EDGAR 10-K Filing

Company CIK: 13239
Filing Year: 2021
Filename: 13239_10-K_2021_0000013239-21-000005.json

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ITEM 1. BUSINESS
ITEM 1 - BUSINESS
(dollars in millions)
General
Based in Columbus, Ohio, Hexion Inc., a New Jersey corporation, with predecessors dating from 1899, is one of the world’s leading global producer of adhesives, coatings and composites materials. 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. We serve highly diversified growing end-markets such as residential and non-residential construction, wind energy, industrial, automotive, consumer goods and electronics.
In January 2020, we changed our reporting segments to align around our two growth platforms, Adhesives and Coatings & Composites. Our Adhesives segment produces construction and industrial adhesives and additives for energy and agricultural applications. In our Coatings & Composites segment, we produce resins used in energy, aerospace and automotive, as well as other high performance coatings applications. Our integrated manufacturing platform allows us to supply our derivatives internally and sell excess material to the market. We sell this excess material as Intermediates & Derivatives in the Adhesives segment and Base Chemicals in the Coatings & Composites segment.
In this Annual Report on Form 10-K (“10-K”, “2020 Form 10-K” or “Report”) for the fiscal year ended December 31, 2020, Hexion Inc. is referred to as “Hexion”, the “Company”, “we,” “us” or “our.”
Sale of Phenolic Specialty Resins Business
On September 27, 2020, the Company entered into a Purchase Agreement for the sale of Phenolic Specialty Resins ("PSR"), Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business” or the “Business”) to Black Diamond Capital Management, LLC and Investindustrial (the “Buyers”) for a purchase price of approximately $425. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future contingent proceeds based on the performance of the Held for Sale Business. The final purchase price is subject to customary post-closing adjustments. The Held for Sale Business was formerly included in the Company’s Adhesives reportable segment.
Assets included in the transaction are the Company’s manufacturing sites in Barry, United Kingdom; Cowie, United Kingdom; Lantaron, Spain; Botlek, Netherlands; Iserlohn, Germany; Frielendorf, Germany; Solbiate, Italy; Kitee, Finland; Louisville, Kentucky; Acme, North Carolina; and the Company's 50% ownership interest in Hexion Schekinoazot Holding B.V. (the “Russia JV”), a joint venture that manufactures forest products resins in Russia.
Until the closing date, the Company has agreed to operate the Held for Sale Business in the ordinary course. The Company has agreed to provide certain transitional services to the Buyers for a limited period of time following the closing. The sale is subject to customary closing conditions, including European Works Council consultation, and is expected to close in the first quarter of 2021.
Emergence from Chapter 11 Bankruptcy
On April 1, 2019, the Company, Hexion Holdings LLC, Hexion LLC and certain of the Company’s subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware, (the “Bankruptcy Court”). The Chapter 11 proceedings were jointly administered under the caption In re Hexion TopCo, LLC, No. 19-10684 (the “Chapter 11 Cases”). The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
On June 25, 2019, the Court entered an order (the “Confirmation Order”) confirming the Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the “Plan”). On the morning of July 1, 2019, in accordance with the terms of the Plan and the Confirmation Order, the Plan became effective and the Debtors emerged from bankruptcy (the “Emergence”).
As a result of our reorganization and emergence from Chapter 11 on the morning of July 1, 2019 (the “Effective Date”), our direct parent is Hexion Intermediate Holding 2, Inc. (“Hexion Intermediate”), a holding company and wholly owned subsidiary of Hexion Intermediate Holding 1, Inc., a holding company and wholly owned subsidiary of Hexion Holdings Corporation, the ultimate parent of Hexion (“Hexion Holdings” or “Parent”). Prior to its reorganization, the Company’s parent was Hexion LLC, a holding company and wholly owned subsidiary of Hexion Holdings LLC (now known as Hexion TopCo, LLC or “TopCo”), the previous ultimate parent entity of Hexion, which was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, Inc. and its subsidiaries, “Apollo”).
Hexion Inc. | 4 | 2020 Form 10-K
Fresh Start Accounting
On the Effective Date, in accordance with ASC 852, the Company applied fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting was applied to the Company’s consolidated financial statements as of July 1, 2019, the date it emerged from bankruptcy, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result, the Company allocated the reorganization value of the Company to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill. Refer to Note 6 in Item 8 of Part II of this Annual Report on Form 10-K for more information.
