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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2020
OR
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☐ | 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)
________________________________________
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New Jersey | | 13-0511250 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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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) |
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(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
None | | None |
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 ☐ No ☒
Explanatory Note: While the registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, it has filed all reports required to be filed by such filing requirements during the preceding 12 months.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | ☐ | | Accelerated filer | | ☐ |
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Non-accelerated filer | | ☒ | | Smaller reporting company | | ☐ |
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| | | | Emerging growth company | | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒.
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐
Number of shares of common stock, par value $0.01 per share, outstanding as of the close of business on August 1, 2020: 100
HEXION INC.
INDEX
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PART I – FINANCIAL INFORMATION | | |
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Item 1. | Hexion Inc. Condensed Consolidated Financial Statements (Unaudited) | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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PART II – OTHER INFORMATION | | |
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Item 1. | | |
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Item 1A. | | |
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Item 2. | | |
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Item 3. | | |
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Item 4. | | |
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Item 5. | | |
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Item 6. | | |
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
HEXION INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
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(In millions, except share data) | June 30, 2020 | | December 31, 2019 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents (including restricted cash of $3 and $4, respectively) | $ | 295 | | | $ | 254 | |
| | | |
Accounts receivable (net of allowance for doubtful accounts of $3) | 365 | | | 365 | |
Inventories: | | | |
Finished and in-process goods | 230 | | | 232 | |
Raw materials and supplies | 89 | | | 100 | |
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Other current assets | 45 | | | 51 | |
Total current assets | 1,024 | | | 1,002 | |
Investment in unconsolidated entities | 18 | | | 17 | |
Deferred tax assets | 6 | | | 6 | |
Other long-term assets | 54 | | | 55 | |
Property and equipment: | | | |
Land | 110 | | | 116 | |
Buildings | 177 | | | 172 | |
Machinery and equipment | 1,392 | | | 1,368 | |
| 1,679 | | | 1,656 | |
Less accumulated depreciation | (182) | | | (78) | |
| 1,497 | | | 1,578 | |
Operating lease assets | 117 | | | 122 | |
Goodwill | 178 | | | 178 | |
Other intangible assets, net | 1,150 | | | 1,188 | |
Total assets | $ | 4,044 | | | $ | 4,146 | |
Liabilities and Equity | | | |
Current liabilities: | | | |
Accounts payable | $ | 290 | | | $ | 341 | |
Debt payable within one year | 76 | | | 70 | |
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Interest payable | 31 | | | 35 | |
Income taxes payable | 14 | | | 17 | |
Accrued payroll and incentive compensation | 39 | | | 48 | |
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Current portion of operating lease liabilities | 22 | | | 22 | |
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Other current liabilities | 124 | | | 105 | |
Total current liabilities | 596 | | | 638 | |
Long-term liabilities: | | | |
Long-term debt | 1,839 | | | 1,715 | |
Long-term pension and post employment benefit obligations | 246 | | | 252 | |
Deferred income taxes | 153 | | | 164 | |
Operating lease liabilities | 82 | | | 86 | |
Other long-term liabilities | 209 | | | 216 | |
Total liabilities | 3,125 | | | 3,071 | |
Commitments and contingencies (see Note 8) | | | |
Equity | | | |
Common stock —$0.01 par value; 100 shares authorized, issued and outstanding | — | | | — | |
Paid-in capital | 1,164 | | | 1,165 | |
