Document

As filed with the Securities and Exchange Commission on September 29, 2021.
Registration No. 333-                
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Hexion Holdings Corporation
(Exact name of registrant as specified in its charter)
Delaware282184-2191440
(State or Other Jurisdiction of
Incorporation or Organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
180 East Broad Street
Columbus, Ohio 43215
Attention: Corporate Secretary
(614) 225-4000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Douglas A. Johns
Executive Vice President and General Counsel
Hexion Holdings Corporation
180 East Broad Street
Columbus, Ohio 43215
(614) 225-4000
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent For Service)
Copies to:
David S. Huntington, Esq.
Paul, Weiss, Rifkind, Wharton & Garrison LLP
1285 Avenue of the Americas
New York, NY 10019-6064
(212) 373-3000
Michael Kaplan, Esq.
Marcel Fausten, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
(212) 450-4000
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box.  ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
  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 7(a)(2)(B) of the Securities Act.  ☐
CALCULATION OF REGISTRATION FEE
Title of each Class of
Securities to be Registered
Proposed Maximum Aggregate Offering Price(1)(2)
Amount of
Registration Fee
Class B common stock, par value $0.01 per share $100,000,000 $10,910
(1)Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)Includes offering price of any additional shares that the underwriters have the option to purchase, if any. See “Underwriters.”
The registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.



The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Subject to Completion, dated September 29, 2021
PRELIMINARY PROSPECTUS
         Shares
Hexion Holdings Corporation
Class B common stock
This is the initial public offering of Hexion Holdings Corporation, a Delaware corporation. We are offering                shares of Class B common stock, par value $0.01 per share (“common stock”), and the selling stockholders identified in this prospectus are offering                shares of common stock.
We expect the public offering price to be between $         and $         per share. Prior to this offering, our common stock was quoted on the OTC Pink market. We intend to apply to list our common stock on the New York Stock Exchange (the “NYSE”) under the symbol “HXN.”
Prior to the consummation of this offering of common stock, we will distribute to our existing stockholders and warrant holders all of the shares of common stock of our subsidiary Hexion Coatings and Composites (US) Inc. (“Epoxy”), which will hold our epoxy specialty resins and our base epoxy resins & intermediates product lines (together, the “Epoxy Business”). Investors who purchase shares of our common stock in this offering will not be entitled to participate in the distribution of Epoxy shares as a result of such purchase and will not receive any interest in the Epoxy Business.
Investing in our common stock involves risks that are described in the “Risk Factors” section beginning on page 28 of this prospectus.
 Per ShareTotal
Public offering price$$
Underwriting discounts and commissions(1)
$$
Proceeds to us, before expenses$$
Proceeds to the selling stockholders, before expenses$$
_____________________
(1)See “Underwriters” for additional information regarding the underwriters’ compensation and reimbursement expenses.
The underwriters may also exercise their option to purchase up to an additional          shares of common stock from us at the public offering price, less underwriting discounts and commissions, for 30 days after the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares against payment on or about                 , 2021.
Morgan Stanley
The date of this prospectus is                , 2021



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TABLE OF CONTENTS
We, the selling stockholders and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We, the selling stockholders and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may provide you. We and the selling stockholders are offering to sell, and seeking offers to buy, shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock.
For investors outside the United States: none of us, the selling stockholders or the underwriters have done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus and any such free writing prospectus outside of the United States.
Until                 , 2021, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.



PRESENTATION OF FINANCIAL INFORMATION
The historical financial information presented in this prospectus, except where designated “pro forma,” includes the historical results of Hexion Holdings Corporation and its subsidiaries. References to pro forma information, such as “pro forma net revenue,” “pro forma net income” and “pro forma net sales” give effect to the Separation (as defined herein) of our Epoxy Business and the other Transactions described herein, as reflected in the unaudited pro forma condensed consolidated financial information included elsewhere in this prospectus.
We have made rounding adjustments to some of the figures included in this prospectus. Numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that precede them. Unless otherwise indicated, all references to “U.S. dollars,” “dollars,” “U.S. $” and “$” in this prospectus are to the lawful currency of the United States of America.
Prior to July 1, 2019, the date we emerged from bankruptcy (the “Emergence Date”), Hexion Holdings Corporation had not conducted any business operations. Accordingly, unless otherwise noted or suggested by context, all financial information and data and accompanying financial statements and corresponding notes, with respect to periods prior to the Emergence Date, as contained in this prospectus, reflect the actual historical consolidated results of operations and financial condition of Hexion Inc. for the periods presented and do not give effect to our plan of reorganization or any of the transactions contemplated thereby or the adoption of fresh start accounting. Such financial information may not be representative of our performance or financial condition after the Emergence Date.
INDUSTRY AND MARKET DATA
This prospectus includes industry data that we obtained from periodic industry publications and internal company surveys. This prospectus includes market share and industry data that we prepared primarily based on management’s knowledge of the industry and industry data. We are responsible for all industry and market data included in this prospectus. Unless otherwise noted, statements as to our market share and market position relative to our competitors are approximated and based on management estimates using the above-mentioned latest available third-party data and our internal analysis and estimates. We determined our market share and market positions utilizing periodic industry publications. If we were unable to obtain relevant periodic industry publications, we based our estimates on our knowledge of the size of our markets, our sales in each of these markets and publicly available information regarding our competitors, as well as internal estimates of competitors’ sales based on discussion with our sales force and other industry participants. Our estimates, in particular as they relate to market share and our general expectations, involve risks and uncertainties and are subject to change based on various factors, including those discussed under “Risk Factors” and “Forward-Looking Statements.”
NON-GAAP FINANCIAL MEASURES
This prospectus includes certain non-GAAP financial measures, including EBITDA, Segment EBITDA, Pro Forma EBITDA, Pro Forma Segment EBITDA and Non-GAAP combined results. For a discussion of the limitations on these measures, the rationales for using these measures and a reconciliation of these measures to the most directly comparable measures used in accordance with generally accepted accounting principles in the United States (“U.S. GAAP”), see “The Offering—Summary Historical Financial Information,” “The Offering—Summary Pro Forma Financial Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
FORWARD-LOOKING STATEMENTS
Certain statements in this prospectus are forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “might,” “plan,” “estimate,” “may,” “will,” “could,” “should,” “seek” or “intend” and similar expressions. Forward-looking statements reflect our current expectations and assumptions regarding our business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors as discussed in the “Risk Factors” section of this prospectus. While we believe our assumptions are reasonable, we
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caution you against relying on any forward-looking statements as it is very difficult to predict the impact of known factors and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to:
a weakening of global economic and financial conditions;
interruptions in the supply of or increased cost of raw materials;
the impact of our indebtedness;
our failure to comply with financial covenants under our credit facilities or other debt;
pricing actions by our competitors that could affect our operating margins;
changes in governmental regulations and related compliance and litigation costs;
uncertainties related to the COVID-19 pandemic and the impacts of our responses to it;
our ability to realize the anticipated benefits from the Separation;
disruptions to our business in connection with the Separation; and
other factors, including the factors discussed in the “Risk Factors” section of this prospectus.
All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The forward-looking statements made by us speak only as of the date on which they are made. Factors or events that could cause our actual results to differ may emerge from time to time. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
We use various trademarks, trade names and service marks in our business, including Cardura™, EcoBind™, VeoVa™ and Versatic™. This prospectus contains references to our and other companies’ trade names, trademarks and service marks. Solely for convenience, trademarks, trade names or service marks referred to in this prospectus may appear without the ® or ™ symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks, trade names or service marks. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us or by any other companies.
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PROSPECTUS SUMMARY
This summary highlights the more detailed information contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you. You should carefully read the entire prospectus before making an investment decision, especially the information presented under the heading “Risk Factors.”
In this prospectus, except as otherwise indicated, or as the context may otherwise require, all references to “Hexion,” the “Company,” “we,” “us,” and “our,” (i) with respect to periods prior to and including the Emergence Date (July 1, 2019) (the “Predecessor period”), refer to Hexion Inc. and its subsidiaries and (ii) with respect to periods after the Emergence Date (the “Successor period”), refer to Hexion Holdings Corporation and its subsidiaries.
Prior to the consummation of this offering of common stock, we will distribute to our existing stockholders and warrant holders all of the shares of common stock of our subsidiary Hexion Coatings and Composites (US) Inc. (“Epoxy”), which will hold our epoxy product lines. We refer to this distribution of Epoxy shares as the “Distribution” and to the separation of the Epoxy Business as the “Separation.” See “The Separation and Distribution.” Investors who purchase shares of our common stock in this offering will not be entitled to participate in the distribution of Epoxy shares as a result of such purchase and will not receive any interest in the Epoxy Business. The discussion below is a summary of our business after giving effect to the Separation and Distribution, and where noted, the financial information provided below gives pro forma effect to the Separation and Distribution and the other Transactions described herein. See “Unaudited Pro Forma Condensed Consolidated Financial Information.”
Our Company
We are a leading global producer of adhesives and performance materials that enable the production of engineered wood products, one of the world’s most sustainable building products and other growing specialty materials. We enable carbon sequestration within the building products value chain and increase the efficiency in the lumber industry to allow the use of 97% of the tree with our products. We serve highly diversified growing end-markets such as residential and non-residential construction, energy, automotive and agriculture. Our products include a broad range of critical components and formulations used to impart valuable performance characteristics such as durability, gloss, heat resistance, adhesion and strength to our customers’ and their customers’ final products. As such, our products sold to our customers are highly value-added contributions to their final work product, even though they often represent only a small portion of the overall end-product cost of adhesives and coating resins.
Our products are well aligned with global mega-trends, which we believe are being driven by stringent safety and sustainability requirements and regulations, population growth and an increasing need for stronger, higher performance and engineered materials in many end-markets such as construction, furniture, energy and automotive. In addition, we are seeing fast growth in the housing market to support the demand from residential housing that is only now catching up to housing formations and historic long-term growth trends.
We produce resins that are used in the formulation of wood adhesives and we produce critical building blocks that are used in the formulation of binders for coatings and construction applications. Our resins are generally considered specialty chemical products because they are principally produced based on customer product specifications and sold on the basis of performance, technical support, product innovation and customer service. We expect that favorable industry dynamics will continue to drive resin growth ahead of global GDP, driven by customers’ preferences that are shifting towards green energy, energy efficient production and lower volatile organic compounds (“VOCs”). We address our customers’ increasing sustainability requirements through our products such as EcoBind™ Resin Technology, an ultra low-emitting binder resin used to produce engineered wood products. In addition, two of our Versatic™ Acid and Derivatives products, VeoVa™ vinyl ester and Cardura™ glycidyl ester, enable low-VOC waterborne paint formulations for architectural and automotive applications that provide enhanced water resistance and exterior durability.
Additionally, our adhesive technology enables the efficient use of engineered wood products, which is one of the most sustainable building materials in the world. Wood construction materials help sequester carbon by keeping
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it out of the atmosphere for the lifetime of the structure, or longer if the wood is reused. In addition, processing wood requires less energy and results in fewer greenhouse gas emissions than other building materials. In fact, compared to other building materials, our resins enable the use of wood, which has a significantly lower energy intensity compared to glass, steel and aluminum. Our products are the “glue” that holds everything together, enabling 97% of the tree to be put to use. We believe we are well positioned with our adhesives products as the global markets continue to shift to sustainable materials.
In addition to the various products mentioned above, we are committed to developing future new products with sustainable characteristics. For example, as part of our sustainability goals, we have announced a commitment that, by 2030, all new products developed by Hexion will incorporate sustainable attributes. We have also taken steps to further align our manufacturing operations with our strategic sustainability practices. For instance, in order to help address climate change, we have announced our commitment to reduce absolute carbon emissions by 20 percent by 2030. Our commitment encompasses “Scope 1” and “Scope 2” emissions, which are direct and indirect greenhouse emissions from operations and consumed energy. In addition, in April 2021, we were awarded the ENERGY STAR® Partner of the Year, one of the highest honors bestowed by the United States Environmental Protection Agency’s ENERGY STAR program, in recognition of our efforts in waste reduction and energy efficiency.
We have leading market share positions across our integrated and global manufacturing platform in well-structured markets with over 90% of our sales on a pro forma basis being products that have the number one global position. We are the number one wood adhesive supplier in the United States, Canada, Brazil and Australia/New Zealand. Our manufacturing is localized, providing additional stability and barriers to entry due to the close proximity of our sites to our customers. For example, the majority of our adhesive and merchant formaldehyde products are delivered through pipelines or through truck and rail within the region to our customers.
Our products sold to our customers are used in thousands of applications and sold into a variety of end-markets. We sell to a diverse global and regional set of customers that consist of more than 1,200 companies across approximately 60 countries, with our top ten customers accounting for approximately 30% of our net sales in 2020 on a pro forma basis. Given our limited working capital requirements, a right-sized capital structure, low capital-intensive operations and pass-through customer contract structures, we believe we are positioned to generate positive cash flow.
After the Separation, the Company will have two reporting segments, Adhesives and Performance Materials. Our Adhesives segment produces products for construction, industrial and wood adhesives as well as additives for energy and agricultural applications. In our Performance Materials segment, we produce Versatic™ Acids and Derivatives for high performance coatings and construction applications and chemical intermediates.
The following table presents our Pro Forma and historical net sales and Segment EBITDA as of June 30, 2021 and December 31, 2020:
(In millions)Net SalesSegment EBITDASegment EBITDA Margin
HistoricalSix Months Ended June 30, 2021Year Ended December 31, 2020Six Months Ended June 30, 2021Year Ended December 31, 2020Six Months Ended June 30, 2021Year Ended December 31, 2020
Adhesives$770 $1,188 $143 $214 19 %18 %
Coatings and Composites835 1,322 173 151 21 %11 %
Total$1,605 $2,510 $316 $365 
Pro Forma
Adhesives$758 $1,168 $142 $219 19 %19 %
Performance Materials120 208 28 53 23 %25 %
Total$878 $1,376 $170 $272 

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We serve customers in the United States, Europe, Asia, Latin America, Australia and New Zealand through our manufacturing network of 27 production facilities. We had approximately 1,300 employees with total pro forma net sales of $1.4 billion and historical net sales of $2.5 billion for the year ended December 31, 2020.
The breakdown of our end-markets and global exposure on a pro forma basis for the year ended December 31, 2020 are included below:
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Our Business
Adhesives Segment
We are a leading producer of adhesives used in building products and furniture applications. Our products are used in engineered wood products, which is one of the most sustainable building materials in the world. Our adhesives are based on our vertically integrated formaldehyde-based resins production platform. These adhesives are critical components that provide the structural integrity from their binding properties to structural and decorative wood products such as oriented strand board, plywood and medium density fiberboard. Wood adhesives support a more sustainable construction market where wood products use renewable materials, e.g., sustainable tree plantations, with a much lower carbon footprint. We engineer our products with customized specifications based on collaboration with our customers who interface with our regional commercial, technical support and research and
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development organization. Through these collaborative relationships, we help our customers address the shifting requirements of their products due to new performance requirements, new standards related to workplace safety, new environmental standards and increasing energy conservation requirements.
Our Adhesives segment benefits from integration across the value chain; for example, we supply essentially all of the formaldehyde needed for our construction and adhesives business. In addition, our facilities are geographically positioned to competitively serve our customers, as nearly all of our wood adhesives resins and merchant formaldehyde customers are served via pipelines, truck or rail within the region. Further, in our formaldehyde and adhesives businesses, we leverage key third-party raw material indexes to periodically adjust both contractual and non-contractual pricing for approximately 90% of revenue, which has produced consistent material margins over time.
ProductsKey ApplicationsKey Product Attributes 
Construction Adhesives (75% of 2020 Pro Forma Segment Sales)
   
Wood Adhesives: Phenol Formaldehyde, Amino Resins (Urea Formaldehyde, Melamine Formaldehyde), Laminates and Derivatives
Plywood, particleboard, oriented strand board, medium density fiberboard, laminated veneer lumber particleboard, laminated beams, cross-laminated timber, truck-decking, glass mat
Structural integrity, thermal stability, durability, moisture resistance
Wax Emulsions
Panel board, specialty applications
Long-term stability, consistency, water absorption, lubrication
Intermediates & Derivatives (25% of 2020 Pro Forma Segment Sales)
Formaldehyde: Solutions, Urea Formaldehyde Concentrate, Methaform
Methylene diphenyl diisocyanate, butanediol, herbicides and fungicides, oil and gas production scavengers, fabric softeners, formaldehyde-based resins
Essential chemical building block
Formaldehyde: Triazines
Hydrogen sulfide scavenging for oil and gas applications
Heat, stress and corrosion resistance
Performance Materials Segment
We produce Versatic™ acid and the derivatives VeoVa™ vinyl ester and Cardura™ glycidyl ester, which are branded ingredients sold to coatings companies to produce resins for high-performance coatings and construction, automotive and industrial applications.
In our derivatives business, we produce our VeoVa™ vinyl ester. VeoVa™ is an ingredient that helps decorative paints and adhesives last longer and perform better by increasing their weatherability which is especially important in outdoor applications and other applications where water resistance is important. Examples of applications are exterior wall paints, kitchen and bathroom paints, tile adhesives, wood coatings and elastomeric roof coatings. Also, VeoVa™ vinyl ester enables the production of waterborne and low-VOC biocide free coatings.
Another derivative is our Cardura™ glycidyl ester, which is an ingredient used in resins for automotive coatings as well as coil, protective and industrial coatings. These high-performance coating applications require outstanding appearance, gloss and weatherability while reducing VOC levels. Cardura™ glycidyl supports meeting these requirements by improving water and chemical resistance and lowering viscosity to support a smooth surface and high-quality appearance. Cardura™ glycidyl ester helps reduce VOC levels and can be formulated in high solids or waterborne systems.
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In our chemical intermediates sub-segment, we produce Versatic™ Acids, a range of unique building blocks. Versatic™ Acids are used in a variety of applications and increase performance in terms of stability, compatibility and efficiency and lubrication in a wide spectrum of products such as catalysts (more specifically, peroxides), pharmaceutical ingredients, agrochemicals, tire adhesives, lubricant additives, metal working fluids and other applications. We supply Versatic™ acid to both our derivatives business and to the external market.
ProductsKey ApplicationsKey Product Attributes
Performance Coatings (81% of 2020 Segment Sales)
Versatic™ Acid  Derivatives: VeoVa™vinyl ester, Cardura™ glycidyl ester
Automotive, industrial, protective, architectural, construction, adhesives
Hydrolytic stability, water resistance, appearance, ease of application, adhesion and durability, low VOC emissions
 
Chemical Intermediates (19% of 2020 Segment Sales)
Versatic™ Acids & : Neo-Acids
Catalysts (peroxides), pharmaceuticals, agrochemicals, adhesion promoters
Hydrolytic stability, heat resistance, solubility in non-polar compounds
The schematics below showcase certain applications for our Adhesives and Performance Materials:
Housing and General Construction
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Commercial/ Automotive
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Competitive Strengths
Leading End-Market Positions. On a pro forma basis, more than 90% of our sales in Adhesives and Performance Materials for the year ended December 31, 2020 were from number one positions in our key markets. We generally operate in end-markets where we are one of two or three global suppliers who can bring solutions to regional and global customers. We have a broad range of adhesive resin technologies, with leading technical service, application development and research capabilities that we believe are unmatched in the sector. In addition, our facilities are well positioned to serve local customers in regional geographies. Nearly all of our adhesives resins and formaldehyde business are served to customers via pipelines or truck and rail within the region.
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Segment ProductsLeadership PositionKey Attributes
Adhesives
Construction AdhesivesWood Adhesives#1 in United States, Canada, Brazil and Australia/New Zealand
Regional market (300-mile economically viable shipping radius)
Approximately two-and-a-half times bigger than next competitor
    
Intermediates & DerivativesFormaldehyde#1 in North America
Approximately three times bigger than next competitor
40% of North America capacity
 
Performance Materials
Performance CoatingsVersatic™ Acid Derivatives
#1 Globally
Only one other direct competitor in each of our product lines
    