Financial Results Summary
Our financial results for the period from January 1, 2019 through July 1, 2019 and for fiscal year ended December 31, 2018 are referred to as those of the “Predecessor” period. Our financial results for the fiscal year ended December 31, 2020 and for the period from July 2, 2019 through December 31, 2019 are referred to as those of the “Successor” period. Our results of operations as reported in our Consolidated Financial Statements for these periods are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires that we report on our results for the period from January 1, 2019 through July 1, 2019 and the period from July 2, 2019 through December 31, 2019 separately.
We do not believe that reviewing the results of these periods in isolation would be useful in identifying any trends in or reaching any conclusions regarding our overall operating performance. Management believes that the key performance metrics such as Net sales, Operating income and Segment EBITDA for the Successor period when combined with the Predecessor period provides more meaningful comparisons to other periods and are useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our Consolidated Financial Statements in accordance with U.S. GAAP, the tables and discussions below also present the combined results for the year ended December 31, 2019.
The combined results (referenced 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 is 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.
Hexion Inc. | 5 | 2020 Form 10-K
Products and Markets
We have a broad range of thermoset resin technologies, with high quality research, applications development and technical service capabilities, and we have significant market positions in each of the key markets that we serve.
Our products are well aligned with global mega-trends, which we believe are being driven by stringent safety requirements and regulations, population growth and an increasing need for lighter, stronger, higher performance and engineered materials in many end-markets such as aerospace, automotive, energy and construction. We produce resins that are used in the formulation of adhesives, coatings and composites. Such resins are part of the broader thermoset resin industry. Thermosets are materials that permanently cure, harden or set in a final product application. Thermoset 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 believe we have the broadest range of thermoset resin technologies in the world. We expect that favorable industry dynamics will continue to drive thermoset 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 the NextGen Epoxy™ waterborne system that delivers a low-VOC emitting system in construction, transportation and agricultural equipment markets, and the EPIKOTE™ resin systems and EPIKURE™ and the MGS™ curing agents that provide strength and fatigue performance for larger and heavier rotor blades in wind turbines.
Additionally, our wood adhesive technology enables the most 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 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. We are well positioned with our wood adhesives products as the global markets continue to shift to sustainable products.
We have leading market share positions across our integrated and global manufacturing platform in well-structured markets with over 80% of our sales being products that have the number one or two global positions. We are the number one wood adhesive supplier in the United States, Canada, Brazil and Australia. In composites, we are one of only three global suppliers in the epoxy resin market and we have leadership positions in each of the key end-markets and regions in which we participate. In addition to market leadership, we are integrated from key intermediates to final products, which gives us significant competitive advantages through a cost-effective position, security of supply and stable integrated margins across our value chain. Our manufacturing is localized, providing additional stability and barriers to entry due to the proximity of our sites to our customers. For example, the majority of our wood adhesive and merchant formaldehyde products are delivered through our pipelines or through truck and rail within the region to our customers.
In 2020, our revenue base included net sales in the following end markets:
Hexion Inc. | 6 | 2020 Form 10-K
We have a history of product innovation and success in introducing new products to new markets, as evidenced by more than 750 granted patents, the majority of which relate to the development of new products and manufacturing processes, and we are constantly looking at ways to introduce new products in our currently established markets.
As of December 31, 2020, we had 34 active production sites from continuing operations around the world. Through our worldwide network of strategically located production facilities, we serve more than 2,900 customers in approximately 86 countries. Our position in certain additives, complementary materials and services further enables us to leverage our core thermoset technologies and provide our customers with a broad range of product solutions. As a result of our focus on innovation and a high level of technical service, we have cultivated long-standing customer relationships. Our global customers include leading companies in their respective industries, such as Akzo Nobel, BASF, Norbord, Louisiana Pacific, Bayer, Owens Corning, PPG Industries, Sherwin Williams, Sinoma, Aeolon and Weyerhaeuser.
Top selected global customers:
Our Businesses
The following is a discussion of our reportable segments, their corresponding major product lines and the primary end-use applications of our key products as of December 31, 2020.