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Accumulated other comprehensive loss | (55) | | | (1) | |
Accumulated deficit | (190) | | | (89) | |
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Total equity | 919 | | | 1,075 | |
Total liabilities and equity | $ | 4,044 | | | $ | 4,146 | |
See Notes to Condensed Consolidated Financial Statements
HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
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| Successor | | | Predecessor | | Successor | | | Predecessor |
(In millions) | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2020 | | | Six Months Ended June 30, 2019 |
| | | | | | | | | |
Net sales | $ | 628 | | | | $ | 892 | | | $ | 1,454 | | | | $ | 1,778 | |
Cost of sales (exclusive of depreciation and amortization shown below, see Note 2) | 528 | | | | 735 | | | 1,208 | | | | 1,462 | |
Selling, general and administrative expense (see Note 2) | 55 | | | | 57 | | | 130 | | | | 145 | |
Depreciation and amortization (see Note 2) | 56 | | | | 26 | | | 114 | | | | 52 | |
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Asset impairments | — | | | | — | | | 16 | | | | — | |
Business realignment costs | 18 | | | | 11 | | | 39 | | | | 15 | |
Other operating expense, net | 4 | | | | 8 | | | 11 | | | | 16 | |
Operating (loss) income | (33) | | | | 55 | | | (64) | | | | 88 | |
Interest expense, net | 25 | | | | 9 | | | 51 | | | | 89 | |
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Other non-operating income, net | (4) | | | | (10) | | | (4) | | | | (11) | |
Reorganization items, net | — | | | | 156 | | | — | | | | 156 | |
Loss before income tax and earnings from unconsolidated entities | (54) | | | | (100) | | | (111) | | | | (146) | |
Income tax (benefit) expense | (11) | | | | 8 | | | (8) | | | | 15 | |
Loss before earnings from unconsolidated entities | (43) | | | | (108) | | | (103) | | | | (161) | |
Earnings from unconsolidated entities, net of taxes | 1 | | | | 1 | | | 2 | | | | 2 | |
Net loss | $ | (42) | | | | $ | (107) | | | $ | (101) | | | | $ | (159) | |
Net income attributable to noncontrolling interest | — | | | | (1) | | | — | | | | (1) | |
Net loss attributable to Hexion Inc. | $ | (42) | | | | $ | (108) | | | $ | (101) | | | | $ | (160) | |
See Notes to Condensed Consolidated Financial Statements
HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Successor | | | Predecessor | | Successor | | | | | Predecessor |
(In millions) | Three Months Ended June 30, 2020 | | | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2020 | | | | | Six Months Ended June 30, 2019 |
| | | | | | | | | | | |
Net loss | $ | (42) | | | | $ | (107) | | | $ | (101) | | | | | | $ | (159) | |
Other comprehensive income (loss), net of tax: | | | | | | | | | | | |
Foreign currency translation adjustments | 6 | | | | (8) | | | (36) | | | | | | (8) | |
Unrealized loss on cash flow hedge | (3) | | | | — | | | (18) | | | | | | — | |
Other comprehensive income (loss) | 3 | | | | (8) | | | (54) | | | | | | (8) | |
Comprehensive loss | $ | (39) | | | | $ | (115) | | | $ | (155) | | | | | | $ | (167) | |
Comprehensive income attributable to noncontrolling interest | — | | | | (1) | | | — | | | | | | (1) | |
Comprehensive loss attributable to Hexion Inc. | $ | (39) | | | | $ | (116) | | | $ | (155) | | | | | | $ | (168) | |
See Notes to Condensed Consolidated Financial Statements
HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
| | | | | | | | | | | | | | | | |
| Successor | | | | | Predecessor |
(In millions) | Six Months Ended June 30, 2020 | | | | | Six Months Ended June 30, 2019 |
Cash flows used in operating activities | | | | | | |
Net loss | $ | (101) | | | | | | $ | (159) | |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | |
Depreciation and amortization | 114 | | | | | | 52 | |
Non-cash asset impairments | 16 | | | | | | — | |
Non-cash reorganization items, net | — | | | | | | 139 | |
Deferred tax benefit | (7) | | | | | | — | |
Loss on sale of assets | 9 | | | | | | 3 | |
| | | | | | |
| | | | | | |
Unrealized foreign currency losses (gains) | 4 | | | | | | (7) | |
Non-cash stock based compensation expense | 9 | | | | | | — | |
Financing fees included in net loss | — | | | | | | 13 | |
Other non-cash adjustments | (1) | | | | | | (2) | |
Net change in assets and liabilities: | | | | | | |
Accounts receivable | (16) | | | | | | (88) | |
Inventories | 5 | | | | | | (19) | |
Accounts payable | (34) | | | | | | (28) | |
Income taxes payable | (3) | | | | | | 8 | |
Other assets, current and non-current | (6) | | | | | | (8) | |
Other liabilities, current and long-term | (8) | | | | | | (17) | |