Chemical IntermediatesVersatic™ Acid
 
#1 Globally
Large scale producer provides backward integration
Strategically Aligned with End-Market Growth Drivers. Our products are well aligned with global mega-trends in population growth and sustainability, as well as increasingly stringent safety and performance standards. Global population growth is expected to result in ever increasing demands for more sustainable solutions, such as in energy, automotive, agriculture and construction. Demand for carbon efficient buildings drives growth in our low-emitting coatings and our resins that enable sustainable engineered structural wood. We believe growth in many of our key applications is being driven by an increasing need for lighter, stronger, higher performance engineered materials, as well as improved fire, smoke and toxicity properties.  
Our Adhesives business serves the growing U.S. housing market, both through remodeling activity and new construction. Wood adhesives support a more sustainable structural market where wood products use renewable materials, such as tree plantations, that use much less energy per ton and have a lower carbon footprint than traditional materials such as steel, glass and concrete. The global trend to use lower VOCs in specialty coatings applications due to environmental concerns supports growth in our Performance Materials business.
Diverse Customer Base and Variety of End Markets Allows for Stable Earnings and Reduced Volatility. Our products sold to our customers are used in thousands of applications and sold into end-markets such as residential and non-residential construction, furniture, energy, decorative coatings, industrial, automotive and agriculture. Residential construction, one of our leading end-markets, represented 22% of our total pro forma net sales in 2020. Repair and remodel represented 15% of our pro forma net sales. Our broad product portfolio also addresses diverse applications and geographies within a single end-market. Our adhesives products are critical to engineered panel board production across diverse geographies including the United States, Canada, Brazil and Australia. Across our entire portfolio, we sell our products in approximately 60 countries. Our products are sold to a diverse global and regional set of customers that consist of more than 1,200 companies, with our top ten customers accounting for approximately 30% of our pro forma net sales in 2020. Our largest customer accounted for approximately 5% of our pro forma net sales in 2020. Our global customers include leading multinational companies that collaborate with us to develop global product solutions. Many of these blue-chip companies are leaders in their respective industries such as Akzo Nobel, Axalta, BASF, Bayer, Duratex, Norbord, Laminex, Louisiana Pacific, PPG Industries, Sherwin Williams, Synthomer and Weyerhaeuser.
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Leading Technology Platform Across Products and Applications. We have a leading technology platform of products that address critical performance attributes for our customers and their customers’ products through our global and regional network. Our product technologies are centered around our broad wood adhesives platform with leading research, applications development and technical service capabilities. We have 11 research and development sites where we collaborate with local and global customers to develop customized products and solutions. These sites are located globally in North America, South America, Europe and Asia Pacific. We have the broadest wood adhesives platform with over 700 unique SKUs of products that make up the industry’s leading technology. In addition, we are strategically located near our customers with large-scale facilities such as Edmonton, Canada and Springfield, Oregon, which enables a low-cost position. Our VeoVa™ and Cardura™ products provide a unique technology to the market to allow coatings players to both lower VOCs and provide high performance. Our new product sales across the portfolio represented approximately 28% of our total pro forma net sales in each of the last five years.
Tailored Solutions and Regional Customer Engagement. We engage our customer base by providing solutions for their product development and formulation needs. We provide these solutions on both a global and regional basis. We utilize a network of technical sales, commercial development centers and research and development facilities to provide collaborative solutions. In adhesives we have experts who develop customer products and are embedded at our customers’ panelboard facilities. We offer panelboard pilot facilities in North America, Latin America and Australia for customers to test new products or create existing product modifications. The technology center at our Edmonton, Alberta site focuses on developing next generation resin chemistry for panel production. Our Versatic™ acids and derivatives business works with customers in regional labs based in Belgium, United States and China where customers utilize our unique polymerization, formulation and synthesis capabilities unmatched in the industry. We believe our tailored solutions and intimate customer engagement have allowed us to maintain industry leadership, profitability and growth potential.
Integrated Value Chain Provides Stability and Competitive Advantage. We produce a majority of the critical intermediates for our key products across our portfolio. This integration gives us significant competitive advantages through cost effective production, security of supply to us and our customers and less volatility in our overall input costs. For example, we supply essentially all of the formaldehyde needed for our construction and adhesives business. Our Cardura™ glycidyl ester and VeoVa™ vinyl ester products source their Versatic™ acid needs from our facilities. This integrated platform allows us to lower costs through sourcing locally, often through pipelines, to reduce delivered costs of raw materials. In addition, we have the ability to run our intermediates facilities at high utilization rates to lower our operating cost per ton due to our internal needs for base-load operations.
Favorable Cash Flow Attributes. We have favorable cash flow attributes given our pass-through customer contract structures, limited working capital requirements, a right-sized capital structure, low capital-intensive operations and positive tax attributes. In a majority of our businesses, we benefit from strong contract structures that allow for raw material pass-through. In our formaldehyde and adhesives businesses, we leverage third-party raw material indices to periodically adjust contractual and non-contractual pricing for approximately 90% of revenue, which has produced relatively consistent margins over materials.
On a pro forma basis, year-end net working capital averaged approximately 6% of sales from 2019 through 2020, which is top decile in the chemical industry. Our annual investment in maintenance and environmental capital expenditures has typically ranged between $30 million and $45 million on a pro forma basis, which was approximately 3% of pro forma net sales in 2020. Additionally, as of December 31, 2020, the Company had $636 million of U.S. federal net operating loss carryforwards available prior to the impact of the Separation and Distribution.
We expect these attributes to help produce more stable profit and free cash flow through fluctuating raw material price environments.
Experienced Management Team with Impressive Track Record. Our management is highly experienced with a history and track record of creating value at other public companies. Craig Rogerson, our Chief Executive Officer, was chief executive officer of Chemtura Corporation for over seven years and chief executive officer of Hercules Inc. for five years. Our key segment leaders each have over 20 years of relevant industry experience. In addition, our
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management team has reduced fixed costs by $90 million between 2017 and 2020. Our management team has strong leadership experience navigating across a broad range of economic conditions. In addition, as a result of this team, the portfolio has been better positioned with a new product focus, where our new products across the portfolio have consisted of approximately 28% of our pro forma net sales from 2016 to 2020.
Strategy
Our strategy is focused on increasing shareholder value by increasing our profit and free cash flow generation dollars by leveraging our technologies, manufacturing footprint and customer relationships to provide customers with value added solutions to their ever-changing requirements and growing end-market needs. We continually seek to introduce new products to address our growing end-market needs. We continue to drive productivity through disciplined investment and heightened commitment on cost management. We aggressively manage our portfolio focusing on bolt-on acquisitions to broaden and deepen our specialty product solutions.
Leveraging our technologies, manufacturing footprint and customer relationships to provide customers with value added solutions to their ever-changing requirements. We have a platform of technologies in the resin and performance materials markets that we will leverage to continue to introduce new products addressing market growth driven by increasing population growth, increasing stringent safety requirements and increasing sustainability trends. In addition, we have continued to invest over the last decade in growing our global and regional commercial base, developing our research and development capabilities, and expanding our production network. As we address our attractive growing markets through increased volumes of existing and new product sales, we intend to improve our profit through operating leverage across our global and regional base of operations.
In addition, we believe our diversified portfolio is uniquely aligned to serve our customers that are increasingly demanding products with sustainable attributes. Within our Adhesives segment, our ArmorBuilt™ fire resistant wrap is a new product which greatly improves fire protection when applied to a substrate. ArmorBuilt™ wrap is a proprietary wrap from Hexion that can be applied to utility companies’ infrastructure, including new utility poles with potential for existing pole applications and cellular towers. Hexion has been providing high-performing adhesives for decades and has leveraged its expertise to develop a fire-retardant coating for more sustainable wooden utility poles that greatly improves their fire resistance and protects critical utility infrastructure. We also believe that the fire-retardant properties of ArmorBuilt™ positions us favorably to capture other high-growth applications as we bring on additional manufacturing capacity through our announced site expansions. We anticipate that new potential applications include roofing and siding “fire hardening” materials, as well as protective wrapping for storage tanks and natural gas and oil pipelines. We believe that the total addressable market for ArmorBuilt is approximately $500 million. Within our Performance Materials segment, we are constantly adapting our application development pipeline to answer manufacturers’ increasing need for sustainable, durable and low VOC coating solutions. For instance, we recently launched our patent pending VeoVa™ Silane technology platform on moisture curable resins for easy to handle, 1K isocyanate-free protective coatings. Cardura™ glycidyl ester enables high performance waterborne 2K PU industrial and protective coatings. VeoVa™ vinyl ester today is already used in latex polymers for waterborne intumescent coatings. Our goal of increasing the offerings of products with sustainable attributes is expected to create value for our customers and our stakeholders.
Driving continuing productivity through disciplined investment and commitment to cost management. We expect to continue to invest in our development and production capabilities to bring new products to the market that provide innovative lower VOC attributes, fire resistance and toxicity attributes that meet the needs of our customers and deliver attractive margins to the Company. Our new products across the portfolio have consisted of 28% of our pro forma net sales from 2016 to 2020. We intend to continue this new product focus with our global commercial, technical support and research and development base of people and capabilities, such as in our commercial development centers and regional labs. Our adhesive systems are ideal for new building applications, such as cross-laminated timbers for multi-story commercial buildings, for example. The previously discussed ArmorBuilt™ wrap protects utility poles during wildfires. We will also invest to support our customers’ evolving needs, such as our intention to add phenolic resin capacity to expand our adhesives and binders business at our Brimbank, Australia site designed to provide fire-resistant cladding materials for new commercial and residential building. Our constantly developing pipeline should drive growth of our business to increase profit and margin to increase shareholder value.
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We also have a track record of effectively managing our cost base. For example, we reduced fixed costs by $90 million from 2017 to 2020. We believe this stable fixed cost base will support future operating leverage driven by increasing volumes. Additionally, we have increased our investment in capital expenditures focused on productivity in the last two years.
Aggressive portfolio management through focus on bolt-on acquisitions and research and development. We plan to proactively optimize our portfolio of businesses and solutions by focusing on the most attractive businesses we have today and growing our platform through strategic bolt-on acquisitions. We believe our optimization, through divestitures, acquisitions and joint ventures, will drive our businesses to areas where our solutions and products achieve attractive margins based on their performance enabling characteristics for customers and where we can achieve high and increasing returns over the long term. We intend to explore new product technologies that complement our existing solution base and customer application set and/or our downstream formulation expertise. We have historically prioritized capacity expansion projects and the development of new products that have an expected annual return of greater than 15%. In addition, we intend to evaluate regional additions in our current product set that can broaden our global reach. Our acquisitions will be evaluated under a disciplined return on capital requirement and achievable synergies. We believe this portfolio optimization will position us to expand globally as a stronger and higher valued specialty chemical company with capabilities to continue to deliver best-in-class solutions to our customers.
The Separation and Distribution
Prior to the consummation of this offering of common stock, we will distribute to our existing stockholders and warrant holders all of the shares of common stock of Epoxy, which will hold our Epoxy Business. The Epoxy Business is currently a wholly owned business of Hexion and, at the time of the Distribution, Epoxy will hold, directly or indirectly through its subsidiaries, the assets and liabilities associated with the Epoxy Business. We refer to this distribution of Epoxy shares as the “Distribution” and to the separation of the Epoxy Business as the “Separation.”
Assets included in the Epoxy Business are the Company’s manufacturing sites in Argo, IL (USA); Deer Park, TX (USA); Lakeland, FL (USA); Barbastro, Spain; Onsan, Korea; Pernis, Netherlands (excluding Versatic™ Acid and derivative facilities); and Duisburg, Germany; Esslingen, Germany.
The Epoxy Business produces in various product categories that include composites, electrical applications, performance coatings, and industrial coatings and construction chemicals. In industrial coatings, epoxy specialty resins are used to impart superior adhesion, corrosion resistance and other high-performance characteristics. Epoxy resins are also used as the key component in composite materials. Composite materials are high strength, yet lightweight materials that consist of resins and a reinforcement material, such as glass and carbon fibers. Epoxy supplies specialty epoxy resins to producers that make composites for wind blades, aerospace and automotive parts among many other lightweight structural parts. Given its integrated platform, Epoxy supplies a portion of its liquid epoxy resins to its epoxy specialty resins business but the majority is supplied to the external market. The Epoxy products requires collaboration with customers and a technical and formulation expertise given that wind energy, automotive, aerospace and other industrial products are highly engineered for specific applications. These end-markets require demanding performance requirements for these structural components and have long development cycles and long in-use time horizons.
Prior to the Distribution, the assets and liabilities of the Epoxy Business will be transferred and assigned to Epoxy or entities that are, or will become prior to the Distribution, subsidiaries of Epoxy. At the effective time of the Distribution, our stockholders will receive one share of Epoxy common stock for every      shares of our common stock held on the record date and our warrant holders will receive one share of Epoxy common stock for every      shares of our common stock they would have received if they had exercised their warrants immediately prior to the record date. The Separation is expected to be completed prior to this offering of common stock. Immediately following the Separation, our stockholders and warrant holders as of the record date for the Distribution will own 100% of the outstanding shares of common stock of Epoxy.
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Prior to the Distribution, we will enter into a Separation and Distribution Agreement and several other ancillary agreements with Epoxy to effect the Separation and provide a framework for our relationship with Epoxy after the Separation. These agreements will provide for the allocation between Hexion and Epoxy of Hexion’s assets, liabilities and obligations (including with respect to employee matters, intellectual property matters, tax matters and certain other matters). Hexion and Epoxy will also enter into a Shared Services Agreement, which will set forth the terms on which Hexion and Epoxy will provide one another as the case may be, on a transitional basis, certain services or functions that the companies historically have shared, as well as one or more commercial agreements relating to the ownership, management, maintenance, support, and use of certain shared operations services by Hexion to Epoxy.
Our Board of Directors believes separating the Epoxy Business from Hexion’s other businesses is in the best interests of Hexion and its stockholders and has concluded that the Separation will provide Hexion and Epoxy with a number of potential opportunities and benefits, including the following:
Strategic and Management Focus. Permit the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business and opportunities. We believe the Separation will enable each company’s management team to better position its businesses to capitalize on developing macroeconomic trends, increase managerial focus to pursue its individual strategies and leverage its key strengths to drive performance. The management of each resulting company will be able to concentrate on its core competencies and growth opportunities and will have increased flexibility and speed to design and implement strategies based on the characteristics of its business.
Resource Allocation and Capital Deployment. Allow each company to allocate resources, incentivize employees and deploy capital to capture the significant long-term opportunities in their respective markets. The Separation will enable each company’s management team to implement a capital structure, dividend policy and growth strategy tailored to each unique business. Both businesses are expected to have direct access to the debt and equity capital markets to fund their respective growth strategies.
Investor Choice. Provide investors, both current and prospective, with the ability to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics. Separating the two businesses will provide investors with a more targeted investment opportunity so that investors interested in the Epoxy Business will have the opportunity to acquire stock of Epoxy.
Employee Incentives and Retention. Enable each company to better incentivize, attract, and retain key employees through the use of equity compensation. Separating the two businesses will allow each company to design stock option and similar programs that better incentivize management to enhance business performance because the stock price performance of each company will be based on the performance of its own business.
While a number of potential costs and risks were also considered, including, among others, risks relating to the creation of a new public company, such as increased costs from operating as a separate public company, the risk of volatility in our stock price immediately following the Distribution, potential disruptions to each business, the loss of synergies, scale and joint purchasing power, increased administrative costs, one-time separation costs, the fact that each company will be less diversified following the Separation, and the potential inability to realize the anticipated benefits of the Separation, it was nevertheless determined that the potential benefits of the Separation outweighed the potential costs and risks in connection therewith and provided the best opportunity to achieve the above benefits and enhance stockholder value.
The distribution of Epoxy common stock in the Distribution is subject to the satisfaction or waiver of certain conditions. For more information, see “Risk Factors—Risks Relating to the Separation” and “The Separation—Conditions to the Distribution” included elsewhere in this prospectus.
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Epoxy Financing
Prior to the consummation of the Separation and Distribution, the Epoxy Business will incur new indebtedness of approximately $400 million (the “Epoxy Financing”) and we will use the proceeds of the Epoxy Financing to repay in full the outstanding €300 million principal amount under our Euro-denominated Term Loan Facility (“Euro Term Loan Facility”).
Recent Divestiture
On April 30, 2021, we completed the sale of our Phenolic Specialty Resin, Hexamine and European-based Forest Products Resins businesses (the “Held for Sale Business”) for approximately $425 million to Black Diamond and Investindustrial (the “Buyers”) pursuant to a purchase agreement entered into on September 27, 2020 (the “Purchase Agreement”). We received gross cash consideration for the Held for Sale Business in the amount of $304 million. In addition, the Buyers assumed approximately $31 million of certain liabilities, net of preliminary working capital and other closing adjustments as part of the Purchase Agreement. A subsequent post-closing adjustment to the initial cash consideration will be made in accordance with the Purchase Agreement.
The remainder in future proceeds of up to $90 million is based on the performance of the Held for Sale Business over the three year period after the completion of the sale. Payments will be based on the amount of actual EBITDA (as defined in the Purchase Agreement) above targeted EBITDA amounts of $45 million, $50 million and $60 million in 2021, 2022 and 2023, respectively. The maximum payout per year under the earnout is $40 million, $35 million and $15 million, respectively. The Company has made an accounting policy election to account for the initial and subsequent measurement of the future contingent proceeds, of up to $90 million, as a gain contingency. Under this model, any future contingent consideration is not recognized until all future conditions are met and the Company has earned the proceeds.
We used $150 million of the sale proceeds to repay a portion of the Euro Term Loan Facility and expect to invest the remainder of the proceeds in our business. In this prospectus, we refer to this divestiture as “Project Fusion.”
Transactions
In this prospectus, the “Transactions” refers, collectively, to (i) the consummation of the Epoxy Financing and the use of proceeds therefrom, together with cash on hand, to repay €300 million principal amount under our Euro Term Loan Facility, (ii) the consummation of the Separation and Distribution, (iii) the consummation of this offering of common stock and the application of the proceeds as described herein and (iv) the payment of fees and expenses related to this offering, the Epoxy Financing and the Separation and Distribution.
Emergence Transactions
On July 1, 2019 (the “Emergence Date”), we emerged from bankruptcy proceedings pursuant to the terms of a Plan of Reorganization (the “Plan”). On the Emergence Date, we consummated the following exit financings (collectively, the “Exit Financings”) in accordance with the Plan:
We issued $450 million aggregate principal amount of 7.875% Senior Notes due 2027 (the “Senior Notes”);
We entered into a new $350 million asset-based revolving credit facility (the “ABL Facility”) and a new $1.2 billion senior secured term loan facility (the “Term Loan Facility” and, together with the ABL Facility, the “Credit Facilities”); and
We raised $300 million of gross cash proceeds from a rights offering (the “Rights Offering”) of our common stock to certain eligible holders of Hexion Inc.’s pre-petition notes under the Plan.
In this prospectus, the “Emergence Transactions” refers, collectively, to the consummation of the Plan and related transactions, including the application of fresh start accounting principles, the consummation of the Rights Offering, the entry into the ABL Facility, the entry into the Term Loan Facility and the borrowing of $1.2 billion
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thereunder, the issuance of the Senior Notes and the application of the proceeds from the Exit Financings pursuant to the terms of the Plan.
Risk Factors
Participating in this offering involves substantial risk. Our ability to execute our strategy also is subject to certain risks. The risks described under the heading “Risk Factors” immediately following this summary may cause us not to realize the full benefits of our competitive strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges and risks we face include the following:
Risks Relating to our Business
If global economic conditions weaken or deteriorate, it will negatively impact our business, results of operations and financial condition;
Natural or other disasters or pandemics could disrupt our business and result in loss of revenue or higher expenses. The continued impact of the COVID-19 pandemic could adversely result in business and manufacturing disruption, inventory shortages, delivery delays, our ability to obtain financing on favorable terms and reduced sales due to an economic downturn that could affect demand for our products;
An inadequate supply of direct or indirect raw materials and intermediate products could have a material adverse effect on our business;
Our production facilities are subject to significant operating hazards which could cause environmental contamination, personal injury and loss of life, and severe damage to, or destruction of, property and equipment;
Because we manufacture and use materials that are known to be hazardous, we are subject to, or affected by, certain product and manufacturing regulations, for which compliance can be costly and time consuming. In addition, we may be subject to personal injury or product liability claims as a result of human exposure to such hazardous materials;
We could face intellectual property infringement claims that could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations;
Our debt could adversely affect our operations and prevent us from satisfying our obligations under our debt obligations and may have an adverse effect on our stock price. As of June 30, 2021, we had approximately $1.6 billion aggregate principal amount of consolidated outstanding indebtedness. For the year ended December 31, 2020, we had interest expense of $100 million;
Our debt instruments contain restrictive covenants that, among other things, limit our ability to incur debt, grant liens on assets, pay dividends, make investments or acquisitions or merge or consolidate with another company. These restrictions may limit our ability to effectively execute our strategy;
Our pension obligations could be greater than we expect. For the year ended December 31, 2020, we made contributions totaling $40 million to our defined benefit pension plans;
Cybersecurity attacks and other disruptions to our or our third-party vendors’ information systems could interfere with our operations, and could compromise our information and the information of our customers and suppliers, which would adversely affect our relationships with business partners and harm our brands, reputation and financial results;
We could face additional tax obligations based on the Emergence and other income tax contingencies we have recorded on our books;
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The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could adversely impact our financial position and results of operations;
If we fail to establish and maintain an effective internal control environment, our ability to both timely and accurately report our financial results could be adversely affected;
A downgrade in our debt ratings could restrict our access to, and negatively impact the terms of future financings or trade credit;
Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium on their shares;
We may issue preferred stock, the terms of which could adversely affect the voting power or value of our common stock;
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees;
We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations;
Investors in this offering will experience immediate and substantial dilution and may be diluted by the future issuance of additional common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise, which could adversely affect our stock price;
Our stock price could be adversely affected by future sales of our common stock in the public market, or the perception in the public market that such sales may occur;
There can be no assurances that a viable public market for our common stock will develop;
The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering and our stock price may fluctuate significantly;
If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline;
Ownership of our common stock is concentrated in the hands of certain stockholders that may have significant influence on corporate decisions sufficient to approve or veto most corporate actions requiring a vote of our stockholders; and
Actions of activist stockholders, and such activism, could adversely impact our business.
Risks Relating to the Separation
We may not realize some or all of the anticipated benefits from the Separation; and
Our combined historical and pro forma financial information is not necessarily representative of the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.
Corporate Information
We were incorporated under the laws of the State of Delaware on June 24, 2019. Our principal executive offices are located at 180 East Broad Street, Columbus, Ohio 43215. Our telephone number is (614) 225-4000. Our website is located at www.hexion.com. Our website and the information contained on, or that can be accessed through, our website will not be deemed to be incorporated by reference in, and are not considered part of, this prospectus.
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The Offering
IssuerHexion Holdings Corporation
Common stock offered by us                 shares of common stock (or
                 shares, if the underwriters exercise in full their option to purchase additional shares as described below).
Common stock offered by the selling stockholders                 shares of common stock.
Option to purchase additional sharesWe have granted the underwriters an option to purchase from us up to an additional                  shares of common stock. The underwriters may exercise this option at any time within 30 days from the date of this prospectus. See “Underwriters.”
Common stock outstanding after this offering
                 shares of common stock (or                 shares if the underwriters exercise in full their option to purchase additional shares), assuming exercise of all of the outstanding warrants to purchase                  shares of common stock at an exercise price of $0.01 per share.
Use of proceedsWe estimate that our net proceeds from this offering will be approximately $        million (or approximately $        million if the underwriters exercise in full their option to purchase additional shares), after deducting underwriting discounts and commissions and estimated offering expenses payable by us, based on an assumed initial offering price of $        per share (the midpoint of the range set forth on the cover of this prospectus). We intend to use the net proceeds received by us in this offering for general corporate purposes. We will not receive any of the proceeds from the sale of shares offered by the selling stockholders. See “Use of Proceeds.”
Dividend policyWe have not paid any dividends on our common stock other than to the extent the distribution of our Epoxy business is a taxable dividend. We do not intend to declare or pay any cash dividends on our common stock in the foreseeable future. We plan to review our dividend policy periodically. See “Dividend Policy.”
ListingWe intend to apply to list our common stock on the NYSE under the symbol “HXN.”
Risk FactorsYou should read the section titled “Risk Factors” and the other information included in this prospectus for a discussion of some of the risks and uncertainties you should carefully consider before deciding to invest in our common stock.
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Except as otherwise indicated, all of the information in this prospectus assumes:
an initial public offering price of $          per share of common stock, the midpoint of the range set forth on the cover of this prospectus;
no exercise of the underwriters’ option to purchase up to          additional shares of common stock in this offering;
the exercise of all outstanding warrants to purchase an aggregate of                  shares of common stock at an exercise price of $0.01 per share;
that the                  shares of common stock reserved for future grant under our Management Incentive Plan have not been issued; and
that the                  shares of common stock reserved for issuance under our 2019 Omnibus Incentive Plan (the “2019 Incentive Plan”) have not been issued.
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Summary Unaudited Pro Forma Financial Information
The following tables presenting our summary unaudited pro forma financial information have been prepared in accordance with Article 11 of Regulation S-X as amended, in order to give effect to the Pro Forma Transactions (as defined “Unaudited Pro Forma Condensed Consolidated Financial Information”). The following unaudited pro forma condensed consolidated statements of operations for the six months ended June 30, 2021 and and the year ended December 31, 2020 give effect to the Pro Forma Transactions as if they occurred on January 1, 2020, the beginning of the most recently completed fiscal year. The unaudited pro forma condensed consolidated statements of operations for the Successor period from July 2, 2019 through December 31, 2019, the Predecessor period from January 1, 2019 to July 1, 2019 and the year ended December 31, 2018 give effect to the presentation of the Epoxy business as discontinued operations in accordance with ASC 205. The Unaudited Pro Forma Condensed Consolidated Balance Sheet gives effect to the Pro Forma Transactions (as defined in “Unaudited Pro Forma Condensed Consolidated Financial Information”) as if they occurred as of June 30, 2021, our latest balance sheet date. The pro forma adjustments are based upon available information and assumptions that we believe are reasonable. The summary unaudited pro forma consolidated financial information does not purport to represent what our financial position or results of operations would have been if we had operated as a public company during the periods presented or if the transaction described therein had actually occurred as of the dates indicated, nor does it project the financial position at any future date or the results of operations for any future period. Please see the notes to the “Unaudited Pro Forma Consolidated Financial Data” included elsewhere in this prospectus for a complete description of the adjustments reflected in the unaudited pro forma consolidated financial data.
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Pro Forma
 SuccessorPredecessor
Non-GAAP Combined(1)
Predecessor
(in millions, except share and per share data)Six Months Ended June 30, 2021Year Ended December 31, 2020July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019Year Ended December 31, 2019Year Ended
December 31, 2018
Net sales(2)
$878 $1,376 $779 $860 $1,639 $1,845 
Cost of sales(2)(3)(4)
672 1,050 625 693 1,318 1,483 
Selling, general and administrative expense(2)(3)(4)
108 165 80 93 173 158 
Depreciation and amortization(4)(5)
59 116 56 24 80 60 
Gain on dispositions— — — — — (44)
Asset impairments— 16 — — — 27 
Business realignment costs11 56 17 26 18 
Other operating (income) expense, net(4)12 18 22 
Operating income (loss)32 (36)(5)29 24 121 
Interest expense, net40 82 54 87 141 359 
Reorganization items, net— — — (2,447)(2,447)— 
Other non-operating expense (income), net(3)
(26)(28)(7)(9)(16)10 
Income (loss) before income tax and earnings from unconsolidated entities18 (90)(52)2,398 2,346 (248)
Income tax expense (benefit)20 30 (7)146 139 15 
(Loss) income from continuing operations before earnings from unconsolidated entities(2)(120)(45)2,252 2,207 (263)
Earnings from unconsolidated entities, net of taxes— — — — 
Net (loss) income from continuing operations, net of taxes(2)(120)(44)2,252 2,208 (263)
Amounts attributable to Hexion Holdings Corporation common shareholders and warrant holders:
Net (loss) income from continuing operations$(2)$(120)$(44)$2,252 $2,208 $(263)
Basic income (loss) per share attributable to Hexion Holdings Corporation common stockholders and warrant holders:
Net income (loss) per share from continuing operations, basic$(0.64)$27.26 $26.62 $(3.18)
Weighted average common shares and warrants outstanding, basic68.7 82.6 82.6 
Diluted income per share attributable to Hexion Holdings Corporation common stockholders and warrant holders:
Net income per share from continuing operations, diluted$(0.64)$27.26 $26.62 $(3.18)
Weighted average common shares and warrants outstanding, Diluted68.7 82.6 82.6 
Balance Sheet Data (at end of period):
Cash and cash equivalents$252 
Total assets(2)
2,396 
Total debt(5)
1,243 
Total liabilities(2)
1,954 
Total equity442 
Other Financial Data from continuing operations:
EBITDA(6)
117 108 
Segment EBITDA(6)
147 235 
__________________
(1)See “Management’s Discussion and Analysis—Overview and Outlook” for a discussion of the Non-GAAP Combined operating results for the year ended December 31, 2019.
(2)ASC 606 Revenue from Contracts with Customers and ASC 842 Leases, were effective for the year ended December 31, 2018 and for the Successor period from July 2, 2019 through December 31, 2019 and the Predecessor period from January 1, 2019 through July 1, 2019, respectively. Prior periods have not been adjusted for the adoption of these standards.
(3)“Cost of sales,” “Selling, general and administrative expense” and “Other non-operating income, net” have been adjusted for all periods presented to reflect the adoption of Accounting Standards Board Update No. 2017-07 (“ASU 2017-07”), which reclassified certain
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components of net periodic pension and postretirement benefit costs from “Cost of sales” and “Selling, general and administrative expense” to “Other non-operating income, net” within our consolidated statements of operations.
(4)As a result of the application of fresh start accounting upon our emergence from Chapter 11, we elected to change our income statement presentation for depreciation and amortization expense. All depreciation and amortization expense has been reclassified from “Cost of sales” and “Selling, general and administrative expense” to “Depreciation and amortization” for all periods presented. In addition, we no longer present “Gross profit” as a subtotal caption.
(5)Total debt represents the sum of “Debt payable within one year” and “Long-term debt” on our consolidated balance sheets. See Note 12 to our audited consolidated financial statements included in this prospectus for more information.
(6)EBITDA is defined as Net income (loss) (excluding loss (gain) on extinguishment of debt) before interest, income taxes and depreciation and amortization. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and other income and expenses. We have presented EBITDA and Segment EBITDA because we believe that these measures are useful to investors since they are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. Segment EBITDA is the primary performance measure used by our 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. EBITDA and Segment EBITDA are not recognized terms under GAAP, should not be viewed in isolation and do not purport to be alternatives to Net income (loss) as indicators of operating performance or cash flows from operating activities as measures of liquidity. There are material limitations associated with making the adjustments to our earnings to calculate EBITDA and Segment EBITDA and using these non-GAAP financial measures as compared to the most directly comparable GAAP financial measures. For instance, EBITDA and Segment EBITDA do not include:
interest expense, and because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue;
depreciation and amortization expense, and because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue; and
tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate.
Additionally, EBITDA and Segment EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as capital expenditures, contractual commitments, interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, this presentation of EBITDA and Segment EBITDA may not be comparable to other similarly titled measures for other companies.
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A reconciliation between Pro Forma Net Income from Continuing Operations, Pro Forma EBITDA and Pro Forma Segment EBITDA is as follows:
(in millions)Six Months Ended June 30, 2021Year Ended December 31, 2020
Reconciliation:
Pro Forma Net income (loss) from continuing operations$(2)$(120)
Income tax expense (benefit)20 30 
Interest expense, net40 82 
Depreciation and amortization (a)
59 116 
Pro Forma EBITDA
117 108 
Adjustments to arrive at Segment EBITDA:
Asset impairments— 16 
Business realignment costs (b)
11 56 
Transaction costs (c)
Realized and unrealized foreign currency losses— 
Unrealized losses (gains) on pension and OPEB plan liabilities— 
Other non-cash items (d)
16 26 
Other (e)
(3)
Total adjustments30 127 
Pro Forma Segment EBITDA
$147 $235 
Pro Forma Segment EBITDA:
Adhesives$142 $219 
Performance Materials28 53 
Corporate and Other(23)(37)
Total
$147 $235 
__________________
(a)There was no accelerated depreciation for the six months ended June 30, 2021. For the year ended December 31, 2020, accelerated depreciation of $2 million has been included in “Depreciation and amortization.”
(b)Business realignment costs for the periods below included:
Six Months Ended June 30, 2021Year Ended December 31, 2020
Severance costs$— $
In-process facility rationalizations
Contractual costs from exited businesses
Business services implementation22 
Legacy environmental reserves— 
Other
Total11 56 
(c)For the six months ended June 30, 2021 transaction costs represent professional fees related to strategic projects and costs associated with the set up of our transition services agreement and professional fees related to strategic projects. For the year ended
December 31, 2020 the transaction costs primarily relate to certain professional fees related to strategic projects.
(d)Other non-cash items for the periods presented below included:
Six Months Ended June 30, 2021Year Ended December 31, 2020
Fixed asset write-offs$— $
Stock-based compensation costs14 16 
Long-term retention programs
Other— 
Total16 26 
(e)    Other for the periods presented below included:
20