Adhesives Segment
2020 Net Sales: $1,188
Wood Adhesives and Intermediates
We are the leading producer of formaldehyde-based resins for the North American forest products industry, and also are a leader in the following regions: Latin America, Australia and New Zealand. Formaldehyde-based resins, also known as forest products resins, are a key adhesive and binding ingredient used in the production of a wide variety of engineered lumber products, including medium-density fiberboard (“MDF”), particleboard, oriented strand board (“OSB”) and various types of plywood and laminated veneer lumber (“LVL”). These products are used in a wide range of applications in the construction, remodeling and furniture industries. Nearly all of our formaldehyde requirements for the production of forest products resins are provided by internal production, giving us a competitive advantage versus our non-integrated competitors.
In addition, we are a significant producer of formaldehyde, a key raw material used to manufacture thousands of other chemicals and products, including the manufacture of methylene diphenyl diisocyanate (“MDI”) and butanediol (“BDO”). Formaldehyde consuming products are used in multiple applications including agricultural, construction, energy and automotive industries. We are also a leading supplier of phenolic resin coated proppants used in oil field applications. Our highly specialized compounds and resins are designed to perform well under extreme conditions, such as intense heat, high-closure stress and corrosive environments, that characterize oil and gas drilling and are also used to enhance oil and gas recovery rates and extend well life.
Both forest products resins and formaldehyde have relatively short shelf lives, and as such, our manufacturing facilities are strategically located in close proximity to our customers.
Hexion Inc. | 7 | 2020 Form 10-K
Products Key Applications Key End Markets
Forest Products Resins:
Engineered Wood Resins Softwood and hardwood plywood, OSB, LVL, particleboard, MDF and decorative laminates Construction
Repair & Remodel
Furniture
Specialty Wood Adhesives Laminated beams, cross-laminated timber, structural and nonstructural fingerjoints, wood composite I-beams, truck-decking, cabinets, doors, windows, furniture, molding and millwork and paper laminations
Wax Emulsions Moisture resistance for panel boards and other specialty applications
Phenolic Encapsulated Substrates:
Resin Encapsulated Proppants Oil and gas fracturing Oil & Gas
Principal Competitors: Arclin, Georgia-Pacific, Huntsman and BASF
Products Key Applications Key End Markets
Formaldehyde Applications:
Formaldehyde MDI, BDO, herbicides and fungicides, scavengers for oil and gas production, fabric softeners, urea formaldehyde resins, phenol formaldehyde resins, melamine formaldehyde resins, hexamine and other catalysts Agriculture
Construction
Consumer Goods
Energy
Automotive
Oil & Gas
Principal Competitors: Foremark Performance Chemicals, Georgia-Pacific and Arclin
Hexion Inc. | 8 | 2020 Form 10-K
Coatings and Composites Segment
2020 Net Sales: $1,322
Epoxy Specialty Resins
We are a leading producer of epoxy specialty resins, modifiers and curing agents in Europe and the United States with a global reach to our end markets, which include other regions such as China and Latin America. Epoxy resins are the fundamental component of many types of materials and are often used in the automotive, construction, wind energy, aerospace and electronics industries due to their superior adhesion, strength and durability. We internally consume approximately 30% of our liquid epoxy resin (“LER”) production in specialty composite, coating and adhesive applications, which ensures a consistent supply of our required intermediate materials. Our position in basic epoxy resins, along with our technology and service expertise, has enabled us to offer formulated specialty products in certain markets. In composites, our specialty epoxy products are used either as replacements for traditional materials such as metal, wood and ceramics, or in applications where traditional materials do not meet demanding engineering specifications.
We are a leading producer of resins that are used in fiber reinforced composites. Composites are a fast growing class of materials that are used in a wide variety of applications ranging from aircraft components and wind turbine blades to sports equipment, and increasingly in automotive and transportation. We supply epoxy resin systems to composite fabricators in the wind energy, automotive and pipe markets.
Epoxy specialty resins are also used for a variety of high-end coating applications that require the superior adhesion, corrosion resistance and durability of epoxy, such as protective coatings for industrial flooring, pipe, marine and construction applications and automotive coatings. Epoxy-based surface coatings are among the most widely used industrial coatings due to their long service life and broad application functionality combined with overall economic efficiency. We also leverage our resin and additives position to supply custom resins to specialty coatings formulators.