Net cash used in operating activities | (19) | | | | | | (113) | |
Cash flows used in investing activities | | | | | | |
Capital expenditures | (61) | | | | | | (43) | |
| | | | | | |
| | | | | | |
Proceeds from sale of assets, net | — | | | | | | 1 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Net cash used in investing activities | (61) | | | | | | (42) | |
Cash flows provided by financing activities | | | | | | |
Net short-term debt repayments | (14) | | | | | | (4) | |
Borrowings of long-term debt | 181 | | | | | | 667 | |
Repayments of long-term debt | (32) | | | | | | (527) | |
| | | | | | |
Return of capital to parent (see Note 5) | (10) | | | | | | — | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Financing fees paid | — | | | | | | (13) | |
Net cash provided by financing activities | 125 | | | | | | 123 | |
Effect of exchange rates on cash and cash equivalents, including restricted cash | (4) | | | | | | — | |
Change in cash and cash equivalents, including restricted cash | 41 | | | | | | (32) | |
Cash, cash equivalents and restricted cash at beginning of period | 254 | | | | | | 128 | |
Cash, cash equivalents and restricted cash at end of period | $ | 295 | | | | | | $ | 96 | |
Supplemental disclosures of cash flow information | | | | | | |
Cash paid for: | | | | | | |
Interest, net | $ | 53 | | | | | | $ | 66 | |
Income taxes, net | 4 | | | | | | 10 | |
Reorganization items, net | — | | | | | | 17 | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
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| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
See Notes to Condensed Consolidated Financial Statements
HEXION INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT) (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In millions) | Common Stock | | Paid-in Capital | | Treasury Stock | | Loan Receivable from Parent | | Accumulated Other Comprehensive Loss | | Accumulated Deficit | | Total Hexion Inc. (Deficit) Equity | | Noncontrolling Interest | | Total Shareholder’s (Deficit) Equity |
Predecessor | | | | | | | | | | | | | | | | | |
Balance at March 31, 2019 | $ | 1 | | | $ | 526 | | | $ | (296) | | | $ | — | | | $ | (18) | | | $ | (3,177) | | | $ | (2,964) | | | $ | (2) | | | $ | (2,966) | |
Net loss | — | | | — | | | — | | | — | | | — | | | (108) | | | (108) | | | 1 | | | (107) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (8) | | | — | | | (8) | | | — | | | (8) | |
Balance at June 30, 2019 | $ | 1 | | | $ | 526 | | | $ | (296) | | | $ | — | | | $ | (26) | | | $ | (3,285) | | | $ | (3,080) | | | $ | (1) | | | $ | (3,081) | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2018 | $ | 1 | | | $ | 526 | | | $ | (296) | | | $ | — | | | $ | (18) | | | $ | (3,125) | | | $ | (2,912) | | | $ | (2) | | | $ | (2,914) | |
Net loss | — | | | — | | | — | | | — | | | — | | | (160) | | | (160) | | | 1 | | | (159) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (8) | | | — | | | (8) | | | — | | | (8) | |
Balance at June 30, 2019 | $ | 1 | | | $ | 526 | | | $ | (296) | | | $ | — | | | $ | (26) | | | $ | (3,285) | | | $ | (3,080) | | | $ | (1) | | | $ | (3,081) | |
| | | | | | | | | | | | | | | | | |
Successor | | | | | | | | | | | | | | | | | |
Balance at March 31, 2020 | $ | — | | | $ | 1,170 | | | $ | — | | | $ | (10) | | | $ | (58) | | | $ | (148) | | | $ | 954 | | | $ | — | | | $ | 954 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (42) | | | (42) | | | — | | | (42) | |
Stock-based compensation expense | — | | | 4 | | | — | | | — | | | — | | | — | | | 4 | | | — | | | 4 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 3 | | | — | | | 3 | | | — | | | 3 | |
Return of capital to parent (see Note 5) | — | | | (10) | | | — | | | — | | | — | | | — | | | (10) | | | — | | | (10) | |
Settlement of affiliate loan (see Note 5) | — | | | — | | | — | | | 10 | | | — | | | — | | | 10 | | | — | | | 10 | |
Balance at June 30, 2020 | $ | — | | | $ | 1,164 | | | $ | — | | | $ | — | | | $ | (55) | | | $ | (190) | | | $ | 919 | | | $ | — | | | $ | 919 | |
| | | | | | | | | | | | | | | | | |
Balance at December 31, 2019 | $ | — | | | $ | 1,165 | | | $ | — | | | $ | — | | | $ | (1) | | | $ | (89) | | | $ | 1,075 | | | $ | — | | | $ | 1,075 | |
Net loss | — | | | — | | | — | | | — | | | — | | | (101) | | | (101) | | | — | | | (101) | |
Stock-based compensation expense | — | | | 9 | | | — | | | — | | | — | | | — | | | 9 | | | — | | | 9 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (54) | | | — | | | (54) | | | — | | | (54) | |
Return of capital to parent (see Note 5) | — | | | (10) | | | — | | | — | | | — | | | — | | | (10) | | | — | | | (10) | |