Six Months Ended June 30, 2021Year Ended December 31, 2020
Legacy and other non-recurring items$$
IT outage recoveries, net— (4)
Financing fees and other(5)
Total(3)
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Summary Historical Financial Information
The following table presents our summary historical financial information as of and for the periods presented. Prior to our emergence from bankruptcy on July 1, 2019 (the “Emergence Date”), Hexion Holdings Corporation had not conducted any business operations. Accordingly, unless otherwise noted or suggested by context, all financial information and data and accompanying financial statements and corresponding notes, as of and prior to the Emergence Date, as contained in this prospectus, reflect the actual historical consolidated results of operations and financial condition of Hexion Inc. for the periods presented and do not give effect to the Plan or any of the transactions contemplated thereby or the adoption of fresh start accounting.
Upon emergence from bankruptcy on the Emergence Date, we adopted fresh start accounting, which resulted in the creation of a new entity for financial reporting purposes. As a result of the application of fresh start accounting, as well as the effects of the implementation of the Plan, the consolidated financial statements after July 1, 2019 are not comparable with the consolidated financial statements on or prior to that date. Refer to Notes 1 and 3 to our audited consolidated financial statements included elsewhere in this prospectus for more information.
The summary historical financial information as of December 31, 2020 and December 31, 2019 and for the year ended December 31, 2020 and for the Successor period from July 2, 2019 through December 31, 2019 and the Predecessor period from January 1, 2019 through July 1, 2019 and for the Predecessor year ended December 31, 2018 has been derived from, and should be read in conjunction with, our audited consolidated financial statements included elsewhere in this prospectus. The summary unaudited historical financial information as of June 30, 2021 and for the six months ended June 30, 2021 and 2020 has been derived from, and should be read in conjunction with, our unaudited consolidated financial statements included elsewhere in this prospectus.
The combined results (referred to as “Non-GAAP Combined” or “Combined”) for the year ended December 31, 2019, which we refer to herein as results for the “Year Ended December 31, 2019” represent the sum of the reported amounts for the Predecessor period January 1, 2019 through July 1, 2019 combined with the Successor period from July 2, 2019 through December 31, 2019. These Combined results are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations. The Non-GAAP Combined operating results are presented for supplemental purposes only, may not reflect the actual results we would have achieved absent our emergence from bankruptcy, may not be indicative of future results and should not be viewed as a substitute for the financial results of the Predecessor period and Successor period presented in accordance with U.S. GAAP.
You should read the following summary information in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the historical financial statements included elsewhere in this prospectus.
22


Historical
 SuccessorPredecessor
Non-GAAP Combined(1)
Predecessor
(in millions, except share and per share data)Six months ended June 30,Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019Year Ended December 31, 2019Year Ended December 31, 2018
20212020
Statements of Operations:
Net sales(2)
$1,605 $1,222 $2,510 $1,323 $1,481 $2,804 $3,137 
Cost of sales(2)(3)(4)
1,220 1,013 2,043 1,117 1,211 2,328 2,559 
Selling, general and administrative expense(2)(3)(4)
153 109 231 124 128 252 243 
Depreciation and amortization(4)(5)
100 96 191 93 43 136 98 
Gain on dispositions— — — — — — (44)
Asset impairments— 16 16 — — — 28 
Business realignment costs13 38 69 22 14 36 27 
Other operating (income) expense, net— 12 24 16 17 33 37 
Operating income (loss)119 (62)(64)(49)68 19 189 
Interest expense, net48 51 100 55 89 144 365 
Reorganization items, net— — — — (2,970)(2,970)— 
Other non-operating income, net(3)
(7)(4)(15)— (11)(11)(12)
Income (loss) before income tax and earnings from unconsolidated entities78 (109)(149)(104)2,960 2,856 (164)
Income tax expense (benefit)25 (9)14 (10)201 191 31 
Income (loss) from continuing operations before earnings from unconsolidated entities53 (100)(163)(94)2,759 2,665 (195)
Earnings from unconsolidated entities, net of taxes
Net income (loss) from continuing operations, net of taxes54 (98)$(161)$(92)$2,760 $2,668 $(191)
(Loss) income from discontinued operations, net of taxes(5)(3)(69)135 139 28 
Net income (loss)$49 $(101)$(230)$(88)$2,895 $2,807 $(163)
Net (income) loss attributable to noncontrolling interest— — — (1)(1)(2)
Net income (loss) attributable to Hexion Holdings Corporation common stockholders and warrant holders$49 $(101)$(230)$(89)$2,894 $2,805 $(162)
Amounts attributable to Hexion Holdings Corporation common shareholders and warrant holders:
Net income (loss) from continuing operations$54 $(98)$(161)$(92)$2,760 $2,668 $(191)
Net (loss) income from discontinued operations(5)(3)(69)135 139 28 
Net income (loss)$49 $(101)$(230)$(88)$2,895 $2,807 $(163)
Basic income (loss) per share attributable to Hexion Holdings Corporation common stockholders and warrant holders:   
Net income (loss) per share from continuing operations, basic$0.79 $(1.44)$(2.36)$(1.36)$33.41 32.05 $(2.30)
Net (loss) income per share from discontinued operations, basic(0.07)(0.04)(1.01)0.06 1.63 1.69 0.34 
Net (loss) income per share, basic$0.72 $(1.48)$(3.37)$(1.30)$35.04 $33.74 $(1.96)
Weighted average common shares and warrants outstanding, basic68.4 68.2 68.3 68.7 82.6 82.6 
Diluted income per share attributable to Hexion Holdings Corporation common stockholders and warrant holders:
Net income per share from continuing operations, diluted$0.78 
Net loss per share from discontinued operations, diluted(0.07)
Net income per share, diluted$0.71 
Weighted average common shares and warrants outstanding, Diluted69.5 
Cash Flows (used in) provided by continuing operations:
Operating activities$(5)$(22)$116 $174 $(163)$11 $(63)
Investing activities(6)
263 (52)(105)(47)(40)(87)(31)
Financing activities(171)125 (57)(38)212 174 81 
23


