total
Beginning balance
$
4

 
$
(19
)
 
$
(15
)
 
$
4

 
$
69

 
$
73

Other comprehensive (loss) income before reclassifications, net of tax
(1
)
 
8

 
7

 

 
(73
)
 
(73
)
Ending balance
$
3

 
$
(11
)
 
$
(8
)
 
$
4

 
$
(4
)
 
$

12. HAI Disposition
On May 31, 2016, the Company sold its 50% interest in HA-International, LLC (“HAI”), a joint venture within the Epoxy, Phenolic and Coating Resins segment serving the North American foundry industry, to its joint venture partner HA-USA, Inc., for a purchase price of $136, which includes $2 representing the Company’s 50% share of HAI’s cash balance at closing. Sale proceeds consisted of $61 in cash and a $75 buyer’s note issued by HA-USA, Inc. to the Company. As of September 30, 2016, $45 of cash has been received on the buyer’s note and $30 remains outstanding, which is recorded in “Other current assets” in the unaudited Condensed Consolidated Balance Sheets. The Company recognized a gain on this disposition of $120, which is recorded as a component of “Gain on dispositions” in the unaudited Condensed Consolidated Statements of Operations.
13. PAC Disposition
    
On June 30, 2016, the Company completed the sale of its Performance Adhesives, Powder Coatings, Additives & Acrylic Coatings and Monomers (“PAC”) businesses pursuant to the terms of a Purchase Agreement with Synthomer plc (the “Buyer”) dated March 18, 2016. The PAC business includes manufacturing sites in Sokolov, Czech Republic; Sant’Albano, Italy; Leuna, Germany; Ribecourt, France; Asua, Spain; Roebuck, South Carolina; and Chonburi, Thailand. PAC produces resins, polymers, monomers and additives that provide enhanced performance for adhesives, sealants, paints, coatings, mortars and cements used primarily in consumer, industrial and building and construction applications. The employment relationships with the employees at these facilities, the PAC management team and other employees affiliated with PAC have been transferred to the Buyer in connection with the sale. Neither the Company nor any of its officers and directors, or associates of such persons, have any material relationship with the Buyer.


17


The Company received gross cash consideration for the PAC business in the amount of $226, less approximately $6 relating to liabilities, net of cash and estimated working capital, that transferred to the Buyer as part of the Purchase Agreement. A subsequent post-closing adjustment to the purchase price of less than $1 was made in accordance with the Purchase Agreement. The Company recorded a gain on this disposition of $120, which is recorded in “Gain on dispositions” in the unaudited Condensed Consolidated Statements of Operations.

The PAC Business generated annual sales of approximately $370 in 2015, and was reported within the Epoxy, Phenolic and Coating Resins segment. The PAC Business had pre-tax income of $14 for the nine months ended September 30, 2016, which is reported as a component of “(Loss) income before income tax and earnings from unconsolidated entities” in the unaudited Condensed Consolidated Statements of Operations.

As part of this transaction, the Company is currently providing certain transitional services to the Buyer for an initial period of up to six months pursuant to a Transitional Services Agreement, which may be extended an additional three months by the Buyer, and potentially longer by mutual agreement of the parties. The purpose of these services is to provide short-term assistance to the Buyer in assuming the operations of the PAC business. These services do not confer to the Company the ability to influence the operating or financial policies of the PAC business under its new ownership.

14. Income Taxes

The effective tax rate was (53)% and 25% for the three months ended September 30, 2016 and 2015, respectively. The effective tax rate was 44% and (200)% for the nine months ended September 30, 2016 and 2015, respectively. The change in the effective tax rate was primarily attributable to the amount and distribution of income and losses among the various jurisdictions in which we operate, as well as the recording of an income tax contingency liability related to ongoing foreign jurisdictional matters. The effective tax rates were also impacted by operating gains and losses generated in jurisdictions where no tax expense or benefit was recognized due to the maintenance of a full valuation allowance.