Products Key Applications Key End Markets
Protective Coatings and Adhesive Applications:
Civil Engineering Building and bridge construction, concrete enhancement and corrosion protection Architectural Coatings
Waterbourne Coatings
Wind Energy
Automotive
Aerospace
Adhesives Automotive: hem flange adhesives and panel reinforcements
Construction: ceramic tiles, chemical dowels and marble
Aerospace: metal and composite laminates
Electronics: chip adhesives and solder masks
Electrical Applications:
Electronic Resins Unclad sheets, paper impregnation and electrical laminates for printed circuit boards Architectural Coatings
Automotive
Construction
Electrical Castings Generators and bushings, transformers, medium and high-voltage switch gear components, post insulators, capacitors and automotive ignition coils
Principal Competitors: Olin, Nan Ya, Huntsman, Spolchemie, Leuna Harze and Aditya Birla (Thai Epoxy)
Products Key Applications Key End Markets
Composites:
Composite Epoxy Resins Pipes and tanks, automotive, sports (ski, snowboard, golf), boats, construction, aerospace, wind energy and industrial applications Wind Energy
Automotive
Aerospace
Principal Competitors: Olin, Aditya Birla (Thai Epoxy), Huntsman, Swancor, Bohui, Techstorm and Kangda
Hexion Inc. | 9 | 2020 Form 10-K
Products Key Applications Key End Markets
Coating Applications:
Floor Coatings (LER, Solutions, Performance Products) Chemically resistant, antistatic and heavy duty flooring used in hospitals, the chemical industry, electronics workshops, retail areas and warehouses Architectural Coatings
Waterborne Coatings
Ambient Cured Coatings (LER, Solid Epoxy Resin (“SER”) Solutions, Performance Products) Marine (manufacturing and maintenance), shipping containers and large steel structures (such as bridges, pipes, plants and offshore equipment)
Waterborne Coatings (EPI-REZTM Epoxy Waterborne Resins)
Substitutes of solvent-borne products in both heat cured and ambient cured applications
Principal Competitors: Olin, Huntsman, Nan Ya, Evonik and Allnex
Basic Epoxy Resins and Intermediates
We are one of the world’s largest suppliers of basic epoxy resins, such as SER and LER. These base epoxies are used in a wide variety of industrial coatings applications. In addition, we are a major producer of bisphenol-A (“BPA”) and epichlorohydrin (“ECH”), key precursors in the downstream manufacture of basic epoxy resins and epoxy specialty resins. We internally consume the majority of our BPA, and all of our ECH, which ensures a consistent supply of our required intermediate materials.
Products Key Applications Key End Markets
Electrocoat (LER, SER, BPA) Automotive, general industry and white goods (such as appliances) Architectural Coatings
Automotive
Construction
Powder Coatings (SER, Performance Products) White goods, pipes for oil and gas transportation, general industry (such as heating radiators) and automotive (interior parts and small components)
Heat Cured Coatings (LER, SER) Metal packaging and coil-coated steel for construction and general industry
Principal Competitors: Olin, Kukdo, Nan Ya and the Formosa Plastics Group and CCP
Versatic Acids and Derivatives
We are the world’s largest producer of Versatic acids and derivatives. Versatic acids and derivatives are specialty monomers that provide significant performance advantages for finished coatings, including superior adhesion, hydrolytic stability, water resistance, appearance and ease of application. Our products include basic Versatic acids and derivatives sold under the Versatic™, VEOVA™ vinyl ester and CARDURA™ glycidyl ester names. Applications for these specialty monomers include decorative, automotive and protective coatings, as well as other uses, such as adhesives and intermediates.
Products Key Applications Key End Markets
CARDURA™ glycidyl ester Automotive repair/refinishing, automotive original equipment manufacturing (“OEM”) and industrial coatings Architectural Coatings
Automotive
Versatic™ Acids Chemical intermediates (e.g., for peroxides, pharmaceuticals and agrochemicals) and adhesion promoters (e.g., for tires)
VEOVA™ vinyl ester
Architectural coatings, construction and adhesives
Principal Competitors: ExxonMobil and Hebei Shield Excellence Technology
Hexion Inc. | 10 | 2020 Form 10-K
Corporate and Other Segment
Our Corporate and Other segment primarily includes corporate general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions, foreign exchange gains and losses and legacy company costs.
For additional information about our segments, see Note 20 to our Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Industry & Competitors
We are a large participant in the specialty chemicals industry. Thermosetting resins are generally considered specialty chemical products because they are sold primarily on the basis of performance, technical support, product innovation and customer service. However, as a result of the impact of the ongoing global economic uncertainty and overcapacity in certain markets, certain of our competitors have focused more on price to retain business and market share, which we have selectively followed in certain markets to maintain market share and remain a market leader.