Historical
 SuccessorPredecessor
Non-GAAP Combined(1)
Predecessor
(in millions, except share and per share data)Six months ended June 30,Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019Year Ended December 31, 2019Year Ended December 31, 2018
20212020
Balance Sheet Data (at end of period):
Cash and cash equivalents$288 $295 $204 $254 $128 
Total assets(2)
3,754 4,044 4,002 4,146 1,961 
Total debt(7)
1,610 1,915 1,792 1,785 3,815 
Total liabilities(2)
2,871 3,125 3,179 3,071 4,875 
Total redeemable common stock (June 30, 2021 and December 31, 2020, as restated)— — — 147 — 
Total equity (deficit) (June 30, 2021 and December 31, 2020, as restated)883 919 823 928 (2,914)
Other Financial Data from continuing operations:
Capital Expenditures$(52)$(52)$(108)$(47)$(41)$(88)$(81)
EBITDA(8)
227 40 144 46 3,093 3,139 303 
Segment EBITDA(8)
274 129 294 139 201 340 381 
Hexion Inc. Pro Forma EBITDA (for the twelve months ended)(9)
444 353 304 
_________________
(1)See “Management’s Discussion and Analysis— “Overview and Outlook” for a discussion of the Non-GAAP Combined operating results for the year ended December 31, 2019.
(2)ASC 606 Revenue from Contracts with Customers and ASC 842 Leases, were effective for the year ended December 31, 2018 and for the Successor period from July 2, 2019 through December 31, 2019 and the Predecessor period from January 1, 2019 through July 1, 2019, respectively. Prior periods have not been adjusted for the adoption of these standards.
(3)“Cost of sales,” “Selling, general and administrative expense” and “Other non-operating income, net” have been adjusted for all periods presented to reflect the adoption of Accounting Standards Board Update No. 2017-07 (“ASU 2017-07”), which reclassified certain components of net periodic pension and postretirement benefit costs from “Cost of sales” and “Selling, general and administrative expense” to “Other non-operating income, net” within our consolidated statements of operations.
(4)As a result of the application of fresh start accounting upon our emergence from Chapter 11, we elected to change our income statement presentation for depreciation and amortization expense. All depreciation and amortization expense has been reclassified from “Cost of sales” and “Selling, general and administrative expense” to “Depreciation and amortization” for all periods presented. In addition, we no longer present “Gross profit” as a subtotal caption.
(5)For the six months ended June 30, 2021 and 2020, accelerated depreciation of $2 million has been included in “Depreciation and amortization.” “Depreciation and amortization” for the years ended December 31, 2020 and 2018 includes accelerated depreciation of $2 million and $4 million, respectively, related to facility rationalizations. There was no accelerated depreciation in either the Successor period from July 2, 2019 through December 31, 2019 or in the Predecessor period from January 1, 2019 through July 1, 2019.
(6)“Investing activities” within our consolidated statement of cash flows has been adjusted for all periods presented to reflect the adoption of Accounting Standards Board Update No. 2016-18 (“ASU 2016-18”), which removed the change in restricted cash from “Investing activities” in the consolidated statement of cash flows. See Note 2 to our consolidated financial statements included in this prospectus for more information.
(7)Total debt represents the sum of “Debt payable within one year” and “Long-term debt” on our consolidated balance sheets. See Note 12 to our audited consolidated financial statements included in this prospectus for more information.
(8)EBITDA is defined as Net income (loss) (excluding loss (gain) on extinguishment of debt) before interest, income taxes and depreciation and amortization. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and other income and expenses. We have presented EBITDA and Segment EBITDA because we believe that these measures are useful to investors since they are frequently used by securities analysts, investors and other interested parties to evaluate companies in our industry. Segment EBITDA is the primary performance measure used by our 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. EBITDA and Segment EBITDA are not recognized terms under GAAP, should not be viewed in isolation and do not purport to be alternatives to Net income (loss) as indicators of operating performance or cash flows from operating activities as measures of liquidity. There are material limitations associated with making the adjustments to our earnings to calculate EBITDA and Segment EBITDA and using these non-GAAP financial measures as compared to the most directly comparable GAAP financial measures. For instance, EBITDA and Segment EBITDA do not include:
interest expense, and because we have borrowed money in order to finance our operations, interest expense is a necessary element of our costs and ability to generate revenue;
depreciation and amortization expense, and because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue; and
tax expense, and because the payment of taxes is part of our operations, tax expense is a necessary element of our costs and ability to operate.
24


Additionally, EBITDA and Segment EBITDA are not intended to be measures of free cash flow for management’s discretionary use, as they do not consider certain cash requirements such as capital expenditures, contractual commitments, interest payments, tax payments and debt service requirements. Because not all companies use identical calculations, this presentation of EBITDA and Segment EBITDA may not be comparable to other similarly titled measures for other companies.
Historical
 SuccessorSuccessorPredecessorNon-GAAP CombinedPredecessor
(in millions)Six Months Ended June 30, 2021Six Months Ended June 30, 2020Year Ended December 31, 2020Period from July 2, 2019 through December 31, 2019Period from January 1, 2019 through July 1, 2019Year
 Ended December 31, 2019
Year
 Ended December 31, 2018
Reconciliation:   
Net income (loss) attributable to Hexion Holdings Corporation$49 $(101)$(230)$(89)$2,894 $2,805 $(162)
Net income (loss) attributable to noncontrolling interest— — — (1)
Less: Net (loss) income from discontinued operations(5)(3)(69)135 139 28 
Net income (loss)54 (98)(161)(92)2,760 2,668 (191)
Income tax expense (benefit)25 (9)14 (10)201 191 31 
Interest expense, net48 51 100 55 89 144 365 
Depreciation and amortization(a)
100 96 191 93 43 136 98 
EBITDA227 40 144 46 3,093 3,139 303 
Adjustments to arrive at Segment EBITDA:   
Asset impairments and write-downs$— $16 $16 $— $— $— $32 
Business realignment costs(b)
13 38 69 22 14 36 27 
Realized and unrealized foreign currency losses (gains)4— (7)(3)28 
Gain on dispositions— — — — — — (44)
Unrealized losses (gains) on pension and OPEB plan liabilities— — — (13)
Transaction costs(c)
11 26 37 13 
Reorganization items, net(d)
— — — — (2,943)(2,943)— 
Non-cash impact of inventory step-up(e)
— — — 27 (27)— — 
Accelerated deferred revenue(f)
— — — — 18 18 — 
Other non-cash items(g)
25 23 43 10 19 14 
Other(h)
(2)12 14 18 32 21 
Total adjustments47 89 150 93 (2,892)(2,799)78 
Segment EBITDA $274 $129 $294 $139 $201 $340 $381 
Segment EBITDA:   
Adhesives$143 $98 $214 $116 $135 $251 $252 
Coatings & Composites173 65 151 60 96 156 200 
Corporate & Other(42)(34)(71)(37)(30)(67)(71)
Total $274 $129 $294 $139 $201 $340 $381 
________________
(a)For the six months ended June 30, 2021 and 2020, accelerated depreciation of $2 million has been included in “Depreciation and amortization.” For the year ended December 31, 2020 and Predecessor year ended December 31, 2018 accelerated depreciation of $2 million and $4 million has been included in “Depreciation and amortization.” There was no accelerated depreciation in either the Successor period from July 2, 2019 through December 31, 2019 or in the Predecessor period from January 1, 2019 through July 1, 2019.
(b)Business realignment costs for the Successor and Predecessor periods below included:
25