Distribution of affiliate loan (see Note 5) | — | | | — | | | — | | | (10) | | | — | | | — | | | (10) | | | — | | | (10) | |
Settlement of affiliate loan (see Note 5) | — | | | — | | | — | | | 10 | | | — | | | — | | | 10 | | | — | | | 10 | |
Balance at June 30, 2020 | $ | — | | | $ | 1,164 | | | $ | — | | | $ | — | | | $ | (55) | | | $ | (190) | | | $ | 919 | | | $ | — | | | $ | 919 | |
See Notes to Condensed Consolidated Financial Statements
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 adhesive, coatings, composites and industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. The Company’s business is organized based on the products offered and the markets served. In January 2020, the Company changed its reporting segments to align around its growth platforms. At June 30, 2020, the Company had three reportable segments: Adhesives; Coatings and Composites; and Corporate and Other.
The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights. 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 (“SEC”), 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.
Emergence from Chapter 11 and Fresh Start Accounting
On April 1, 2019, the Company, Hexion Holdings LLC, Hexion LLC and certain of the Company’s subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware, (the “Bankruptcy Court”). The Chapter 11 proceedings were jointly administered under the caption In re Hexion TopCo, LLC, No. 19-10684 (the “Chapter 11 Cases”). The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
On June 25, 2019, the Court entered an order (the “Confirmation Order”) confirming the Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the “Plan”). On the morning of July 1, 2019 (the "Effective Date"), in accordance with the terms of the Plan and the Confirmation Order, the Plan became effective and the Debtors emerged from bankruptcy (the “Emergence”).
As a result of the Company’s reorganization and emergence from Chapter 11 bankruptcy on the Effective Date, the Company’s direct parent is Hexion Intermediate Holding 2, Inc. (“Hexion Intermediate”), a holding company and wholly owned subsidiary of Hexion Intermediate Holding 1, Inc., a holding company and wholly owned subsidiary of Hexion Holdings Corporation, the ultimate parent of Hexion (“Hexion Holdings” or “Parent”). Prior to its reorganization, the Company’s parent was Hexion LLC, a holding company and wholly owned subsidiary of Hexion Holdings LLC (now known as Hexion TopCo, LLC or “TopCo”), the previous ultimate parent entity of Hexion, which was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, Inc. and its subsidiaries, “Apollo”). On the Effective Date, the Company’s existing common stock were cancelled and 100 new shares of common stock were issued at a par value of $0.01 to the Company’s new direct parent Hexion Intermediate in accordance with the Plan.
On the Effective Date, the Company applied fresh start accounting to its financial statements, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Condensed Consolidated Financial Statements after the Effective Date are not comparable with the Condensed Consolidated Financial Statements prior to that date. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the Company after the Effective Date. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on or before the Effective Date.
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.
Revenue Recognition—The Company follows the 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. Revenue, net of estimated allowances and returns, is recognized when the Company has completed its performance obligations under a contract and control of the product is transferred to the customer. Substantially all revenue is recognized at the time shipment is made or upon delivery as risk and title to the product transfer to the customer. Sales, value add, and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue. Contract terms for certain transactions, including sales made on a consignment basis, result in the transfer of control of the finished product to the customer prior to the point at which the Company has the right to invoice for the product. In these cases, timing of revenue recognition will differ from the timing of invoicing to customers and will result in the Company recording a contract asset. A contract asset balance of $8 and $9 is recorded within “Other current assets” at June 30, 2020 and December 31, 2019, respectively, in the unaudited Condensed Consolidated Balance Sheet. Refer to Note 11 for additional discussion of the Company’s net sales by reportable segment disaggregated by geographic region.