For the three and nine months ended September 30, 2016 and 2015, income tax expense relates primarily to income from certain foreign operations. In the third quarter of 2016, the Company recorded an income tax contingency liability related to ongoing foreign jurisdictional matters. In 2016, the income tax expense related to the gain on dispositions was substantially reduced by net operating loss utilization which was offset by a decrease to the respective valuation allowances. In 2015, losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to the maintenance of a full valuation allowance.
15. Guarantor/Non-Guarantor Subsidiary Financial Information
The Company’s 6.625% First-Priority Senior Secured Notes due 2020, 10.00% First-Priority Senior Secured Notes due 2020, 8.875% Senior Secured Notes due 2018 and 9.00% Second-Priority Senior Secured Notes due 2020 are guaranteed by certain of its U.S. subsidiaries.
The following information contains the condensed consolidating financial information for Hexion Inc. (the parent), the combined subsidiary guarantors (Hexion Investments Inc.; Borden Chemical Foundry, LLC; Lawter International, Inc.; HSC Capital Corporation; Hexion International Inc.; Hexion CI Holding Company (China) LLC; 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 guarantors are 100% owned by Hexion Inc. 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.
These financial statements are prepared on the same basis as the consolidated financial statements of the Company except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.
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.


18

Table of Contents

HEXION INC.
SEPTEMBER 30, 2016
CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)
 
 
Hexion
Inc.
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0 and $19, respectively)
$
49

 
$

 
$
96

 
$

 
$
145

Accounts receivable, net
140

 
1

 
357

 

 
498

Intercompany accounts receivable
115

 

 
38

 
(153
)
 

Intercompany loans receivable - current portion
27

 

 
144

 
(171
)
 

Inventories:
 
 
 
 
 
 
 
 


Finished and in-process goods
90

 

 
131

 

 
221

Raw materials and supplies
35

 

 
63

 

 
98

Other current assets
42

 

 
38

 

 
80

Total current assets
498

 
1

 
867

 
(324
)
 
1,042

Investment in unconsolidated entities
79

 
6

 
18

 
(86
)
 
17

Deferred income taxes

 

 
10

 

 
10

Other assets, net
15

 
6

 
22

 

 
43

Intercompany loans receivable
1,080

 

 
214

 
(1,294
)
 

Property and equipment, net
444

 

 
448

 

 
892

Goodwill
66

 

 
58

 

 
124

Other intangible assets, net
43

 

 
13

 

 
56

Total assets
$
2,225

 
$
13

 
$
1,650

 
$
(1,704
)
 
$
2,184

Liabilities and Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
106

 
$

 
$
205

 
$

 
$
311

Intercompany accounts payable
38

 

 
115

 
(153
)
 

Debt payable within one year
8

 

 
61

 

 
69

Intercompany loans payable within one year
144

 

 
27

 
(171
)
 

Interest payable
95

 

 
1

 

 
96

Income taxes payable
22

 

 
2

 

 
24

Accrued payroll and incentive compensation
23

 

 
35

 

 
58

Other current liabilities
104

 

 
56

 

 
160

Total current liabilities
540

 

 
502

 
(324
)
 
718

Long-term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
3,430

 

 
45

 

 
3,475

Intercompany loans payable
210

 
6

 
1,078

 
(1,294
)
 

Accumulated losses of unconsolidated subsidiaries in excess of investment
313

 
86

 

 
(399
)
 

Long-term pension and post employment benefit obligations
41

 

 
183

 

 
224

Deferred income taxes
(3
)
 

 
17

 

 
14

Other long-term liabilities
104

 

 
60

 

 
164

Advance from affiliates

 

 

 

 

Total liabilities
4,635

 
92

 
1,885

 
(2,017
)
 
4,595

Total Hexion Inc. shareholder’s deficit
(2,410
)
 
(79
)
 
(234
)
 
313

 
(2,410
)
Noncontrolling interest

 

 
(1
)
 

 
(1
)
Total deficit
(2,410
)
 
(79
)
 
(235
)
 