SuccessorPredecessor
Historical
(in millions)Six Months Ended June 30, 2021Six Months Ended June 30, 2020Year Ended December 31, 2020July 2, 2019 through
December 31, 2019
January 1, 2019 through
July 1, 2019
Year Ended December 31, 2018
Severance costs$— $10 $16 $$$
In-process facility rationalizations11 11 
Contractual costs from exited business— — — 
Business services implementation12 22 — — — 
Legacy environmental reserves— 
Other
Total$13 $38 $69 $22 $14 $27 
(c)For the six months ended June 30, 2021, transaction costs represent the costs associated with professional fees related to strategic projects and the set up of our transition services agreement related to the Held for Sale Business, and for the six months ended June 30, 2020 the transaction costs primarily included certain professional fees related to strategic projects. For the year ended December 31, 2020, transaction costs included certain professional fees related to strategic projects. For the Successor period from July 2, 2019 through December 31, 2019 and the Predecessor period from January 1, 2019 through July 1, 2019, transaction costs primarily included $6 million and $23 million, respectively, of certain professional fees and other expenses related to the Company’s Chapter 11 proceedings.
(d)Represents incremental costs incurred directly as a result of the Company’s Chapter 11 proceedings after the date of filing, gains on settlement of liabilities under the Plan and the net impact of fresh start accounting adjustments. The amounts excludes the “Non-cash impact of inventory step-up” discussed below.
(e)Represents $27 million of non-cash expense related to the step up of finished goods inventory on July 1 as part of fresh start accounting that was expensed in the Successor period upon the sale of the inventory.
(f)For the Predecessor period from January 1, 2019 through July 1, 2019, $18 million of deferred revenue was accelerated on July 1 as part of fresh start accounting.
(g)Other non-cash items for the Successor and Predecessor periods presented below included:
SuccessorPredecessor
Historical
(in millions)Six Months Ended June 30, 2021Six Months Ended June 30, 2020Year Ended December 31, 2020July 2, 2019 through
December 31, 2019
January 1, 2019 through
July 1, 2019
Year Ended December 31, 2018
Fixed asset write-offs$$$13 $$$
Stock-based compensation costs15 17 — — 
Long-term retention programs(2)
One-time capitalized variance impact of inventory fresh start step-up— — — (4)— — 
Other— 
Total$25 $23 $43 $10 $$14 
(h)Other for the periods presented below included:
SuccessorPredecessor
Historical
(in millions)Six Months Ended June 30, 2021Six Months Ended June 30, 2020Year Ended December 31, 2020July 2, 2019 through
December 31, 2019
January 1, 2019 through
July 1, 2019
Year Ended December 31, 2018
Legacy and other non-recurring items$$$$$$
IT outage (recoveries) costs, net— (4)(4)— — 
Gain on sale of assets(4)— — — — — 
Financing fees and other— 14 
Total(2)12 14 18 21 
(9)Hexion Inc. Pro Forma EBITDA (as defined in the Senior Note Indenture) reflects certain other adjustments permitted in calculating compliance under the indenture governing our Senior Notes and under our Credit Facilities, including reflecting the expected future impact of in-process cost savings initiatives associated with our in-process facility rationalizations and the creation of a business service group. The estimated cost savings are based on certain assumptions and our current estimates, but they involve risks, uncertainties, projections and other factors that may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied. Any of the assumptions could be inaccurate and, therefore, there can be no assurance that the estimated cost savings will prove to be accurate.
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The following table reconciles Hexion Inc.’s net loss to EBITDA, Segment EBITDA and Hexion Inc. Pro Forma EBITDA for the twelve month period ended June 30, 2021.
(In millions)June 30, 2021
LTM Period
(Hexion Inc.)
 (unaudited)
Net loss$(80)
Net loss from discontinued operations(71)
Net loss from continuing operations(9)
Income tax expense48 
Interest expense, net97 
Depreciation and amortization195 
EBITDA$331 
Adjustments to arrive at Segment EBITDA:
Business realignment costs(a)
44 
Unrealized loss on pension and OPEB plan liabilities(b)
Transaction costs(c)
10 
Realized and unrealized foreign currency gains(2)
Other non-cash(d)
45 
Other(e)
Segment EBITDA
$438 
Business operations expenses(f)
Hexion Inc. Pro Forma EBITDA
$444 
__________________
(a)Primarily represents costs related to cost reduction activities, including severance costs of $6 million, $6 million related to facility rationalizations, $8 million of contractual costs for exited businesses, $5 million for environmental clean-up of closed facilities and one-time implementation and transition costs associated with the creation of a business services group within the Company of $13 million.
(b)Represents non-cash losses resulting from pension and postretirement benefit plan liability remeasurements.
(c)Represents certain professional fees related to strategic projects and the costs associated with the set up of our transition services agreement.
(d)Primarily includes expenses for retention programs of $7 million, fixed asset disposals of $11 million and share-based compensation costs of $23 million.
(e)Primarily represents $6 million of expenses related to legacy expenses and other non-recurring items, $5 million related to financing fees and other expenses, offset by $4 million of gain on dispositions.
(f)Represents costs incurred related to business optimization program costs.
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RISK FACTORS
You should carefully consider the risk factors set forth below, as well as the other information contained in this prospectus. The risks described below are not the only risks facing us. Any of the following risks could materially; and adversely affect our business, financial condition or operating results. In such a case, you may lose all or a part of your original investment.
Risks Related to Our Business
If global economic conditions are weak or deteriorate, it will negatively impact our business operations, results of operations and financial condition.
Changes in global economic and financial market conditions could impact our business operations in a number of ways including, but not limited to, the following:
reduced demand in key customer segments, especially building and construction, as well as energy and automotive, compared to prior years;
weak economic conditions in our primary regions of operations: United States, Canada, South America, Europe and Asia Pacific;
payment delays by customers and reduced demand for our products caused by customer insolvencies and/or the inability of customers to obtain adequate financing to maintain operations;
insolvency of suppliers or the failure of suppliers to meet their commitments resulting in product delays;
more onerous credit and commercial terms from our suppliers such as shortening the required payment period for outstanding accounts receivable or reducing or eliminating the amount of trade credit available to us; and
potential delays in accessing our ABL Facility and the potential inability of one or more of the financial institutions included in our syndicated ABL Facility to fulfill their funding obligations.
Many of our key customer segments are sensitive to macroeconomic conditions, which are currently uncertain. Accordingly, the short and long-term outlook for our business is difficult to predict and our results of operations could, as a result of this uncertainty, fall below our expectations.
Fluctuations in direct or indirect raw material costs could have an adverse impact on our business.
Raw materials costs made up approximately 75% of our cost of sales (excluding depreciation expense) in 2020. The prices of our direct and indirect raw materials have been, and we expect them to continue to be, volatile. If the cost of direct or indirect raw materials increases significantly and we are unable to offset the increased costs with higher selling prices, our profitability will decline. Increases in prices for our products could also hurt our ability to remain both competitive and profitable in the markets in which we compete.
Although some of our raw materials contracts include competitive price clauses that allow us to buy outside the contract if market pricing falls below contract pricing, and certain contracts have minimum-maximum monthly volume commitments that allow us to take advantage of spot pricing, we may be unable to purchase raw materials at market prices. In addition, some of our customer contracts have fixed prices for a certain term, and as a result, we may not be able to pass on raw material price increases to our customers immediately, if at all. Due to differences in timing of the pricing trigger points between our sales and purchase contracts, there is often a “lead-lag” impact. In many cases this “lead-lag” impact can negatively impact our margins in the short term in periods of rising raw material prices and positively impact them in the short term in periods of falling raw material prices. Future raw material prices may be impacted by new laws or regulations, suppliers’ allocations to other purchasers, changes in our suppliers’ manufacturing processes as some of our products are byproducts of these processes, interruptions in production by suppliers, natural disasters, volatility in the price of crude oil and related petrochemical products and changes in exchange rates.
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Our operations and results have been impacted and may be negatively impacted by the COVID-19 outbreak.
Global or national health concerns, including the outbreak of pandemic or contagious disease, such as the recent COVID-19 pandemic, may adversely affect us.
Since December 2019, the COVID-19 virus which was first reported in Wuhan, China, has spread further in China and other regions including Europe and the United States, where we have operations. In March 2020, the World Health Organization declared that the COVID-19 outbreak is a global pandemic. Around the world, local governments’ responses to the COVID-19 pandemic continue to evolve, which has led to stay-at-home orders and social distancing guidelines and other measures that have disrupted various industries in the global economy and created significant volatility in the financial markets.
While we have continued to operate during the pandemic, we incurred adverse financial impacts to our sales and profitability results during the year ended December 31, 2020 from the COVID-19 pandemic, primarily related to reduced volumes associated with the pandemic. In particular, demand for our products in some of our key end markets like aerospace, automotive and construction deteriorated at a rapid pace in the second quarter of 2020, which had an adverse impact on our revenues and financial results for fiscal year 2020. Although we experienced improved conditions in our core markets in the third and fourth quarters of 2020, there continues to be uncertainty regarding the impact of the COVID-19 pandemic. In particular, a significant improvement in our core markets is attributable to a rapid growth in the demand for new residential construction in the United States. However, such demand for new residential construction in the United States may not continue at the same level, in which case our results of operations could be negatively affected. Additionally, notwithstanding general recovery of the global economy from the COVID-19 pandemic, several of our key end markets, including aerospace have been disproportionately impacted by the effects of the COVID-19 pandemic and have experienced relatively slow recoveries.
Future COVID-19 pandemic developments could adversely result in business and manufacturing disruptions, staffing impacts at our manufacturing facilities, restrictions on our employees’ ability to work and travel, inventory shortages, delivery delays, our ability to obtain financing on favorable terms, and reduced sales due to an economic downturn that could affect demand for our products. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 pandemic and the actions to contain COVID-19 or treat its impact, among others. A prolonged economic downturn from the COVID-19 pandemic could also result in impairments to long-lived assets, including goodwill and intangibles.
An inadequate supply of direct or indirect raw materials and intermediate products could have a material adverse effect on our business.
Our manufacturing operations require adequate supplies of raw materials and intermediate products on a timely basis. The loss of a key source or a delay in shipments could have a material adverse effect on our business. Raw material availability may be subject to curtailment or change due to, among other things:
new or existing laws or regulations;
suppliers’ allocations to other purchasers;
interruptions in production by suppliers; and
natural disasters.
Many of our raw materials and intermediate products are available in the quantities we require from a limited number of suppliers. Should any of our key suppliers fail to deliver these raw materials or intermediate products to us or no longer supply us, we may be unable to purchase these materials in necessary quantities, which could adversely affect our volumes, or may not be able to purchase them at prices that would allow us to remain competitive. During the past several years, certain of our suppliers have experienced force majeure events rendering them unable to deliver all, or a portion of, the contracted-for raw materials. On these occasions, we have been forced
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to limit production or were forced to purchase replacement raw materials in the open market at significantly higher costs or place our customers on an allocation of our products. In the past, some of our customers have chosen to discontinue or decrease the use of our products as a result of these measures. We have experienced force majeure events by certain of our suppliers which have had significant negative impacts on our business. For example, over the past several years there have been various supply interruption events due to hurricanes, supplier production fires and other supply issues which have impacted our ability to obtain key raw materials. Additionally, we cannot predict whether new regulations or restrictions may be imposed in the future which may result in reduced supply or further increases in prices. We cannot assure investors that we will be able to renew our current materials contracts or enter into replacement contracts on commercially acceptable terms, or at all. Fluctuations in the price of these or other raw materials or intermediate products, the loss of a key source of supply or any delay in the supply could result in a material adverse effect on our business.
Our production facilities are subject to significant operating hazards which could cause environmental contamination, personal injury and loss of life, and severe damage to, or destruction of, property and equipment.
Our production facilities are subject to hazards associated with the manufacturing, handling, storage and transportation of chemical materials and products, including human exposure to hazardous substances, pipeline and equipment leaks and ruptures, explosions, fires, inclement weather and natural disasters (including as a result of climate change), mechanical failures, unscheduled downtime, transportation interruptions, remedial complications, chemical spills, discharges or releases of toxic or hazardous substances or gases, storage tank leaks and other environmental risks. Additionally, a number of our operations are adjacent to operations of independent entities that engage in hazardous and potentially dangerous activities. Our operations or adjacent operations could result in personal injury or loss of life, severe damage to or destruction of property or equipment, environmental damage or a loss of the use of all or a portion of one of our key manufacturing facilities. Such events at our facilities, or adjacent third-party facilities, could have a material adverse effect on us.
We may incur losses beyond the limits or coverage of our insurance policies for liabilities that are associated with these hazards. In addition, various kinds of insurance for companies in the chemical industry have not been available on commercially acceptable terms, or, in some cases, have been unavailable altogether. In the future, we may not be able to obtain coverage at current levels, and our premiums may increase significantly on coverage that we maintain.
Environmental obligations and liabilities could have a substantial negative impact on our financial condition, cash flows and profitability.
Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials and are subject to extensive and complex U.S. federal, state, local and non-U.S. supranational, national, provincial and local environmental, health and safety laws and regulations. These laws and regulations include those that govern the discharge of pollutants into the air and water, the generation, use, storage, transportation, treatment and disposal of hazardous materials and wastes, the cleanup of contaminated sites, occupational health and safety and the safe operation of our equipment, and those requiring permits, licenses or other government approvals for specified operations or activities. Our products are also subject to a variety of international, national, regional, state and provincial requirements and restrictions applicable to the manufacture, import, export or subsequent use of such products. In addition, we are required to maintain, and may be required to obtain in the future, environmental, health and safety permits, licenses or government approvals to continue current operations at most of our manufacturing and research facilities throughout the world.
Compliance with environmental, health and safety laws and regulations, and maintenance of permits, can be costly and complex, and we have incurred and will continue to incur costs, including capital expenditures and costs associated with the issuance and maintenance of letters of credit, to comply with these requirements. In 2020, on a pro forma basis our continuing operations incurred capital expenditures of approximately $7 million, and $13 million on a historical basis, to comply with environmental, health and safety laws and regulations and to make other environmental improvements. If we are unable to comply with environmental, health and safety laws and regulations, or maintain our permits, we could incur substantial costs, including fines and civil or criminal sanctions, third party property damage or personal injury claims or costs associated with upgrades to our facilities or changes
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in our manufacturing processes in order to achieve and maintain compliance, and may also be required to halt permitted activities or operations until any necessary permits can be obtained or complied with, or decide to close the impacted facility. In addition, future developments or increasingly stringent regulations could require us to make additional unforeseen environmental expenditures, which could have a material adverse effect on our business.
Environmental, health and safety requirements change frequently and have tended to become more stringent over time. We cannot predict what environmental, health and safety laws and regulations or permit requirements will be enacted or amended in the future, how existing or future laws or regulations will be interpreted or enforced or the impact of such laws, regulations or permits on future production expenditures, supply chain or sales. Our costs of compliance with current and future environmental, health and safety requirements could be material. Such future requirements include legislation designed to reduce emissions of carbon dioxide and other substances associated with climate change (“greenhouse gases” or “GHGs”). The European Union (the “EU”) has enacted GHG emissions legislation and continues to expand the scope of such legislation. The U.S. Environmental Protection Agency (the “USEPA”) has promulgated regulations applicable to projects involving GHG emissions above a certain threshold, and the United States and certain states within the United States have enacted, or are considering, limitations on GHG emissions. These requirements to limit GHG emissions could significantly increase our energy costs, and may also require us to incur material capital costs to modify our manufacturing facilities.
In addition, we are subject to liability associated with hazardous substances in soil, groundwater and elsewhere at a number of sites. These include sites that we formerly owned or operated and sites where hazardous wastes and other substances from our current and former facilities and operations have been sent, treated, stored or recycled or disposed of, as well as sites that we currently own or operate. Depending upon the circumstances, our liability may be strict, joint and several, meaning that we may be held responsible for more than our proportionate share, or even all, of the liability involved regardless of our fault or whether we are aware of the conditions giving rise to the liability. Even where liability has been allocated among parties, we may be subject to material changes in such allocation in the future for a number of reasons, including the discovery of new contamination, the insolvency of a responsible party, or a heightened nexus to the remediation site. Environmental conditions at these sites can lead to environmental cleanup liability and claims against us for personal injury or wrongful death, property damages and natural resource damages, as well as to claims and obligations for the investigation and cleanup of environmental conditions. The extent of any of these liabilities is difficult to predict, but in the aggregate such liabilities could be material.
We have been notified that we are or may be responsible for environmental remediation at a number of sites in North America, Europe and South America. We are also performing a number of voluntary cleanups. The most significant sites at which we are performing or participating in environmental remediation are sites formerly owned by us in Geismar, Louisiana and Plant City, Florida. As the result of former, current or future operations, there may be additional environmental remediation or restoration liabilities or claims of personal injury by employees or members of the public due to exposure or alleged exposure to hazardous materials in connection with our operations, properties or products. Sites sold by us in past years may have significant site closure or remediation costs and our share, if any, may be unknown to us at this time. These environmental liabilities or obligations, or any that may arise or become known to us in the future, could have a material adverse effect on our financial condition, cash flows and profitability.
Global climate change legislation and regulations could negatively impact our results of operations or limit our ability to operate our business.
We operate production facilities in several countries. In many of the countries in which we operate, legislation has been passed or proposed, or legislation or regulation is being considered, to limit greenhouse gases through various means, including the capping and trading of emissions credits. In addition, there are international agreements such as the European Union emissions trading scheme, and the Paris Agreement, which was adopted in December 2015 by the Conference of Parties to the United Nations Framework Convention on Climate Change. Existing and future greenhouse gas legislation and regulation in the jurisdictions in which we operate could negatively impact our future results from operations through increased costs of production. We may be unable to pass such increased costs on to our customers, which may decrease our revenues and net income and have a material adverse effect on our business, financial condition, and results of operations. In addition, the potential impact of climate change regulation on our
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customers is highly uncertain and may also materially adversely affect our business, financial condition, and results of operations.
Future chemical regulatory actions may decrease our profitability.
Several governmental agencies have enacted, are considering or may consider in the future, regulations that may impact our ability to manufacture and sell formaldehyde based containing chemical products, primarily in North America and Europe, and potentially elsewhere if regulations develop. The European Registration, Evaluation and Authorization of Chemicals (“REACH”) regulation requires manufacturers, importers and consumers of certain chemicals manufactured in, or imported into, the EU to register such chemicals and evaluate their potential impacts on human health and the environment. REACH may result in certain chemicals being further regulated, restricted or banned from use in the EU. In addition, the Frank R. Lautenberg Chemical Safety for the 21st Century Act (“LCSA”) was signed into law on June 22, 2016, and updates and revises the Toxic Substances Control Act. LCSA regulates manufacturing, importing and commercial sale of chemical products in the United States and requires the implementing agency to conduct risk evaluations on high priority chemicals, which could include chemical products we manufacture and sell. LCSA requires the implementing agency to conduct risk evaluations on high priority chemicals, which could include chemical products we manufacture and sell. Other countries have implemented, or are considering implementation of, similar chemical regulatory programs. When fully implemented, REACH, LCSA and other regulatory programs may result in significant adverse market impacts on the affected chemical products, including any or all of the entirety of our portfolio of products, which would adversely impact our business. If we fail to comply with REACH, LCSA or other similar laws and regulations, we may be subject to penalties or other enforcement actions, including fines, injunctions, recalls or seizures, which would have a material adverse effect on our financial condition, cash flows and profitability. Additionally, studies conducted in association with these regulatory programs, or otherwise conducted through trade associations, may result in new information regarding the health effects and environmental impact of our products and raw materials. Such studies could result in future regulations restricting the manufacture or use of our products, liability for adverse environmental or health effects linked to our products, and/or de-selection of our products for specific applications. These restrictions, liability and product de-selection could have a material adverse effect on our business, our financial condition and/or liquidity.
Because of certain government public health agencies’ concerns regarding the potential for adverse human health effects, formaldehyde is a regulated chemical and public health agencies continue to evaluate its safety. A division of the World Health Organization, the International Agency for Research on Cancer (“IARC”), and the National Toxicology Program (“NTP”) within the U.S. Department of Health and Human Services, have classified formaldehyde as being carcinogenic to humans. The USEPA, under its Integrated Risk Information System (“IRIS”), released a draft of its toxicological review of formaldehyde in 2010, stating that formaldehyde meets the criteria to be described as “carcinogenic to humans.” The National Academy of Sciences (“NAS”) peer reviewed the draft IRIS toxicological review and issued a report in April 2011 that criticized the draft IRIS toxicological review and stated that the methodologies and the underlying science used in the draft IRIS review did not clearly support a conclusion of a causal link between formaldehyde exposure and leukemia. USEPA may or may not issue a revised draft IRIS toxicological review to reflect the NAS findings, including the conclusions regarding a causal link between formaldehyde exposure and leukemia. Formaldehyde has been designated to undergo a risk evaluation under the 2016 amended Toxic Substances Control Act (“TSCA”). The TSCA review process for formaldehyde has started and a final risk determination is expected at the end of 2022. The risk evaluation will include an assessment of most consumer, general public and occupational exposure conditions of use. The final risk determinations will drive how the chemistry of formaldehyde and its many applications will be regulated going forward. A high-priority designation means the USEPA has nominated formaldehyde for further risk evaluation. Effective January 1, 2016, the European Chemicals Agency did not classify formaldehyde as a Category 2 Mutagen, but instead, classified it as a Category 1B “presumed carcinogen”. It is possible that new regulatory requirements could be promulgated to limit human exposure to formaldehyde, that we could incur substantial additional costs to meet any such regulatory requirements, and that there could be a reduction in demand for our formaldehyde-based products in North America and Europe, and potentially elsewhere if regulations develop. These additional costs and reduced demand could have a material adverse effect on our operations and profitability.
Scientists periodically conduct studies on the potential human health and environmental impacts of chemicals, including products we manufacture and sell. Also, nongovernmental advocacy organizations and individuals
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periodically issue public statements alleging human health and environmental impacts of chemicals, including products we manufacture and sell. Based upon such studies or public statements, our customers may elect to discontinue the purchase and use of our products, even in the absence of any government regulation. Such actions could significantly decrease the demand for our products and, accordingly, have a material adverse effect on our business, financial condition, cash flows and profitability.
We are subject to certain risks related to litigation filed by or against us and adverse results may harm our business.
We cannot predict with certainty the cost of defense, of prosecution or of the ultimate outcome of litigation and other proceedings filed by or against us, including penalties or other civil or criminal sanctions, or remedies or damage awards, and adverse results in any litigation and other proceedings may materially harm our business. Litigation and other proceedings may include, but are not limited to, actions relating to intellectual property, international trade, commercial arrangements, product liability, environmental, health and safety, joint venture agreements, labor and employment or other harms resulting from the actions of individuals or entities outside of our control. In the case of intellectual property litigation and proceedings, adverse outcomes could include the cancellation, invalidation or other loss of material intellectual property rights used in our business and injunctions prohibiting our use of business processes or technology that are subject to third-party patents or other third-party intellectual property rights. Litigation based on environmental matters or exposure to hazardous substances in the workplace or based upon the use of our products could result in significant liability for us, which could have a material adverse effect on our business, financial condition and/or profitability.
Because we manufacture and use materials that are known to be hazardous, we are subject to, or affected by, certain product and manufacturing regulations, for which compliance can be costly and time consuming. In addition, we may be subject to personal injury or product liability claims as a result of human exposure to such hazardous materials.
We produce hazardous chemicals that require care in handling and use that are subject to regulation by many U.S. and non-U.S. national, supra-national, state and local governmental authorities. In some circumstances, these authorities must review and, in some cases approve, our products and/or manufacturing processes and facilities before we may manufacture and sell some of these chemicals. To be able to manufacture and sell certain new chemical products, we may be required, among other things, to demonstrate to the relevant authority that the product does not pose an unreasonable risk during its intended uses and/or that we are capable of manufacturing the product in compliance with current regulations. The process of seeking any necessary approvals can be costly, time consuming and subject to unanticipated and significant delays. Approvals may not be granted to us on a timely basis, or at all. Any delay in obtaining, or any failure to obtain or maintain, these approvals would adversely affect our ability to introduce new products and to generate revenue from those products. New laws and regulations may be introduced in the future that could result in additional compliance costs, bans on product sales or use, seizures, confiscation, recall or monetary fines, any of which could prevent or inhibit the development, distribution or sale of our products and could increase our customers’ efforts to find less hazardous substitutes for our products. We are subject to ongoing reviews of our products and manufacturing processes.
As discussed above, we manufacture and sell products containing formaldehyde, and certain governmental bodies have stated that there is a causal link between formaldehyde exposure and certain types of cancer, including myeloid leukemia and nasopharyngeal cancer. These conclusions could adversely impact our business and also become the basis of product liability litigation.