Cash and Cash Equivalents— The Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. The Company’s restricted cash balance of $3 and $4 at June 30, 2020 and December 31, 2019, respectively, represents deposits to secure certain bank guarantees issued to third parties to guarantee potential obligations of the Company primarily related to the completion of tax audits and environmental liabilities. These balances will remain restricted as long as the underlying exposures exist and are included in the unaudited Condensed Consolidated Balance Sheets as a component of “Cash and cash equivalents.”
Allowance for Doubtful Accounts— Under adoption of ASU 2016-13, the Company has updated its credit loss methodology to consider a broader range of reasonable and supportable information to inform its credit loss estimates. The Company utilizes a historical aging method disaggregated by portfolio segment of geographic region, and then the Company makes any necessary adjustments for current conditions and forecasts about future economic conditions for calculating its allowance for doubtful accounts. The Company evaluates each pooled receivables’ geographic region by differing regional industrial and economic conditions, overall end market conditions and groups of customers with similar risk profiles related to timing and uncertainty of future collections. If particular accounts receivable balances no longer display risk characteristics that are similar to other pooled receivables, the Company performs individual assessments of expected credit losses for those specific receivables. Receivables are charged against the allowance for doubtful accounts when it is probable that the receivable will not be collected.
During the three and six months ended June 30, 2020, the Company increased its allowance for doubtful accounts provision for expected credit losses by less than $1, to reflect current business conditions, forecasts of future economic conditions and the impacts related to the global business and market disruptions of the coronavirus disease 2019 (“COVID-19”) pandemic in accordance with ASU 2016-13 (see Note 3 for more information). The Company’s current expectations and assumptions regarding its business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and current business plans as of June 30, 2020. Actual results could vary materially depending on risks and uncertainties that may affect the Company’s operations, markets, services, prices and other factors.
The Company recorded an allowance for doubtful accounts of $3 at both June 30, 2020 and December 31, 2019, to reduce accounts receivable to their estimated net realizable value. Accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. There were no write-offs or recoveries for the Successor three and six months ended June 30, 2020.
Goodwill— Goodwill is reviewed annually for impairment of value or more frequently when potential impairment triggering events are present. The Company’s annual impairment testing date is October 1. The Company continuously monitors events which could trigger an interim impairment analysis, such as changing business conditions and environmental factors, which included the impact of the COVID-19 pandemic for the quarter ended June 30, 2020. The Company determined there was no triggering event requiring an interim impairment analysis in the quarter ended June 30, 2020. However, the continued duration and severity of COVID-19 may result in future impairment charges as a prolonged pandemic could have an additional impact on the results of the Company’s operations.
Income Statement Presentation— As a result of the application of fresh start accounting upon the Company’s emergence from Chapter 11, the Company elected to change its income statement presentation of depreciation and amortization expense beginning in the Successor period July 2, 2019 through December 31, 2019 and all periods thereafter. As a result, “Depreciation and amortization” has been added as a line item in the unaudited Condensed Consolidated Statements of Operations and “Cost of sales” and “Selling, general and administrative expense” will now exclude all depreciation and amortization expense. In addition, the Company no longer presents “Gross profit” as a subtotal caption. For comparability purposes, this presentation change is applied to all comparable periods presented in this Quarterly Report on Form 10-Q and all future filings.
The effects of the income statement presentation change on the Predecessor Company’s previously reported unaudited Condensed Consolidated Statements of Operations are presented below. As noted above, a component of this presentation change is removal of the “Gross profit” subtotal.
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Unaudited Condensed Consolidated Statements of Operations for the three months ended June 30, 2019: | | | | | |
| Previous Presentation Method | | Effect of Presentation Change | | As Reported |
Cost of sales | $ | 757 | | | $ | (22) | | | $ | 735 | |
Selling, general and administrative expense | 61 | | | (4) | | | 57 | |
Depreciation and amortization | — | | | 26 | | | 26 | |
| | | | | | | | | | | | | | | | | |
Unaudited Condensed Consolidated Statements of Operations for the six months ended June 30, 2019: | | | | | |
| Previous Presentation Method | | Effect of Presentation Change | | As Reported |
Cost of sales | $ | 1,507 | | | $ | (45) | | | $ | 1,462 | |
Selling, general and administrative expense | 152 | | | (7) | | | 145 | |
Depreciation and amortization | — | | | |