313

 
(2,411
)
Total liabilities and deficit
$
2,225

 
$
13

 
$
1,650

 
$
(1,704
)
 
$
2,184






19

Table of Contents

HEXION INC.
DECEMBER 31, 2015
CONDENSED CONSOLIDATING BALANCE SHEET
 
 
Hexion
Inc.
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents (including restricted cash of $0 and $8, respectively)
$
62

 
$

 
$
174

 
$

 
$
236

Accounts receivable, net
115

 
1

 
334

 

 
450

Intercompany accounts receivable
132

 

 
154

 
(286
)
 

Intercompany loans receivable

 

 
174

 
(174
)
 

Inventories:
 
 
 
 
 
 
 
 


Finished and in-process goods
97

 

 
121

 

 
218

Raw materials and supplies
34

 

 
56

 

 
90

Other current assets
29

 

 
24

 

 
53

Total current assets
469

 
1

 
1,037

 
(460
)
 
1,047

Investment in unconsolidated entities
117

 
28

 
21

 
(130
)
 
36

Deferred income taxes

 

 
13

 

 
13

Other long-term assets
21

 
6

 
21

 

 
48

Intercompany loans receivable
1,269

 
6

 
108

 
(1,383
)
 

Property and equipment, net
559

 

 
492

 

 
1,051

Goodwill
65

 

 
57

 

 
122

Other intangible assets, net
49

 

 
16

 

 
65

Total assets
$
2,549

 
$
41

 
$
1,765

 
$
(1,973
)
 
$
2,382

Liabilities and Deficit
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Accounts payable
$
148

 
$

 
$
238

 
$

 
$
386

Intercompany accounts payable
154

 

 
132

 
(286
)
 

Debt payable within one year
6

 

 
74

 

 
80

Intercompany loans payable within one year
174

 

 

 
(174
)
 

Interest payable
80

 

 
2

 

 
82

Income taxes payable
7

 

 
8

 

 
15

Accrued payroll and incentive compensation
43

 

 
35

 

 
78

Other current liabilities
73

 

 
50

 

 
123

Total current liabilities
685

 

 
539

 
(460
)
 
764

Long term liabilities:
 
 
 
 
 
 
 
 
 
Long-term debt
3,656

 

 
42

 

 
3,698

Intercompany loans payable
93

 
6

 
1,284

 
(1,383
)
 

Accumulated losses of unconsolidated subsidiaries in excess of investment
429

 
130

 

 
(559
)
 

Long-term pension and post employment benefit obligations
45

 

 
179

 

 
224

Deferred income taxes
6

 

 
6

 

 
12

Other long-term liabilities
111

 

 
50

 

 
161

Total liabilities
5,025

 
136

 
2,100

 
(2,402
)
 
4,859

Total Hexion Inc. shareholder’s deficit
(2,476
)
 
(95
)
 
(334
)
 
429

 
(2,476
)
Noncontrolling interest

 

 
(1
)
 

 
(1
)
Total deficit
(2,476
)
 
(95
)
 
(335
)
 
429

 
(2,477
)
Total liabilities and deficit
$
2,549

 
$
41

 
$
1,765

 
$
(1,973
)
 
$
2,382


20

Table of Contents

HEXION INC.
THREE MONTHS ENDED SEPTEMBER 30, 2016
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)
 
 
Hexion
Inc.
 
Combined
Subsidiary
Guarantors
 
Combined
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
$
356

 
$

 
$
507

 
$
(44
)
 
$
819

Cost of sales
325

 

 
420

 
(44
)
 
701

Gross profit
31

 

 
87

 

 
118

Selling, general and administrative expense
30

 

 
39

 

 
69

Business realignment (income) costs
(7
)
 

 
4

 

 
(3
)
Other operating expense (income), net
10

 
6

 
(9
)
 

 
7

Operating (loss) income
(2
)
 
(6
)
 
53

 

 
45

Interest expense, net
74

 

 
2

 

 
76

Intercompany interest (income) expense, net
(18
)
 

 
18