Other products we have made or used have been and could be the focus of legal claims based upon allegations of harm to human health. While we cannot predict the outcome of pending suits and claims, we believe that we maintain adequate reserves, in accordance with our accounting policy, to address currently pending litigation and are adequately insured to cover currently pending and foreseeable future claims. However, an unfavorable outcome in these litigation matters could have a material adverse effect on our business, financial condition and/or profitability and cause our reputation to decline.
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We are subject to claims from our customers and their employees, environmental action groups and neighbors living near our production facilities.
We produce and use hazardous chemicals that require appropriate procedures and care to be used in handling them or in using them to manufacture other products. As a result of the hazardous nature of some of the products we produce and use, we may face claims relating to incidents that involve our customers’ improper handling, storage and use of our products. We have historically faced lawsuits, including class action lawsuits that claim liability for death, injury or property damage caused by products that we manufacture or that contain our components. Additionally, we may face lawsuits alleging personal injury or property damage by neighbors living near our production facilities. These lawsuits, and any future lawsuits, could result in substantial damage awards against us, which in turn could encourage additional lawsuits and could cause us to incur significant legal fees to defend such lawsuits, either of which could have a material adverse effect on our business, financial condition and/or profitability. In addition, the activities of environmental action groups could result in litigation or damage to our reputation.
Our manufacturing facilities are subject to disruption due to operating hazards.
The storage, handling, manufacturing and transportation of chemicals at our facilities and adjacent facilities could result in leaks, spills, fires or explosions, which could result in production downtime, production delays, raw material supply delays, interruptions and environmental hazards. We have experienced incidents at our own facilities and a raw material supplier located adjacent to our facility that have resulted mostly in short term, but some long term, production delays. Production interruption may also result from severe weather (including as a result of climate change), particularly with respect to our southern U.S. operations near the Gulf Coast. Production lapses caused by any such delays can often be absorbed by our other manufacturing facilities, and we maintain insurance to cover such potential events. However, such events could negatively affect our operations.
As a global business, we are subject to numerous risks associated with our international operations that could have a material adverse effect on our business.
We have significant manufacturing and other operations outside the United States. Some of these operations are in jurisdictions with unstable political or economic conditions. There are numerous inherent risks in international operations, including, but not limited to:
exchange controls and currency restrictions;
currency fluctuations and devaluations;
tariffs and trade barriers imposed by the current U.S. administration or foreign governments;
renegotiation of trade agreements by the current U.S. administration;
export duties and quotas;  
changes in local economic conditions;
changes in laws and regulations;
exposure to possible expropriation or other government actions;
acts by national or regional banks, including the European Central Bank, to increase or restrict the availability of credit;
hostility from local populations;
diminished ability to legally enforce our contractual rights in non-U.S. countries;
restrictions on our ability to repatriate dividends from our subsidiaries; and
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unsettled political conditions and possible terrorist attacks against U.S. interests.
Our international operations expose us to different local political and business risks and challenges. For example, we may face potential difficulties in staffing and managing local operations, and we may have to design local solutions to manage credit risks of local customers and distributors. In addition, some of our operations are located in regions that may be politically unstable, having particular exposure to riots, civil commotion or civil unrest, acts of war (declared or undeclared) or armed hostilities or other national or international calamity. In some of these regions, our status as a U.S. company also exposes us to increased risk of sabotage, terrorist attacks, interference by civil or military authorities or to greater impact from the national and global military, diplomatic and financial response to any future attacks or other threats.
In addition, intellectual property rights may be more difficult to enforce in non-U.S. or non-Western European countries.
If global economic and market conditions, or economic conditions in Europe, China, Brazil, Australia, the United States or other key markets remain uncertain or deteriorate further, the value of associated foreign currencies and the global credit markets may weaken. Additionally, general financial instability in countries where we do not transact a significant amount of business could have a contagion effect and contribute to the general instability and uncertainty within a particular region or globally. If this were to occur, it could adversely affect our customers and suppliers and in turn have a materially adverse effect on our international business and results of operations.
Our overall success as a global business depends, in part, upon our ability to succeed under different economic, social and political conditions. We may fail to develop and implement policies and strategies that are effective in each location where we do business, and failure to do so could have a material adverse effect on our business, financial condition and results of operations.
Our business is subject to foreign currency risk.
In 2020, approximately 50% of our net sales originated outside the United States on a pro forma basis and approximately 54% on a historical basis. In our consolidated financial statements, we translate our local currency financial results into U.S. dollars based on average exchange rates prevailing during a reporting period or the exchange rate at the end of that period. During times of a strengthening U.S. dollar, at a constant level of business, our reported international revenues and earnings would be reduced because the local currency would translate into fewer U.S. dollars.
In addition to currency translation risks, we incur a currency transaction risk whenever we enter into a purchase or a sales transaction or indebtedness transaction using a different currency from the currency in which we record revenues. Given the volatility of exchange rates, we may not manage our currency transaction and/or translation risks effectively, and volatility in currency exchange rates may materially adversely affect our financial condition or results of operations, including our tax obligations. Since the majority of our indebtedness is denominated in U.S. dollars, a strengthening of the U.S. dollar could make it more difficult for us to repay our indebtedness.
We have entered and expect to continue to enter into various hedging and other programs in an effort to protect against adverse changes in the non-U.S. exchange markets and attempt to minimize potential material adverse effects. These hedging and other programs may be unsuccessful in protecting against these risks. Our results of operations could be materially adversely affected if the U.S. dollar strengthens against non-U.S. currencies and our protective strategies are not successful. Likewise, a strengthening U.S. dollar provides opportunities to source raw materials more cheaply from foreign countries.
Fluctuations in energy costs could have an adverse impact on our profitability and negatively affect our financial condition.
Oil and natural gas prices have fluctuated greatly over the past several years and we anticipate that they will continue to do so. Natural gas and electricity are essential to our manufacturing processes, which are energy intensive. Our energy costs represented approximately 3% and 4% of our total cost of sales on a pro forma basis and historical basis, respectively, for the year ended December 31, 2020.
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Our operating expenses will increase if our energy prices increase. Increased energy prices may also result in greater raw materials costs. If we cannot pass these costs through to our customers, our profitability may decline. Increased energy costs may also negatively affect our customers and the demand for our products. In addition, as oil and natural gas prices fall, while having a positive effect on our overall costs, such falling prices can have a negative impact on our oilfield business, as the number of oil and natural gas wells drilled declines in response to market conditions.
If energy prices decrease, we expect benefits in the short run with decreased operating expenses and increased operating income, but may face increased pricing pressure from competitors that are similarly impacted by energy prices. As a result, profitability may decrease over an extended period of lower energy prices. Moreover, any future increases in energy prices after a period of lower energy prices may have an adverse impact on our profitability for the reasons described above.
Globally, our operations are increasingly subject to regulations that seek to reduce emissions of GHGs, such as carbon dioxide and methane. The EU GHG Emissions Trading System (“ETS”) was established pursuant to the Kyoto Protocol to reduce GHG emissions in the EU. The EU has set a binding target to reduce domestic GHG emissions by at least 55% compared to 1990 levels level by 2030. a. 1.While the EU has not set direct requirements on the regulated community, the Company will likely be subject to more stringent GHG emission reduction measures in the near future to achieve the EU emission reduction target. The Company is currently assessing potential energy efficiency as well as emission reduction and offset opportunities associated with the EU emission reduction target, which will likely result in operational and equipment investment costs to the Company. Additionally, US EPA and certain states have adopted or are proposing GHG reduction regulations. If future such regulations impact our operations, we may incur costs to implement additional pollution control systems or improve operational efficiency. , w
We are already managing and reporting GHG emissions, to varying degrees, as required by law for our sites in locations subject to U.S. federal and state requirements, Kyoto Protocol obligations and/or ETS requirements. Although these sites are subject to existing GHG legislation, few have experienced or anticipate significant cost increases as a result of these programs, although it is possible that GHG emission restrictions may increase over time.
We face increased competition from other companies and from substitute products, which could force us to lower our prices, which would adversely affect our profitability and financial condition.
Several of the markets that we operate in are highly competitive, and this competition could harm our results of operations, cash flows and financial condition. Our competitors include major international producers as well as smaller regional competitors. We believe that the most significant competitive factor that impacts demand for certain of our products is selling price. We may be forced to lower our selling price based on our competitors’ pricing decisions, which would reduce our profitability. Certain markets that we serve have become commoditized in recent years and have given rise to several industry participants, resulting in fierce price competition in these markets. In addition, we face competition from a number of products that are potential substitutes for our products. Growth in substitute products could adversely affect our market share, net sales and profit margins.
Additional trends include current and anticipated consolidation among our competitors and customers which may cause us to lose market share as well as put downward pressure on pricing. There is also a trend in our industries toward relocating manufacturing facilities to lower cost regions, such as Asia, which may permit some of our competitors to lower their costs and improve their competitive position. Furthermore, there has been an increase in new competitors based in these regions.
Some of our competitors are larger, have greater financial resources, have a lower cost structure, and/or have less debt than we do. As a result, those competitors may be better able to withstand a change in conditions within our industry and in the economy as a whole. If we do not compete successfully, our operating margins, financial condition, cash flows and profitability could be adversely affected. Furthermore, if we do not have adequate capital to invest in technology, including expenditures for research and development, our technology could be rendered uneconomical or obsolete, negatively affecting our ability to remain competitive.
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Our success depends in part on our ability to protect our intellectual property rights and our inability to enforce these rights could have a material adverse effect on our competitive position.
We rely on the patent, trademark, copyright and trade secret laws of the United States and the countries where we do business to protect our intellectual property rights. We may be unable to prevent third parties from using our intellectual property without our authorization. The unauthorized use of our intellectual property could reduce any competitive advantage we have developed, reduce our market share or otherwise harm our business. In the event of unauthorized use of our intellectual property, litigation to protect or enforce our rights could be costly and we may not prevail.
Many of our technologies are not covered by any patent or patent application, and our issued and pending U.S. and non-U.S. patents may not provide us with any competitive advantage and could be challenged by third parties. Our inability to secure issuance of our pending patent applications may limit our ability to protect the intellectual property rights that these pending patent applications were intended to cover. Our competitors may attempt to design around our patents to avoid liability for infringement and, if successful, our competitors could adversely affect our market share. Furthermore, the expiration of our patents may lead to increased competition.
Our pending trademark applications may not be approved by the responsible governmental authorities and, even if these trademark applications are granted, third parties may seek to oppose or otherwise challenge these trademark applications. A failure to obtain trademark registrations in the United States and in other countries could limit our ability to protect our products and their associated trademarks and impede our marketing efforts in those jurisdictions.
In addition, effective patent, trademark, copyright and trade secret protection may be unavailable or limited in some foreign countries. In some countries we do not apply for patent, trademark or copyright protection. We also rely on unpatented proprietary manufacturing expertise, continuous technological innovation and other trade secrets to develop and maintain our competitive position. While we generally enter into confidentiality agreements with our employees and third parties to protect our intellectual property, these confidentiality agreements are limited in duration and could be breached, and may not provide meaningful protection of our trade secrets or proprietary manufacturing expertise. Adequate remedies may not be available if there is an unauthorized use or disclosure of our trade secrets and manufacturing expertise. In addition, others may obtain knowledge about our trade secrets through independent development or by legal means. The failure to protect our processes, apparatuses, technology, trade secrets and proprietary manufacturing expertise, methods and compounds could have a material adverse effect on our business by jeopardizing critical intellectual property.
Where a product formulation or process is kept as a trade secret, third parties may independently develop or invent and patent products or processes identical to our trade-secret products or processes. This could have an adverse impact on our ability to make and sell products or use such processes and could potentially result in costly litigation in which we might not prevail.
We could face intellectual property infringement claims that could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.
Our production processes and products are specialized; however, we could face intellectual property infringement claims from our competitors or others alleging that our processes or products infringe on their proprietary technology. If we were subject to an infringement suit, we may be required to change our processes or products, or stop using certain technologies or producing the infringing product entirely. Even if we ultimately prevail in an infringement suit, the existence of the suit could cause our customers to seek other products that are not subject to infringement suits. Any infringement suit could result in significant legal costs and damages and impede our ability to produce key products, which could have a material adverse effect on our business, financial condition and results of operations.
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We depend on certain of our key executives and our ability to attract and retain qualified employees.
Our ability to operate our business and implement our strategies depends, in part, on the skills, experience and efforts of key members of our leadership team. We do not maintain any key-man insurance on any of these individuals. In addition, our success will depend on, among other factors, our ability to attract and retain other managerial, scientific and technical qualified personnel, particularly research scientists, technical sales professionals and engineers who have specialized skills required by our business and focused on the industries in which we compete. Competition for qualified employees in the chemicals industry is intense and the loss of the services of any of our key employees or the failure to attract or retain other qualified personnel could have a material adverse effect on our business or business prospects. Further, if any of these executives or employees joins a competitor, we could lose customers and suppliers and incur additional expenses to recruit and train personnel, who require time to become productive and to learn our business.
If we fail to extend or renegotiate our collective bargaining agreements with our works councils and labor unions as they expire from time to time, if disputes with our works councils or unions arise, or if our unionized or represented employees were to engage in a strike or other work stoppage, our business and operating results could be materially adversely affected.
As of December 31, 2020, on a pro forma basis approximately 20% and approximately 35%, on a historical basis, of our employees were unionized or represented by works councils that were covered by collective bargaining agreements. In addition, some of our employees reside in countries in which employment laws provide greater bargaining or other employee rights than the laws of the United States. These rights may require us to expend more time and money altering or amending employees’ terms of employment or making staff reductions. For example, most of our employees in Europe are represented by works councils, which generally must approve changes in conditions of employment, including restructuring initiatives and changes in salaries and benefits. A significant dispute could divert our management’s attention and otherwise hinder our ability to conduct our business or to achieve planned cost savings.
We may be unable to timely extend or renegotiate our collective bargaining agreements as they expire. We have collective bargaining agreements which will expire during the next two years. We also may be subject to strikes or work stoppages by, or disputes with, our labor unions. If we fail to extend or renegotiate our collective bargaining agreements, if disputes with our works councils or unions arise or if our unionized or represented workers engage in a strike or other work stoppage, we could incur higher labor costs or experience a significant disruption of operations, which could have a material adverse effect on our business, financial position and results of operations.
Our pension plans are under-funded and our required cash contributions could be higher than we expect, each of which could have a material adverse effect on our financial condition and liquidity.
We sponsor various pension and similar benefit plans worldwide. Our U.S. and non-U.S. defined benefit pension plans were under-funded in the aggregate by $35 million and $154 million, respectively, as of December 31, 2020. Our U.S. and non-U.S. defined benefit pension plans were under-funded on a pro forma basis by $35 million and $1 million, respectively, as of December 31, 2020. We are legally required to make contributions to our pension plans in the future, and those contributions could be material.
In 2021, we expect to contribute approximately $3 million and $33 million to our U.S. and non-U.S. defined benefit pension plans, respectively, which we believe is sufficient to meet the minimum funding requirements as set forth in employee benefit and tax laws.
Our future funding obligations for our employee benefit plans depend upon the levels of benefits provided for by the plans, the future performance of assets set aside for these plans, the rates of interest used to determine funding levels, the impact of potential business dispositions, actuarial data and experience and any changes in government laws and regulations. In addition, certain of our funded employee benefit plans hold a significant amount of equity securities. If the market values of these securities decline, our pension expense and funding requirements would increase and, as a result, could have a material adverse effect on our business.
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Any decrease in interest rates and asset returns, if and to the extent not offset by contributions, could increase our obligations under these plans. If the performance of assets in the funded plans does not meet our expectations, our cash contributions for these plans could be higher than we expect, which could have a material adverse effect on our financial condition and liquidity.
Natural or other disasters have, and could in the future, disrupt our business and result in loss of revenue or higher expenses.
Any serious disruption at any of our facilities, our suppliers’ facilities or our customers’ facilities due to hurricane, fire, earthquake, flood, terrorist attack, public health crises (including, but not limited to, the coronavirus outbreak) or any other natural or man-made disaster could impair our ability to use our facilities or demand from our customers and have a material adverse impact on our revenues and increase our costs and expenses. If there is a natural disaster or other serious disruption at any of our facilities or our suppliers’ facilities, it could impair our ability to adequately supply our customers and negatively impact our operating results. For example, our manufacturing facilities in the U.S. Gulf Coast region were impacted by Hurricane Harvey in 2017, winter storm Uri and Hurricane Ida in 2021. In addition, many of our current and potential customers are concentrated in specific geographic areas. A disaster in one of these regions could have a material adverse impact on our operations, operating results and financial condition. Our business interruption insurance may not be sufficient to cover all of our losses from a disaster, in which case our unreimbursed losses could be substantial. Some of our operations are located in regions with particular exposure to natural disasters such as storms, floods, fires and earthquakes. It would be difficult or impossible for us to relocate these operations and, as a result, any of the aforementioned occurrences could materially adversely affect our business. At the time of this filing, the coronavirus has not had a material impact to our operations or financial results, however any future impacts of the coronavirus are highly uncertain and cannot be predicted.
Cybersecurity attacks and other disruptions to our or our third-party vendors’ information systems could interfere with our operations, and could compromise our information and the information of our customers and suppliers, which would adversely affect our relationships with business partners and harm our brands, reputation and financial results.
In the ordinary course of business, we rely upon information systems, some of which are managed by third parties, to process, transmit and store digital information, and to manage or support a variety of business processes and activities, including supply chain, manufacturing, distribution, invoicing, and collection of payments from customers. We use information systems to record, process and summarize financial information and results of operations for internal reporting purposes and to comply with regulatory financial reporting, legal and tax requirements. Additionally, we collect and store sensitive data, including intellectual property, proprietary business information, the proprietary business information of our customers and suppliers, as well as personally identifiable information of our customers, suppliers, and employees.
The secure operation of our systems or the technology systems of third parties on which we rely, and the processing and maintenance of this information is critical to our business operations and strategy. We recently transitioned certain of our information technology, procurement administration, accounting and finance functions to our new third party business services partner. Failure to effectively implement these technology services could expose us to security breaches, processing integrity, damage to our reputation, harm to our customer agreements, availability of data and financial reporting integrity. Implementation failure or execution issues with our third party business services partner could lead to a loss of revenue, supply chain issues, disruption of business, loss of customers or regulatory non-compliance. As cyber threats continue to evolve, we may be required to expend significant additional capital and other resources to further enhance our information security measures to protect against, and alleviate problems caused by, such incidents and/or to investigate and remediate any information security vulnerabilities regardless of whether they affect our systems or networks, or the systems and networks of our third-party vendors. Further, because we rely on third-party vendors, we may be affected by security incidents that we can neither control nor mitigate, including their vulnerability to damage or interruption from physical theft, fire, natural disasters, acts of terrorism, power loss, war, telecommunications and other service failures, computer viruses, degradation of service attacks, ransomware, insider theft or misuse, break-ins, human error, and similar
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events. Our crisis management procedures, business continuity plans and disaster recovery capabilities may not be effective at preventing or mitigating the effects of such disruptions, particularly in the case of a catastrophic event.
Despite actions to mitigate or eliminate risk, our information systems may be vulnerable to damage, disruptions or shutdowns due to the activity of hackers, employee error or malfeasance, or other disruptions including, power outages, telecommunication or utility failures, natural disasters or other catastrophic events. The occurrence of any of these events could compromise our systems and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such access, disclosure or other loss of information could result in legal claims or proceedings, liability or regulatory penalties under laws and regulations regarding data privacy, data security and protection of personal information, disrupt operations, and damage our reputation which could adversely affect our business, financial condition and results of operations.
Our insurance policies may not be adequate to reimburse us for losses caused by security breaches, and we may not be able to collect fully, if at all, under these insurance policies. The successful assertion of one or more large claims against us that exceed available insurance coverage, or the occurrence of changes in our insurance policies, including premium increases or the imposition of large deductible or co-insurance requirements, could adversely affect our business. Furthermore, we cannot be certain that insurance coverage will continue to be available on acceptable terms or at all, or that the insurer will not deny coverage as to any future claim.
In March 2019, we experienced a network security incident that temporarily prevented access to certain information technology systems and data within our network, primarily impacting our corporate functions. We took immediate steps to isolate the issue and implemented our technical recovery plan. Our manufacturing sites, which rely on different networks, continued to operate safely and with limited interruption.
Divestitures that we pursue may present unforeseen obstacles and costs and alter the synergies we expect to continue to achieve from our ongoing cost reduction programs. Acquisitions and joint ventures that we pursue may present unforeseen integration obstacles and costs, increase our leverage and negatively impact our performance.
We have selectively made, and may in the future, pursue divestitures of certain of our businesses as one element of our portfolio optimization strategy, including Project Fusion. Divestitures may require us to separate integrated assets and personnel from our retained businesses and devote our resources to transitioning assets and services to purchasers, resulting in disruptions to our ongoing business and distraction of management. Divestitures may alter synergies we expect to continue to achieve from our ongoing cost reduction programs. In the event of a large divestiture, we could use a significant amount of our net operating losses to offset taxable gain on the transaction, which would reduce the amount of losses available to offset our future taxable income and thus could increase the amount of our future cash taxes. In addition, divestitures may result in the retention of certain current and future liabilities as well as obligations to indemnify or reimburse a buyer for certain liabilities of a divested business. These potential obligations could have an adverse effect on our results of operations and financial condition if triggered.
In addition, we have made acquisitions of related businesses, and entered into joint ventures in the past and could selectively pursue acquisitions of, and joint ventures with, related businesses as one element of our growth strategy. If such acquisitions are consummated, the risk factors we describe above and below, and for our business generally, may be intensified or we may be subject to new risks as a result of such acquisitions.
We could face additional tax obligations based on the Emergence.
According to the Plan, the Successor Company indemnified the Predecessor Company for historical tax liabilities, including those related to the Emergence and prior tax contingencies. Tax laws are complex and subject to various interpretations, and tax authorities are increasingly scrutinizing the tax positions of companies. Tax authorities often challenge certain of our tax positions and may challenge other historical tax positions that are subject to indemnification under the Plan. If these challenges are successful, they could adversely affect the Successor Company’s effective tax rate and/or cash tax payments.
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We have recorded on our books and records certain income tax contingencies.
We have certain income tax contingencies associated with various uncertain tax positions. As of December 31, 2020, the amount of such contingencies totaled approximately $187 million, which includes approximately $59 million of interest expense related to the underlying income tax contingencies. We have recorded such income tax contingencies on our books and records. However, if we were to fail in sustaining these uncertain tax positions, it could result in a negative impact on our cash and financial results.
The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could adversely impact our financial position and results of operations.