We compete with many companies in most of our product lines, including large global chemical companies and small specialty chemical companies. No single company competes with us across all of our segments and existing product lines. The principal competitive factors in our industry include technical service, breadth of product offerings, product innovation, product quality and price. Some of our competitors are larger, have greater financial resources and may be able to better withstand adverse changes in industry conditions and the economy as a whole. Further, our competitors may have more resources to support continued expansion than we do. Some of our competitors also have a greater range of products and may be more vertically integrated than we are within specific product lines or geographies.
We believe that the principal factors that contribute to success in the specialty chemicals market, and our ability to maintain our position in the markets we serve, are (i) consistent delivery of high-quality products; (ii) favorable process economics; (iii) the ability to provide value to customers through both product attributes and strong technical service and (iv) an international footprint and presence in growing and developing markets.
Marketing, Customers and Seasonality
Our products are sold to industrial users worldwide through a combination of a direct sales force that services our larger customers and third-party distributors that more cost-effectively serve our smaller customers. Our customer service and support network is made up of key regional customer service centers. We have global account teams that serve the major needs of our global customers for technical service and supply and commercial term requirements. Where operating and regulatory factors vary from country to country, these functions are managed locally.
In 2020, our largest customer accounted for approximately 3% of our net sales, and our top ten customers accounted for approximately 20% of our net sales. Neither our overall business nor any of our reporting segments depends on any single customer or a particular group of customers; therefore, the loss of any single customer would not have a material adverse effect on either of our two reporting segments or the Company as a whole. Our primary customers are manufacturers, and the demand for our products is seasonal in certain of our businesses, with the highest demand in the summer months and lowest in the winter months. Therefore, the dollar amount of our backlog orders as of December 31, 2020 is not significant. Demand for our products can also be cyclical, as general economic health and industrial and commercial production levels are key drivers for our business.
International Operations
Our non-U.S. operations accounted for 54%, 53% and 53% of our sales in 2020, 2019 and 2018, respectively. While our international operations may be subject to a number of additional risks, such as exposure to foreign currency exchange risk, we do not believe that our foreign operations, on the whole, carry significantly greater risk than our operations in the United States. Information about sales by geographic region for the past three years and long-lived assets by geographic region for the past two years can be found in Note 20 in Item 8 of Part II of this Annual Report on Form 10-K. More information about our methods and actions to manage exchange risk and interest rate risk can be found in Item 7A of Part II of this Annual Report on Form 10-K.
Hexion Inc. | 11 | 2020 Form 10-K
In 2020, our revenue base included sales to the following regions:
Key manufacturing locations:
Hexion Inc. | 12 | 2020 Form 10-K
Raw Materials
In 2020, we purchased approximately $1.5 billion of raw materials, representing approximately 75% of our cost of sales (excluding depreciation expense). The three largest raw materials that we use are phenol, methanol and urea, which collectively represented approximately 50% of our total raw material expenditures in 2020. The majority of raw materials that we use to manufacture our products are available from more than one source, and are readily available in the open market. We have long-term purchase agreements for certain raw materials that ensure the availability of adequate supply. These agreements generally have periodic price adjustment mechanisms and do not have minimum annual purchase requirements. Smaller quantity materials that are single sourced generally have long-term supply contracts to maximize supply reliability. Prices for our main feedstocks are generally driven by underlying petrochemical benchmark prices and energy costs, which are subject to price fluctuations. Although we seek to offset increases in raw material prices with increases in our product prices, we may not always be able to do so, and there are periods when price increases lag behind raw material price increases.
Research and Development
Our research and development activities are geared towards developing and enhancing products, processes and application technologies so that we can maintain our position as one of the world’s largest producers of thermosetting resins. We focus on:
•developing new or improved applications based on our existing product lines and identified market trends;
•developing new resin products and applications for customers to improve their competitive advantage and profitability;
•providing premier technical service for customers of specialty products;
•providing technical support for manufacturing locations and assisting in optimizing our manufacturing processes;
•ensuring that our products are manufactured consistent with our global environmental, health and safety policies and objectives;
•developing lower cost manufacturing processes globally; and
•expanding our production capacity.
We have over 300 scientists and technicians worldwide. Our research and development facilities include a broad range of synthesis, testing and formulating equipment and small-scale versions of customer manufacturing processes for applications development and demonstration. We recently completed our new Application Development Center (“ADC”) in Shanghai, China, as part of our global efforts to further strengthen our industry-leading research and development and technical services capabilities. We continue to strategically invest in our R&D footprint to increase opportunities for innovation and stimulate growth.