We are subject to federal, state and local income taxes in the United States and in foreign jurisdictions. Our future effective tax rates could be adversely affected by changes in tax laws, including impacts of the Tax Cuts and Jobs Act enacted in 2017 (the “Tax Act”), as amended by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), the consequences of which have not yet been fully determined. In addition, a number of the jurisdictions we currently operate in, including the United States and other countries and organizations such as the Organization for Economic Co-operation and Development, are actively considering changes to existing tax laws that, if enacted, could increase our tax obligations in countries where we do business or require us to change the manner in which we operate our business.
Legislation or other changes in U.S. and international tax laws could increase our liability and adversely affect our after-tax profitability. For example, the current U.S. administration has proposed to increase the U.S. corporate income tax rate to 28% from 21%, increase the U.S. taxation of our international business operations, including by modifying the taxation of global intangible low-taxed income earned by foreign subsidiaries, and impose a global minimum corporate tax. We are unable to predict which, if any, of these proposals will be enacted into law. Such proposed changes, as well as regulations and legal decisions interpreting and applying these changes, may have significant impacts on our effective tax rate, cash tax expenses and net deferred tax assets in future periods.
We identified a material weakness in our internal control over financial reporting. If we fail to remediate this material weakness, identify additional material weaknesses, or if we otherwise fail to establish and maintain effective internal control over financial reporting, our ability to accurately and timely report our financial results could be adversely affected.
We identified a control deficiency in the design and implementation of our internal control over financial reporting as of December 31, 2020 that constituted a material weakness. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
We did not design and maintain effective controls for communicating and sharing information between the legal and accounting departments. Specifically, the legal and accounting departments are not consistently communicating complete and adequate information to record equity transactions within our financial statements timely, completely, and accurately.
This material weakness resulted in misstatements to the classification of redeemable common stock Class B, common stock Class B, paid-in capital and related financial disclosures, and in the restatement of the annual and interim consolidated financial statements for the periods ended December 31, 2020 and March 31, 2021, respectively. Additionally, this material weakness could result in an additional misstatement of our equity account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected.
To address this material weakness, we have begun implementing a plan to remediate the material weakness described above including enhancing existing quarterly meetings between legal, treasury and financial reporting to include discussions surrounding events that have or may impact the presentation of our financial statements, including key provisions within applicable articles, agreements or similar documents as well as developments that may occurred that could impact the amount or presentation of our equity accounts. However, the material weakness
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will not be remediated until our remediation plan has been fully implemented and we have concluded that our controls are designed and operating effectively for a sufficient period of time. We currently expect to remediate this material weakness by the end of 2021. However, we cannot be certain that the steps we have taken will be sufficient to remediate the control deficiency that led to the material weakness or avoid future material weaknesses. The effectiveness of our internal control over financial reporting is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the possibility of human error and the risk of fraud. If we are unable to remediate the material weakness or we identify other material weaknesses in the future, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods required under SEC rules, could be adversely affected. This may in turn adversely affect our reputation and business and the market price of our common stock. In addition, any such failures could result in litigation or regulatory actions by the SEC or other regulatory authorities, loss of investor confidence, delisting of our common stock and diversion of financial and management resources from the operation of our business.
We are not currently required to comply with the rules of the SEC implementing Section 404 of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act at Hexion Holdings Corporation and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. As a public company, we will be required to comply with the SEC’s rules implementing Sections 302 and 404 of the Sarbanes-Oxley Act, which will require management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of internal control over financial reporting. Though we will be required to disclose changes made in our internal control over financial reporting on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 until the year following our first annual report required to be filed with the SEC.
Repayment of our indebtedness, including required principal and interest payments, depends on cash flows generated by our subsidiaries, which may be subject to limitations beyond our control.
Our subsidiaries own a significant portion of our consolidated assets and conduct a significant portion of our consolidated operations. Repayment of our indebtedness depends, to a significant extent, on the generation of cash flows and the ability of our subsidiaries to make cash available to us by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us to make payments on our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from subsidiaries. While there are limitations on the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make intercompany payments, these limitations are subject to certain qualifications and exceptions. In the event that we are unable to receive distributions from our subsidiaries, we may be unable to make required principal and interest payments on our indebtedness.
A downgrade in our debt ratings could restrict our access to, and negatively impact the terms of, current or future financings or trade credit.
Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investors Service (“Moody’s”) maintain credit ratings on us and certain of our debt. Each of these ratings is currently below investment grade. Any decision by these or other ratings agencies to downgrade such ratings in the future could restrict our access to, and negatively impact the terms of, current or future financings and trade credit extended by our suppliers of raw materials or other vendors.
Risks Related to the Separation
We may not realize some or all of the anticipated benefits from the Separation.
We may not realize the full strategic and financial benefits we expect from the separation of Epoxy, or such benefits may be delayed or not occur at all. As an independent, publicly traded company, we believe that our business will benefit from, among other things, sharpened focus on the financial and operational resources of our specific business, allowing our management to design and implement a capital structure, corporate strategies and policies that are based primarily on the business characteristics and strategic opportunities of our business. We
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anticipate this will allow us to respond more effectively to industry dynamics and to allow us to create effective incentives for our management and employees that are more closely tied to our business performance. However, we may not be able to achieve some or all of the expected benefits, or such benefits may be delayed.
We will also incur significant costs in connection with the Separation, which may exceed our estimates. In addition, completion of the Distribution will require a significant amount of our management’s time and effort, which may divert attention from operating and growing our business. By separating the Epoxy Business, there is also a risk that we may become more susceptible to market fluctuations and other adverse events than while we were a combined company because we will no longer be able to enjoy the benefits of the combined company’s operating diversity and access to capital for investments.
If we fail to achieve some or all of the benefits that we expect from the Separation on a timely basis or at all, our business, results of operations and financial condition could suffer a material adverse effect.
Our combined historical and pro forma financial information is not necessarily representative of the results we would have achieved as a stand-alone company and may not be a reliable indicator of our future results.
Our combined historical and pro forma financial information included in this prospectus does not reflect the financial condition, results of operations or cash flows we would have achieved as a stand-alone company during the periods presented or that we may achieve in the future. This is primarily a result of the following factors:
our combined historical financial results reflect allocations of corporate expenses with Epoxy, which allocations may be different than the comparable expenses we would have actually incurred as a stand-alone company;
our working capital requirements historically have been satisfied as part of the combined company’s corporate-wide cash management policies;
our cost of debt and our capitalization will be different in the future;
our combined historical and pro forma financial results may not fully reflect the costs associated with being a stand-alone public company, including significant changes that will occur in our cost structure, management, financing and business operations as a result of the separation of Epoxy; and
the separation of Epoxy may have a negative impact on our client and other business relationships.
We have made adjustments based upon available information and assumptions that we believe are reasonable to reflect these factors, among others, in our combined historical and pro forma financial information. However, our assumptions may prove not to be accurate, and accordingly, the financial information presented in this prospectus should not be assumed to be indicative of what our financial condition or results of operations actually would have been as a stand-alone company nor to be a reliable indicator of what our financial condition or results of operations actually may be in the future.
For a description of the components of our historical combined financial information and adjustments reflected in our pro forma financial information, see “Unaudited Pro Forma Condensed Consolidated Financial Information” and our combined historical and pro forma financial statements included elsewhere in this prospectus.
Our net operating loss carryforwards may be utilized as part of the Separation and our ability to use any remaining net operating loss carryforwards and certain other deferred tax assets in the future may be limited.
All or a portion of our net operating loss (“NOL”) carryforwards may be utilized to offset taxable gain, if any, as part of the Separation (as defined below). To the extent the NOL carryforwards are used in connection with the Separation, these NOLs will not be available to offset future income.
We may not generate sufficient taxable income to use our NOL carryforwards before expiration. Under Section 382 and Section 383 of the Internal Revenue Code of 1986, as amended (the “Code”), if a corporation undergoes an “ownership change,” the corporation’s ability to use its pre-change NOLs and other tax attributes, including R&D
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tax credits, to offset its post-change income may be limited. In general, an “ownership change” will occur if there is a cumulative change in our ownership by “5 percent stockholders” that exceeds 50 percentage points over a rolling three-year period. Our ability to use federal NOLs and other deferred tax assets to reduce future taxable income may be subject to limitations due to ownership changes that may occur in the future, including as a result of this offering.
Under the Tax Act and CARES Act, net operating losses arising in taxable years beginning after December 31, 2017 and before January 1, 2021 may be carried back to each of the five taxable years preceding the tax year of such loss, but net operating losses arising in taxable years beginning after December 31, 2020 may not be carried back. Additionally, under the Tax Act, as modified by the CARES Act, net operating losses from tax years that began after December 31, 2017 may offset no more than 80% of current taxable income annually for taxable years beginning after December 31, 2020, but the 80% limitation on the use of net operating losses from tax years that began after December 31, 2017 does not apply for taxable income in tax years beginning before January 1, 2021. NOLs arising in tax years ending after December 31, 2017 can be carried forward indefinitely, but NOLs generated in tax years ending before January 1, 2018 will continue to have a two-year carryback and twenty-year carryforward period. As we maintain a full valuation allowance against our U.S. NOLs, these changes will not impact our balance sheet as of December 31, 2019. However, in future years, if and when a net deferred tax asset is recognized related to our NOLs, the changes in the carryforward and carryback periods as well as the new limitation on use of NOLs may significantly impact our valuation allowance assessments for NOLs generated after December 31, 2019.
There is also a risk that due to regulatory changes, such as suspensions on the use of NOLs and tax credits by certain jurisdictions, including in order to raise additional revenue to help counter the fiscal impact from the COVID-19 pandemic, possibly with retroactive effect, or other unforeseen reasons, our existing NOLs and other deferred tax assets could expire or otherwise be unavailable to offset future income tax liabilities. A temporary suspension of the use of certain NOLs and tax credits has been enacted in California, and other states may enact suspensions as well. For these reasons, we may not be able to realize a tax benefit from the use of our deferred tax assets.
Risks Related to Our Chapter 11 Proceedings and Emergence
Our actual financial results may vary significantly from the projections that were filed with the Bankruptcy Court.
In connection with our disclosure statement relating to the Plan (the “Disclosure Statement”), and the hearing to consider confirmation of the Plan, we prepared projected financial information to demonstrate to the Bankruptcy Court the feasibility of the Plan and our ability to continue operations upon Emergence. This projected financial information was prepared by, and is the responsibility of, our management. PricewaterhouseCoopers LLP has not audited, reviewed, compiled or applied agreed-upon procedures with respect to the projected financial information and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or any other form of assurance with respect thereto. The PricewaterhouseCoopers LLP report included in this document relates to our financial statements. It does not extend to the projected financial information and should not be read to do so. Those projections were prepared solely for the purpose of the Bankruptcy Petitions and have not been, and will not be, updated on an ongoing basis. At the time they were prepared, the projections reflected numerous assumptions concerning our anticipated future performance and with respect to prevailing and anticipated market and economic conditions that were and remain beyond our control and that may not materialize. Projections are inherently subject to substantial and numerous uncertainties and to a wide variety of significant business, economic and competitive risks and the assumptions underlying the projections and/or valuation estimates may prove to be wrong in material respects. Actual results may vary significantly from those contemplated by the projections that were prepared in connection with the Disclosure Statement and the hearing to consider confirmation of the Plan. The projections have not been included in this prospectus, are not incorporated by reference in this prospectus and should not be relied upon in connection with the purchase or sale of our common stock.
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Our financial condition and results of operations are not comparable to the financial condition or results of operations reflected in our historical financial statements.
Following our emergence from bankruptcy, we have been operating our existing business under a new capital structure. In addition, we have been subject to the fresh start accounting rules. As required by fresh start accounting, assets and liabilities were recorded at fair value, based on values determined in connection with the implementation of the Plan. Accordingly, our financial condition and results of operations from and after the Emergence Date will not be comparable to the financial condition and results of operations reflected in our historical financial statements included in this prospectus.
Risks Related to Our Indebtedness
We may be unable to generate sufficient cash flows from operations to meet our consolidated debt service payments.
Our ability to generate sufficient cash flows from operations to make scheduled debt service payments depends on a range of economic, competitive and business factors, many of which are outside of our control. Our business may generate insufficient cash flows from operations to meet our debt service and other obligations, and currently anticipated cost savings, working capital reductions and operating improvements may not be realized on schedule, or at all. For the year ended December 31, 2020, we had interest expense of $100 million. If we are unable to meet our expenses and debt service obligations, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets or issue additional equity securities. We may be unable to refinance any of our indebtedness, sell assets or issue equity securities on commercially reasonable terms, or at all, which could cause us to default on our obligations and result in the acceleration of our debt obligations. Our inability to generate sufficient cash flows to satisfy our outstanding debt obligations, or to refinance our obligations on commercially reasonable terms, would have a material adverse effect on our business, financial condition and results of operations.
Availability under the ABL Facility is subject to a borrowing base based on a specified percentage of eligible accounts receivable (85% or, in the case of investment grade receivables, 90%) and inventory and, with respect to the foreign loan parties, a specified percentage of eligible machinery, equipment and real property, subject to certain limitations. To the extent the borrowing base is lower than we expect, that could significantly impair our liquidity. In addition, if our fixed charge coverage ratio falls to less than 1.0 to 1.0, we will need to ensure that our availability under the ABL Facility is at least the greater of (x) $30 million and (y) 10% of the lesser of (i) the borrowing base and (ii) the total ABL Facility commitments at such time.
Our indebtedness could adversely affect our ability to raise additional capital to fund our operations and limit our ability to react to changes in the economy or our industry.
As of December 31, 2020, we had approximately $1.8 billion of indebtedness, including payments due within the next twelve months and short-term borrowings.
Our consolidated indebtedness could have other important consequences, including but not limited to the following:
it may limit our flexibility in planning for, or reacting to, changes in our operations or business;
we are more highly leveraged than many of our competitors, which may place us at a competitive disadvantage;
it may make us more vulnerable to downturns in our business or in the economy;
a portion of our cash flows from operations will be dedicated to the repayment of our indebtedness and will not be available for other purposes;
it may restrict us from making strategic acquisitions, introducing new technologies or exploiting business opportunities;
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it may make it more difficult for us to satisfy our obligations with respect to our existing indebtedness;
it may adversely affect terms under which suppliers provide material and services to us; and
it may limit our ability to borrow additional funds or dispose of assets.
There would be a material adverse effect on our business and financial condition if we were unable to service our indebtedness or obtain additional financing, as needed.
Despite our indebtedness, we may still be able to incur significant additional indebtedness. This could intensify the risks described above and below.
We may be able to incur substantial additional indebtedness in the future. Although the terms governing our indebtedness contain restrictions on our ability to incur additional indebtedness, these restrictions are subject to numerous qualifications and exceptions, and the indebtedness we may incur in compliance with these restrictions could be substantial. Increasing our indebtedness could intensify the risks described above and below.
The terms governing our outstanding debt, including restrictive covenants, may adversely affect our operations.
The terms governing our outstanding debt contain, and any future indebtedness we incur would likely contain, numerous restrictive covenants that impose significant operating and financial restrictions on our ability to, among other things:
incur or guarantee additional indebtedness;
pay dividends and make other distributions to our stockholders;
create or incur certain liens;
make certain loans, acquisitions, capital expenditures or investments;
engage in sales of assets and subsidiary stock;
enter into sale/leaseback transactions;
enter into transactions with affiliates;
enter into agreements that restrict dividends from subsidiaries; and
transfer all or substantially all of our assets or enter into merger or consolidation transactions.
In addition, the credit agreement governing our ABL Facility requires Hexion Inc. to maintain a minimum fixed charge coverage ratio of 1.0 to 1.0 at any time when excess availability is less than the greater of (x) $30 million and (y) 10% of the lesser of the (i) the borrowing base at such time and (ii) the total ABL Facility commitments at such time. The fixed charge coverage ratio under the credit agreement governing the ABL Facility is generally defined as the ratio of (a) Pro Forma EBITDA minus non-financed capital expenditures and cash taxes during such period to (b) debt service plus cash interest expense plus certain restricted payments, each measured for the four most recent quarters for which financial statements have been delivered. We may not be able to satisfy such ratio in future periods. If we anticipate we will be unable to meet such ratio, we expect not to allow our availability under the ABL Facility to fall below such levels.
A breach of our fixed charge coverage ratio covenant, if in effect, would result in an event of default under our ABL Facility. Pursuant to the terms of our ABL Facility, we will have the right, but not the obligation, to cure such default through the purchase of additional equity of Hexion Inc. for cash and the contribution of such cash to the capital of Hexion Inc. in up to two of any four consecutive quarters and seven total during the term of the ABL
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Facility. If a breach of a fixed charge coverage ratio covenant is not cured or waived, or if any other event of default under the ABL Facility occurs, the lenders under such credit facility:
would not be required to lend any additional amounts to us;
could elect to declare all borrowings outstanding under the Credit Facilities, together with accrued and unpaid interest and fees, due and payable and could demand cash collateral for all letters of credit issued thereunder;
could apply all of our available cash that is subject to the cash sweep mechanism of the Credit Facilities to repay these borrowings; and/or
could prevent us from making payments on the Senior Notes;
any or all of which could result in an event of default under the Senior Notes.
The ABL Facility provides for “springing control” over the cash in our deposit accounts constituting collateral for the ABL Facility, and such cash management arrangements includes a cash sweep at any time that availability under the ABL Facility is less than the greater of (x) $30 million and (y) 10% of the lesser of (i) the borrowing base at such time and (ii) the total ABL Facility commitments at such time. Such cash sweep, if in effect, will cause substantially all our available cash to be applied to outstanding borrowings under our ABL Facility. If we satisfy the conditions to borrowings under the ABL Facility while any such cash sweep is in effect, we may be able to make additional borrowings under the ABL Facility to satisfy our working capital and other operational needs. If we do not satisfy the conditions to borrowing, we will not be permitted to make additional borrowings under our ABL Facility, and we may not have sufficient cash to satisfy our working capital and other operational needs.
Risks Related to Our Common Stock
Our stock price may fluctuate significantly.
The market price of our common stock could vary significantly as a result of a number of factors, some of which are beyond our control. In the event of a drop in the market price of our common stock, you could lose a substantial part or all of your investment in our common stock.
our operating and financial performance and prospects;
quarterly variations in the rate of growth (if any) of our financial indicators, such as net income per share, net income and revenues;
the public reaction to our press releases, our other public announcements and our filings with the SEC;
strategic actions by our competitors;
changes in operating performance and the stock market valuations of other companies;
announcements related to litigation;
our failure to meet revenue or earnings estimates made by research analysts or other investors;
changes in revenue or earnings estimates, or changes in recommendations or withdrawal of research coverage, by equity research analysts;
speculation in the press or investment community;
sales of our common stock by us or our stockholders, or the perception that such sales may occur;
changes in accounting principles, policies, guidance, interpretations or standards;
additions or departures of key management personnel;
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actions by our stockholders;
general market conditions;
domestic and international economic, legal and regulatory factors unrelated to our performance;
material weakness in our internal controls over financial reporting; and
the realization of any risks described under this “Risk Factors” section, or other risks that may materialize in the future.
The stock markets in general have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. Securities class action litigation has often been instituted against companies following periods of volatility in the overall market and in the market price of a company’s securities. Such litigation, if instituted against us, could result in very substantial costs, divert our management’s attention and resources and harm our business, financial condition and results of operations.
We will incur significant costs and devote substantial management time as a result of operating as a public company.
As a public company, we will continue to incur legal, accounting, and other expenses. For example, we will be required to comply with certain of the requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer Protection Act, as well as rules and regulations subsequently implemented by the SEC, and the rules of the NYSE, including the establishment and maintenance of effective disclosure and financial controls and changes in corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming and costly. In addition, we expect that our management and other personnel will need to divert attention from operational and other business matters to devote substantial time to these public company requirements. In particular, we expect to continue incurring significant expenses and to devote substantial management effort toward ensuring compliance with the requirements of the Sarbanes-Oxley Act. In that regard, we may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. We cannot predict or estimate the amount of additional costs we may incur as a result of becoming a public company or the timing of such costs.
Ownership of our common stock is concentrated in the hands of certain stockholders that may have significant influence on corporate decisions sufficient to approve or veto most corporate actions requiring a vote of our stockholders.
We have a small number of stockholders that collectively have a large concentration of ownership of common stock. After giving effect to this offering, our five largest stockholders collectively will beneficially own     % of our common stock. This large concentration of ownership could collectively have significant influence over the outcome of actions requiring stockholder approval, including the election of directors and the approval of mergers, consolidations, the sale of all or substantially all of our assets and an amendment to our amended and restated certificate of incorporation and/or by-laws. They collectively could be in a position to prevent or cause a change in control of us.
Additionally, any future change in control of us could result in events that would have an adverse effect on our business or financial condition. For example, a change in control could place limitations on our future ability to use our tax net operating losses.
Our organizational documents may impede or discourage a takeover, which could deprive our investors of the opportunity to receive a premium of their shares.
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Provisions of our amended and restated certificate of incorporation and by-laws may make it more difficult for, or prevent a third party from, acquiring control of us without the approval of our board of directors. These provisions include:
prohibiting cumulative voting in the election of directors;
empowering only the board to fill any vacancy on our board of directors, whether such vacancy occurs as a result of an increase in the number of directors or otherwise;
authorizing the issuance of “blank check” preferred stock without any need for action by stockholders;
prohibiting stockholders from acting by written consent; and
establishing advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted on by stockholders at stockholder meetings.
An issuance of shares of preferred stock could delay or prevent a change in control of us. Our board of directors has the authority to cause us to issue, without any further vote or action by the stockholders, shares of preferred stock, par value $0.01 per share, in one or more series, to designate the number of shares constituting any series, and to fix the rights, preferences, privileges and restrictions thereof, including dividend rights, voting rights, rights and terms of redemption, redemption price or prices and liquidation preferences of such series. The issuance of shares of our preferred stock may have the effect of delaying, deferring or preventing a change in control without further action by the stockholders, even where stockholders are offered a premium for their shares.
We may issue preferred stock, the terms of which could adversely affect the voting power or value of our common stock.
Our amended and restated certificate of incorporation authorizes us to issue, without the approval of our stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over our common stock respecting dividends and distributions, as our board of directors may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of our common stock. For example, we might grant holders of preferred stock the right to elect some number of our directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences we might assign to holders of preferred stock could affect the residual value of the common stock.
Our amended and restated certificate of incorporation provides that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation provides that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware is the sole and exclusive forum for (a) any derivative action or proceeding brought on our behalf; (b) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers, employees or agents to us or our stockholders; (c) any action asserting a claim arising pursuant to any provision of the DGCL or of our amended and restated certificate of incorporation or our amended and restated bylaws; or (d) any action asserting a claim related to or involving us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could materially adversely affect our business, financial condition and results of operations.
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This exclusive forum provision would not apply to suits brought to enforce any duty or liability created by the Securities Act of 1933, as amended (the “Securities Act”), or the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty or liability created by the Securities Act or the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock will be deemed to have notice of and, to the fullest extent permitted by law, to have consented to the provisions described in this paragraph. However, the enforceability of similar forum provisions in other companies’ certificates of incorporation have been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be unenforceable.
We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.
We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers, including for payments in respect of our indebtedness, from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.” Each of our subsidiaries is a distinct legal entity, and under certain circumstances legal and contractual restrictions may limit our ability to obtain cash from them and we may be limited in our ability to cause any future joint ventures to distribute their earnings to us. The deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.
Investors in this offering will experience immediate and substantial dilution.
Based on our pro forma net tangible book value per share as of June 30, 2021 and an assumed initial public offering price of $                per share (the midpoint of the range set forth on the cover of this prospectus), purchasers of our common stock in this offering will experience an immediate and substantial dilution of $                per share, representing the difference between our pro forma net tangible book value per share and the assumed initial public offering price. This dilution is due in large part to earlier investors having paid substantially less than the initial public offering price when they purchased their shares. See “Dilution.”
You may be diluted by the future issuance of additional common stock or convertible securities in connection with our incentive plans, acquisitions or otherwise, which could adversely affect our stock price.
After the completion of this offering, we will have                shares of common stock authorized but unissued (assuming no exercise of the underwriters’ option to purchase additional shares). Our amended and restated certificate of incorporation authorizes us to issue these shares of common stock and options, rights, warrants and appreciation rights relating to common stock for the consideration and on the terms and conditions established by our board of directors in its sole discretion, whether in connection with acquisitions or otherwise. At the closing of this offering, we will have approximately                options outstanding, which are exercisable into approximately                shares of common stock and we will have approximately                 warrants outstanding, which are exercisable into approximately                shares of common stock. We have reserved approximately                shares for issuance upon exercise of outstanding stock options (    of which are issuable under our 2019 Incentive Plan) and an additional approximately                shares for issuance under our 2019 Incentive Plan. See “Compensation Discussion and Analysis—2019 Omnibus Incentive Plan.” Any common stock that we issue, including under our 2019 Incentive Plan or other equity incentive plans that we may adopt in the future, as well as under outstanding options or warrants would dilute the percentage ownership held by the investors who purchase common stock in this offering.
From time to time in the future, we may also issue additional shares of our common stock or securities convertible into common stock pursuant to a variety of transactions, including acquisitions. Our issuance of
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additional shares of our common stock or securities convertible into our common stock would dilute your ownership of us and the sale of a significant amount of such shares in the public market could adversely affect prevailing market prices of our common stock.
Future sales of our common stock in the public market, or the perception in the public market that such sales may occur, could reduce our stock price.
After the completion of this offering, we will have                shares of common stock outstanding (assuming no exercise of the underwriters’ option to purchase additional shares). The number of outstanding shares of common stock includes                shares (assuming no exercise of the underwriters’ option to purchase additional shares) beneficially owned by certain of our employees, that are “restricted securities,” as defined under Rule 144 under the Securities Act, and eligible for sale in the public market subject to the requirements of Rule 144. We, the selling stockholders and each of our officers and directors have agreed that (subject to certain exceptions), for a period of 180 days after the date of this prospectus, we and they will not, without the prior written consent of certain underwriters, dispose of any shares of common stock or any securities convertible into or exchangeable for our common stock. See “Underwriters.” However, holders of approximately          shares of our common stock are not subject to this lock-up requirement, and these holders generally have freely tradeable stock that can be sold into the public markets without limit. Following the expiration of the lock-up period, all of the issued and outstanding shares of our common stock will be eligible for future sale, subject to the applicable volume, manner of sale, holding periods and other limitations of Rule 144. Certain underwriters may, in their sole discretion, release all or any portion of the shares subject to lock-up agreements at any time and for any reason. In addition, certain of our existing stockholders have the right to require us to register the sale of shares of common stock held by them, including in conjunction with underwritten offerings. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.” Sales of significant amounts of stock in the public market upon expiration of lock-up agreements, the perception that such sales may occur, or early release of any lock-up agreements, could adversely affect prevailing market prices of our common stock or make it more difficult for you to sell your shares of common stock at a time and price that you deem appropriate. See “Shares Eligible for Future Sale” for a discussion of the shares of common stock that may be sold into the public market in the future.
There can be no assurances that a viable public market for our common stock will develop.
Prior to this offering, our common stock was quoted on the OTC Pink market. An active, liquid and orderly trading market for our common stock may not develop or be maintained after this offering. Active, liquid and orderly trading markets usually result in less price volatility and more efficiency in carrying out investors’ purchase and sale orders. We cannot predict the extent to which investor interest in our common stock will lead to the development of an active trading market on the NYSE or otherwise or how liquid that market might become. The initial public offering price for the common stock will be determined by negotiations between us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market following this offering. See “Underwriters.” If an active public market for our common stock does not develop, or is not sustained, it may be difficult for you to sell your shares at a price that is attractive to you or at all.
The initial public offering price of our common stock may not be indicative of the market price of our common stock after this offering.
The initial public offering price was determined by negotiations between us, the selling stockholders and representatives of the underwriters, based on numerous factors which we discuss in “Underwriters,” and may not be indicative of the market price of our common stock after this offering. If you purchase our common stock, you may not be able to resell those shares at or above the initial public offering price.
If securities or industry analysts do not publish research or reports about our business or publish negative reports, our stock price could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts publish about us or our business. If one or more of these analysts ceases coverage of our company or fails to publish reports on us regularly, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline. Moreover, if one or more of the analysts who cover our company
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downgrades our common stock or if our operating results do not meet their expectations, our stock price could decline.  
Actions of activist stockholders, and such activism, could adversely impact our business.
We may be subject to proposals by stockholders urging us to take certain corporate actions. Responding to actions by activist stockholders can be costly and time-consuming, disrupting our operations and diverting the attention of management and our employees. Such activities could also interfere with our ability to execute our business strategies. The perceived uncertainties as to our future direction caused by activist actions could affect the market price of our securities, result in the loss of potential business opportunities and make it more difficult to attract and retain qualified personnel, board members and business partners.
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THE SEPARATION AND DISTRIBUTION
General
Prior to the consummation of this offering of common stock, we will distribute to our existing stockholders and warrant holders all of the shares of common stock of Epoxy, which will hold our Epoxy Business. The Epoxy Business is currently a wholly owned business of Hexion and, at the time of the Distribution, Epoxy will hold, directly or indirectly through its subsidiaries, all of the assets and liabilities associated with the Epoxy Business. We refer to this distribution of Epoxy shares as the “Distribution” and to the separation of the Epoxy Business as the “Separation.”
Certain assets included in the transaction include our manufacturing sites in Argo, IL (USA); Deer Park, TX (USA), Lakeland, FL (USA); Barbastro, Spain; Onsan, Korea; Pernis, Netherlands (excluding VersaticTM Acid and derivative facilities); Duisburg, Germany; and Esslingen, Germany.
The Separation will be achieved through the transfer of the assets and liabilities of the Epoxy Business to Epoxy or entities that are, or will become prior to the Distribution, its subsidiaries and the distribution of 100% of the outstanding capital stock of Epoxy to holders of our common stock and warrants on the record date of         , 2021. At the effective time of the Distribution, (i) our stockholders will receive one share of Epoxy common stock for every          shares of our common stock held on the record date and (ii) our warrant holders will receive one share of Epoxy common stock for every           shares of our common stock they would have received if they exercised their warrants immediately prior to the record date. The Separation is expected to be completed prior to the consummation of this offering. Immediately following the Separation, our stockholders and warrant holders as of the record date will own 100% of the outstanding capital stock of Epoxy. Following the Separation, Epoxy will be an independent, public company, and we will retain no ownership interest in Epoxy.
As part of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements to effect the Separation and provide a framework for our relationship with Epoxy after the Separation. These agreements will provide for the allocation between us and Epoxy of the assets, liabilities and obligations of Hexion and its subsidiaries, and will govern the relationship between Epoxy and Hexion after the Separation. In addition to the Separation and Distribution Agreement, the other principal agreements to be entered into with Epoxy include:
Tax Matters Agreement;
Shared Services Agreement;
Employee Matters Agreement;
Certain other commercial arrangements.
The Separation is subject to the satisfaction or waiver of certain conditions. For a more detailed description of these conditions, see “—Conditions to the Distribution” below. We cannot provide any assurances that the Separation will be completed.
Reasons for the Separation
Our Board of Directors believes separating the Epoxy Business from our other businesses is in the best interests of Hexion and its stockholders and has concluded that the Separation will provide us and Epoxy with a number of potential opportunities and benefits, including the following:
Strategic and Management Focus. Permit the management team of each company to focus on its own strategic priorities with financial targets that best fit its own business and opportunities. We believe the Separation will enable each company’s management team to better position its businesses to capitalize on developing macroeconomic trends, increase managerial focus to pursue its individual strategies and leverage its key strengths to drive performance. The management of each resulting company will be able to
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concentrate on its core competencies and growth opportunities and will have increased flexibility and speed to design and implement strategies based on the characteristics of its business.
Resource Allocation and Capital Deployment. Allow each company to allocate resources, incentivize employees and deploy capital to capture the significant long-term opportunities in their respective markets. The Separation will enable each company’s management team to implement a capital structure, dividend policy and growth strategy tailored to each unique business. Both businesses are expected to have direct access to the debt and equity capital markets to fund their respective growth strategies.
Investor Choice. Provide investors, both current and prospective, with the ability to value the two companies based on their distinct business characteristics and make more targeted investment decisions based on those characteristics. Separating the two businesses will provide investors with a more targeted investment opportunity so that investors interested in the Epoxy Business will have the opportunity to acquire stock of Epoxy.
Employee Incentives and Retention. Enable each company to better incentivize, attract, and retain key employees through the use of equity compensation. Separating the two businesses will allow each company to design stock option and similar programs that better incentivize management to enhance business performance because the stock price performance of each company will be based on the performance of its own business.
While a number of potential costs and risks were also considered, including, among others, risks relating to the creation of a new public company, such as increased costs from operating as a separate public company, the risk of volatility in our stock price immediately following the Distribution, potential disruptions to each business, the loss of synergies, scale and joint purchasing power, increased administrative costs, one-time separation costs, the fact that each company will be less diversified following the Separation, and the potential inability to realize the anticipated benefits of the Separation, it was nevertheless determined that the potential benefits of the Separation outweighed the potential costs and risks in connection therewith and provided the best opportunity to achieve the above benefits and enhance stockholder value.
The financial terms of the Separation, including the new indebtedness expected to be incurred by Hexion and Epoxy or entities that are, or will become, prior to the completion of the Separation, subsidiaries of Epoxy, has been, or will be, determined by our Board of Directors based on a variety of factors, including establishing an appropriate pro forma capitalization for Epoxy as a stand-alone company considering the historical earnings of the Epoxy Business and the level of indebtedness relative to earnings of various comparable companies.
In determining the appropriate beginning capital structure for the Epoxy Business our management and Board of Directors considered various factors, including:
the potential credit ratings for the Epoxy Business under various debt scenarios; and
the appropriate mix of debt and equity in the capitalization of the Epoxy Business, reflecting the amount of leverage Epoxy would have if we had been operating as an independent, publicly owned company prior to the Separation.
Our management and Board of Directors believe that given Epoxy’s experienced management team and position as a leading global epoxy supplier, Epoxy will be able to advance its business goals and strategic growth initiatives notwithstanding the debt that Epoxy will incur in connection with the Separation and the Distribution to us.
The Number of Shares Hexion Stockholders and Warrant Holders Will Receive
It is expected that (i) for every         shares of our common stock Epoxy stockholders own as of the close of business on         , 2021, the record date for the Distribution, they will receive one share of Epoxy common stock on the Distribution Date and (ii) for every          shares of our common stock Epoxy warrant holders would have
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received if they exercised their warrants immediately prior to the close of business on           , 2021, the record date for the Distribution, they will receive one share of Epoxy common stock on the Distribution Date.
It is important to note that purchasers in this offering will acquire shares after the dividend record date and will not have the right to receive the share distribution in the Distribution. Please see “—Trading Between the Record Date and Distribution Date” for more information.
Treatment of Outstanding Equity Compensation Awards
In connection with the Separation, outstanding Hexion equity awards will generally be equitably adjusted in a manner that is intended to preserve the aggregate intrinsic value of such awards as of immediately before and after the Distribution.
Specifically, we intend that, in connection with the Separation, (i) outstanding Hexion equity awards (whether held by individuals who will continue to be employed by Hexion (as well as independent contractors of Hexion and former Hexion employees) or held by individuals who are or will be employed by or otherwise providing services to us) will be equitably adjusted to reflect the difference in the value of Hexion common stock before and after the Distribution in a manner that is intended to preserve the overall intrinsic value of the awards by taking into account the relative value of Hexion common stock before and after the Distribution.
In addition, any Hexion equity awards held by employees who are intended to transfer to Epoxy following the Distribution Date (including in connection with any transition services) will be treated in the same manner as described above.
Results of the Separation
After the Separation, Epoxy will be an independent, public company that directly or indirectly holds certain assets and liabilities of the Epoxy Business.
Before the completion of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with Epoxy to effect the Separation and provide a framework for our relationship with Epoxy after the Separation. These agreements will provide for the allocation between Epoxy and Hexion of Hexion’s assets, liabilities and obligations subsequent to the Separation (including with respect to transition services, employee matters, tax matters, and certain commercial arrangements). For a more detailed description of these agreements, see “—Agreements with Epoxy” below. The Separation will not affect the number of outstanding shares of Hexion common stock or outstanding Hexion warrants or any rights of Hexion stockholders or warrant holders.
Conditions to the Distribution
We expect the Distribution will be effective prior to the consummation of this offering, provided that, among other conditions described in the Separation and Distribution Agreement, the following conditions will have been satisfied or waived by Hexion in its sole discretion:
The Separation-related restructuring and financing transactions contemplated by the Separation and Distribution Agreement will each have been completed, and Hexion shall be satisfied in its sole and absolute discretion that, as of the effective time of the Distribution, it shall have no liability whatsoever under such financing transactions;
The Hexion Board of Directors will have approved the Distribution and will not have abandoned the Distribution or terminated the Separation and Distribution Agreement at any time prior to the Distribution;
The SEC will have declared effective Epoxy’s registration statement on Form 10, under the Exchange Act, no stop order suspending the effectiveness of Epoxy’s registration statement on Form 10 will be in effect and no proceedings for such purpose will have been instituted or threatened by the SEC, and the information statement, or a notice of Internet availability thereof, will have been mailed to the holders of Hexion common stock and warrants as of the record date for the Distribution;
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All actions and filings necessary or appropriate under applicable federal, state or other securities laws or “blue sky” laws and the rules and regulations thereunder will have been taken or made and, where applicable, become effective or accepted;
The Epoxy common stock to be delivered in the Distribution will have been approved for listing on the           , subject to official notice of issuance;
The Epoxy board of directors, as named in the information statement, will have been duly elected, and the amended and restated certificate of incorporation and amended and restated bylaws of Epoxy, in substantially the form attached as exhibits to the registration statement on Form 10, will be in effect;
Each of the ancillary agreements contemplated by the Separation and Distribution Agreement will have been executed and delivered by the parties thereto;
An independent appraisal firm acceptable to Hexion will have delivered one or more opinions to our Board of Directors concerning the solvency and capital adequacy matters of Epoxy and its subsidiaries after consummation of the Distribution, and such opinions will be acceptable in form and substance to our Board of Directors in its sole and absolute discretion and such opinions will not have been withdrawn or rescinded;
No applicable law will have been adopted, promulgated or issued that prohibits the consummation of the Distribution or any of the other transactions contemplated by the Separation and Distribution Agreement or an ancillary agreement contemplated by the Separation and Distribution Agreement;
Any material governmental approvals and consents and any material permits, registrations and consents from third parties, in each case, necessary to effect the Distribution, will have been obtained;
Epoxy shall have entered into a registration rights agreement with certain stockholders of Hexion;
No event or development will have occurred or exist that, in the judgment of our Board of Directors, in its sole and absolute discretion, makes it inadvisable to effect the Distribution or any of the other transactions contemplated by the Separation and Distribution Agreement or an ancillary agreement contemplated by the Separation and Distribution Agreement; and
Certain necessary actions to complete the Separation will have occurred, including that Hexion will have entered into a distribution agent agreement with a distribution agent or otherwise provided instructions to a distribution agent regarding the Distribution.
The fulfillment of the foregoing conditions will not create any obligations on our part to effect the Separation, and our Board of Directors has reserved the right, in its sole discretion, to abandon, modify or change the terms of the Separation, including by accelerating or delaying the timing of the consummation of all or part of the Distribution, at any time prior to the Distribution Date.
We cannot assure you that all of the conditions will be satisfied or waived. In addition, if the Distribution is completed and our Board of Directors waived any such condition, such waiver could have a material adverse effect on Hexion’s and Epoxy’s respective business, financial condition or results of operations, the trading price of Epoxy common stock, or the ability of stockholders to sell their shares after the Distribution, including, without limitation, as a result of illiquid trading due to the failure of Epoxy common stock to be accepted for listing or litigation relating to any preliminary or permanent injunctions sought to prevent the consummation of the Distribution.
Agreements with Epoxy
As part of the Separation, we will enter into a Separation and Distribution Agreement and several other agreements with Epoxy to effect the Separation and provide a framework for our relationship with Epoxy after the Separation. These agreements will provide for the allocation between us and Epoxy of the assets, liabilities and obligations of Epoxy and its subsidiaries, and will govern the relationship between Hexion and Epoxy subsequent to
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the Separation (including with respect to transition services, employee matters, tax matters, and certain commercial arrangements).
In addition to the Separation and Distribution Agreement (which will contain many of the key provisions related to the Separation and the distribution of Epoxy shares of common stock to Hexion stockholders and warrant holders), these agreements include, among others:
Tax Matters Agreement;
Shared Services Agreement;
Employee Matters Agreement;
Certain other commercial arrangements.
The forms of the principal agreements described below are expected to be filed as exhibits to the registration statement of which this prospectus forms a part. The following descriptions of these agreements are summaries of the expected material terms of these agreements.
Separation and Distribution Agreement
The Separation and Distribution Agreement will govern the overall terms of the Separation. Generally, the Separation and Distribution Agreement will include Epoxy’s and our agreements relating to the restructuring steps to be taken to complete the Separation, including the assets and rights to be transferred, liabilities to be assumed and related matters.
Subject to the receipt of required governmental and other consents and approvals and the satisfaction of other closing conditions, in order to accomplish the Separation, the Separation and Distribution Agreement will provide for Hexion and Epoxy to transfer specified assets between the companies that will operate the Epoxy Business after the Distribution, on the one hand, and Hexion’s remaining businesses, on the other hand. The Separation and Distribution Agreement will require Epoxy and Hexion to use commercially reasonable efforts to obtain consents, approvals and amendments required to assign the assets and liabilities that are to be transferred pursuant to the Separation and Distribution Agreement.
Unless otherwise provided in the Separation and Distribution Agreement or any of the related ancillary agreements, all assets will be transferred on an “as is, where is” basis. Generally, if the transfer of any assets or any claim or right or benefit arising thereunder requires a consent that will not be obtained before the Distribution, or if the transfer or assignment of any such asset or such claim or right or benefit arising thereunder would be ineffective, would adversely affect the rights of the transferor thereunder or would violate any applicable law, the party retaining any asset that otherwise would have been transferred shall hold such asset in trust for the use and benefit of the party entitled thereto and retain such liability for the account of the party by whom such liability is to be assumed, and take such other action in order to place such party, insofar as reasonably possible, in the same position as would have existed had such asset or liability been transferred prior to the Distribution.
In addition, we will also grant and receive licenses under certain intellectual property in connection with the Separation and Distribution Agreement, which will generally provide us and Epoxy the freedom to continue operating our respective businesses following the Distribution, including as follows:
We may receive from Epoxy, as of the Distribution, a non-exclusive, worldwide, perpetual, irrevocable, fully paid-up and royalty-free license to certain intellectual property transferred to Epoxy in connection with the Separation but used by Hexion in its business in order for Hexion to continue operating its business.
We may grant Epoxy, as of the Distribution, a non-exclusive, worldwide, perpetual, irrevocable, fully paid-up and royalty-free license to certain intellectual property retained by Hexion but used in the Epoxy Business in order for Epoxy to continue operating the Epoxy Business.
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The Separation and Distribution Agreement will specify those conditions that must be satisfied or waived by us prior to the completion of the Separation, which are described further above in “—Conditions to the Distribution.” In addition, we will have the right to determine the date and terms of the Separation, and will have the right, at any time until completion of the Distribution, to determine to abandon or modify the Distribution and to terminate the Separation and Distribution Agreement.
In addition, the Separation and Distribution Agreement will govern the treatment of indemnification, insurance and litigation responsibility and management. Generally, the Separation and Distribution Agreement will provide for uncapped cross-indemnities principally designed to place financial responsibility for the obligations and liabilities of the Epoxy Business with Epoxy and financial responsibility for the obligations and liabilities of Hexion’s retained businesses with Hexion. The Separation and Distribution Agreement will also establish procedures for handling claims subject to indemnification and related matters.
Tax Matters Agreement
In connection with the Separation, we and Epoxy will enter into a tax matters agreement (the “Tax Matters Agreement”) that will govern the parties’ respective rights, responsibilities and obligations with respect to taxes, including taxes arising in the ordinary course of business. The Tax Matters Agreement will also set forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters.
In general, the Tax Matters Agreement will govern the rights and obligations that we and Epoxy have after the Separation with respect to taxes for both pre- and post-closing periods. Under the Tax Matters Agreement, Hexion generally will be responsible for all of the pre-closing taxes that are reported on combined tax returns with Hexion or any of its affiliates, and all of the pre-closing taxes that are reported on tax returns that include only Hexion and/or Hexion’s non-Epoxy subsidiaries (“Hexion separate tax returns”) for taxable years that end before the Separation. In general, subject to certain exceptions, Epoxy will be responsible for all pre-closing taxes that are reported on tax returns that include only Epoxy and/or Epoxy subsidiaries (“Epoxy separate tax returns”).
Shared Services Agreement
The Shared Services Agreement will set forth the terms on which Hexion and Epoxy will provide to one another as the case may be, on a transitional basis, certain services or functions that the companies historically have shared. The Shared Services Agreement includes general services that will be shared by the parties such as human resources, procurement, controllership, treasury, tax, global business service, legal and certain logistics functions for an initial term of one year and successive renewal terms of one year unless either party provides 90 days’ written notice to the contrary. In addition to the general services, the Shared Services Agreement provides for the provision of IT services for an initial term of three years and successive renewal terms of one year unless either party provides 90 days’ written notice to the contrary. Upon a renewal of the general services term, the recipient will have the right to terminate a general service, provided that the termination is for the entire service and not a partial step-down of the service, and further provided that the non-renewal of the general service does not adversely effect the provision of any or all of the IT services. Compensation for the shared services will be determined using various billing methodologies, including fixed fee billing, direct billing and billing for allocated costs that cannot be billed using the other billing methods, and all billing methodologies will include certain administration fees. At the request of either a provider or recipient, upon a termination or non-renewal of the Shared Services Agreement, provider or recipient, as applicable, will provide reasonable transition assistance on substantially the same terms as Hexion has historically provided for divested entities to transfer the applicable shared services during a transition period of up to 180 days and a successive renewal for an additional 180 days at the election of the provider or recipient. During the transition period, the recipient is obligated to pay provider all service fees for providing the shared services, all disengagement costs incurred by provider and a transition administration fee. A recipient of a service does not have the right to terminate a service or part of a service without the written consent of both parties. If either party enters into any agreement that would constitute a change of control, an event of default will occur and the Shared Services Agreement will terminate upon the written election of the non-defaulting party. In such case, the parties agree to use commercially reasonable efforts to ensure that a transition agreement or arrangement is entered into within 60 days of such termination that provides for the continued provision and transition of shared services on subs