Hexion Inc. | 13 | 2020 Form 10-K
More recently, we have focused research and development resources on the incorporation of green chemistry principles into technology innovations to remain competitive and to address our customers’ demands for more environmentally preferred solutions. Our efforts have focused on developing resin technologies that reduce emissions, maximize efficiency and increase the use of bio-based raw materials. Some examples of meaningful results of our investment in the development of products with sustainable attributes include:
•EPIKOTE™ / EPIKURE™ epoxy systems for wind energy applications, which provide superior mechanical and process properties, reducing air emissions when hours of energy are created;
•EPIKOTE™ resin systems for automotive applications, which produce lightweight automotive composite components and other automotive parts that allow customers to build cars with better mileage, reducing air emissions without sacrificing performance;
•EcoBind™ Resin Technology, an ultra low-emitting binder resin used to produce engineered wood products,
•Epi-Rez™ Epoxy Waterborne Resins, which provide for lower volatile organic compounds, reducing air emissions,
•VeoVa™ Silane Technology, an alkoxy silane vinylester technology which can be used to cure coatings isocyanate-free resin; and
•Armorbuilt™, a new fire resistant wrap product when applied to a substrate that launched in 2020. This product is designed to protect the critical utility pole infrastructure against wildfires.
In 2020, 2019 and 2018, our research and development and technical services expense was $38, $41 and $43, respectively. We take a customer-driven approach to discovering new applications and processes and providing customer service through our technical staff. Through regular direct contact with our key customers, our research and development associates can become aware of evolving customer needs in advance, and can anticipate their requirements to more effectively plan customer programs. We also focus on continuous improvement of plant yields and production capacity and reduction of fixed costs.
Intellectual Property
As of December 31, 2020, we own, license or have rights to over 750 patents and over 1,000 registered trademarks, as well as various patent and trademark applications and technology licenses around the world, which we currently use or hold for use in our operations. A majority of our patents relate to developing new products and processes for manufacturing and will expire between 2021 and 2038. We renew our trademarks on a regular basis. While we view our patents and trademarks to be valuable, because of the broad scope of our products and services, we do not believe that the loss or expiration of any single patent or trademark would have a material adverse effect on our results of operations, financial position or the continuation of our business.
Industry Regulatory Matters
Domestic and international laws regulate the production and marketing of chemical substances. Almost every country has its own legal procedures for registration and import. Of these, the laws and regulations in the European Union, the United States (Toxic Substances Control Act) and China are the most significant to our business. Additionally, other laws and regulations may also limit our expansion into other countries, such as K-REACH in South-Korea or KKDIK in Turkey. Chemicals that are not included on one or more of these, or any other country’s chemical inventory lists, can usually be registered and imported, but may first require additional testing or submission of additional administrative information.
The European Commission enacted a regulatory system in 2006, known as Registration, Evaluation, Authorization and Restriction of Chemical substances (“REACH”), which requires manufacturers, importers and consumers of certain chemicals to register these chemicals and evaluate their potential impact on human health and the environment. As REACH matures and is further amended, significant market restrictions could be imposed on the current and future uses of chemical products that we use as raw materials or that we sell as finished products in the European Union. Other countries may also enact similar regulations.
Environmental Regulations
Our policy is to operate our plants in a manner that protects the environment, health and safety of our employees, customers and communities. We have implemented company-wide environmental, health and safety policies managed by our Environmental, Health and Safety (“EH&S”) department and overseen by the EH&S Committee of Hexion Holdings’ Board of Directors. Our EH&S department provides support and oversight to our operations worldwide to ensure compliance with environmental, health and safety laws and regulations. This responsibility is executed via training, communication of EH&S policies, formulation of relevant policies and standards, EH&S audits and incident response planning and implementation. Our EH&S policies include systems and procedures that govern environmental emissions, waste generation, process safety management, handling, storage and disposal of hazardous substances, worker health and safety requirements, site security, emergency planning and response and product stewardship.
Hexion Inc. | 14 | 2020 Form 10-K
Our operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials, and we are subject to extensive environmental regulation at the federal, state and international levels. We are also exposed to the risk of claims for environmental remediation or restoration. Our production facilities require operating permits that are subject to renewal or modification. Violations of environmental laws or permits or safety obligations may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs. In addition, statutes such as the federal Comprehensive Environmental Response, Compensation and Liability Act and comparable state and foreign laws impose strict, joint and several liability for investigating and remediating the consequences of spills and other releases of hazardous materials, substances and wastes at current and former facilities, as well as third-party disposal sites. Other laws permit individuals to seek recovery of damages for alleged personal injury or property damage due to exposure to hazardous substances and conditions at our facilities or to hazardous substances otherwise owned, sold or controlled by us. Therefore, notwithstanding our commitment to environmental management and environmental health and safety, we may incur liabilities in the future, and these liabilities may result in a material adverse effect on our business, financial condition, results of operations or cash flows.
Although our environmental policies and practices are designed to ensure compliance with international, federal and state laws and environmental regulations, future developments and increasingly stringent regulation could require us to make additional unforeseen environmental expenditures. In addition, our former operations, including our ink, wallcoverings, film, phosphate mining and processing, thermoplastics and food and dairy operations may give rise to claims relating to our period of ownership.
We expect to incur future costs for capital improvements and general compliance under environmental, health and safety laws, including costs to acquire, maintain and repair pollution control equipment. In 2020, our continuing operations incurred related capital expenditures of $13. We estimate that capital expenditures in 2021 for environmental controls at our facilities will be between $15 and $20. This estimate is based on current regulations and other requirements, but it is possible that a material amount of capital expenditures, in addition to those we currently anticipate, could be necessary if these regulations or other requirements or other facts change, or are needed to ensure the safe operation of our equipment.
Sustainability Goals for 2021 and Beyond
Hexion completed an assessment in 2020 as part of our ongoing sustainability strategic planning initiatives. By focusing efforts on these sustainability strategic goals which are mentioned below, Hexion can make a positive change. From demand for energy efficiency to creating bio-based and circular products, chemistry can play an important role in addressing climate change as we positively address our carbon footprint. These new goals strengthen our long-standing commitment to sustainability and delivering on our strategic approach to ‘Responsible Chemistry,’ which includes supporting our associates, customers and communities. While not limiting our sustainability efforts to these focus areas alone, these topics included:
•Minimizing climate change impact - Hexion will strive to protect against climate change throughout its business lifecycle by efficiently using natural resources, optimizing existing processes and enhancing products and technologies through continuous innovation.
•Developing innovative sustainable products - Hexion is committed that by 2030, all new products will incorporate sustainable attributes, such as lightweighting, low emissions, and durability.
•Reducing spills and releases - Hexion has committed to reduce spill mass and releases by 80 percent by 2025.
•Maintaining product stewardship - Hexion remains committed to Responsible Care Product Safety Code and will continue to be transparent and communicate to key stakeholders regarding its stewardship programs such as risk reviews and reduction of substances of concern.
Work continues to establish an aspirational goal around climate change and Greenhouse Gas emission reductions, as well as assembling Hexion’s Scope 3 emissions (defined as “value chain emissions”). All are expected to be finalized in the first half of 2021.
Human Capital Management
At December 31, 2020, our continuing operations had approximately 2,600 employees. Approximately 35% of our employees are members of a labor union or are represented by workers’ councils that have collective bargaining agreements, including most of our European employees. We believe that we have good relations with our union and non-union employees. We believe our diverse global employee talent is a key driver of our future success and competitive advantage. Hexion offers industry competitive salary and benefits, performance incentive plans and enriching career opportunities that enable employee engagement. See approximate number of associates by country below:
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At Hexion, We Do the Right Thing. We act ethically and with integrity.
Acting ethically and with integrity is a core value at Hexion. This is a commitment to our company, our customers, our vendors and ourselves. Every associate, regardless of his or her rank or position is responsible for the ethical health of our organization.
Our commitment to acting ethically is non-negotiable.
•We treat others with respect - regardless of gender, race, age, orientation or background.
•We conduct business with integrity - comply with all anti-trust, anti-bribery, workplace harassment, and conflict-of-interest requirements.
•We engage with each other and remind one another of our commitment to act with integrity.
•We speak up if we witness misconduct or have a compliance concern.
Diversity, Equity and Inclusion
We are focused on accelerating our organization’s commitment to diversity, equity and inclusion worldwide, including developing and implementing a strategy to attract, retain and develop diverse talent and promote an inclusive environment where associates at all levels can perform their best. This is a top priority for us in 2021 and long term. In addition, our Chief Executive Officer (“CEO”) has joined with other companies’ CEOs by signing the “CEO Action for Diversity & Inclusion pledge”. We also recently hired a Director of Diversity, Equity and Inclusion to help implement these goals.
At Hexion, Safety is Our Highest Priority. Our work is never more important than performing it safely.
While 2020 was a challenging year for all of us. Hexion’s associates not only endured but stayed focused on serving our customers, operating our manufacturing sites safely and supporting the communities in which they work and live. In fact, 2020 was the strongest safety performance on record for Hexion across the majority of our metrics. In 2020, we operated in the American Chemistry Council’s safety Occupational Injury and Illness Rate (“OIIR”) top quartile. This is a result of our multi-year initiative to enhanced training, alignment between our manufacturing and Environmental, Health and Safety teams, and our associates’ commitment to each other to remain vigilant as part of our “Get Zero. Get Home” safety initiative. At Hexion, we are committed to making sure that each associate goes home just as they arrived to work.
During this pandemic, we have implemented additional guidelines to further protect the health and safety of our employees as we continue to operate with our suppliers and customers. We have committed to maintaining a paramount focus on the safety of our employees while minimizing potential disruptions caused by COVID-19. For example, we are following all legislatively-mandated travel directives in the various countries where we operate, and we have also put additional travel restrictions in place for our associates designed to reduce the risk from COVID-19. Additionally, we are utilizing extended work from home options to protect our office associates, while adjusting our meeting protocols and processes at our manufacturing sites.
Enhancing worker safety/well-being sustainability goals
In addition to our future sustainability goals discussed above, by 2022 Hexion will offer a voluntary well-being program that addresses associate physical, mental, and financial well-being with the goal of 50% associate participation in the program by 2025. Hexion also re-affirmed its commitment to continue to drive toward zero recordable injuries.
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Where You Can Find More Information
The public may read and copy any materials that we file with the Securities and Exchange Commission (the “SEC”) on the SEC’s website at www.sec.gov. In addition, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports are available free of charge to the public through our internet website at www.hexion.com under “Investor Relations - SEC Filings”. The content on any website referenced in this filing is not incorporated by reference into this filing unless expressly noted otherwise.
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ITEM 1A. RISK FACTORS
ITEM 1A - RISK FACTORS
(In millions, except share data)
Following are our principal risks. These factors may or may not occur, and we cannot express a view on the likelihood that any of these may occur. Other factors may exist that we do not consider significant based on information that is currently available or that we are not currently able to anticipate. Any of the following risks could materially adversely affect our business, financial condition or results of operations and prospects.
Risks Related to Our Business
Our operations, results and financial condition may be negatively impacted by the ongoing COVID-19 pandemic.
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 globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Around the world, local governments’ responses to COVID-19 continue to evolve, which has led to stay-at-home orders, social distancing guidelines and other preventative measures that have disrupted various industries in the global economy and created significant volatility in the financial markets.
While the Company has continued to operate during the pandemic, it incurred adverse financial impacts to its sales and profitability results during the year ended December 31, 2020 from COVID-19, primarily related to reduced volumes associated with the pandemic. Future COVID-19 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 COVID-19 and the actions to contain COVID-19 or treat its impact, among others. A prolonged economic downturn from COVID-19 could also result in impairments to long-lived assets, including goodwill and intangibles.
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, such as building, construction, wind energy, oil and gas, automotive and electronics, compared to prior years;
•weak economic conditions in our primary regions of operations: U.S., Europe, and Asia;
•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.
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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 material 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 supplier 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.
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 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, 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.
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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, our continuing operations incurred capital expenditures of approximately $13 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 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”). The European Union has enacted greenhouse gas 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 greenhouse gas emissions above a certain threshold, and the United States and certain states within the United States have enacted, or are considering, limitations on greenhouse gas emissions. These requirements to limit greenhouse gas 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.
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 sell certain chemical products in certain geographic areas. The European Registration, Evaluation and Authorization of Chemicals (“REACH”) regulation requires manufacturers, importers and consumers of certain chemicals manufactured in, or imported into, the European Union 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 European Union. 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 requires the implementing agency to conduct risk evaluations on high priority chemicals, which could include chemical products we manufacture. Other countries have implemented, or are considering implementation of, similar chemical regulatory programs. When fully implemented, REACH, LCSA and other similar regulatory programs may result in significant adverse market impacts on the
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affected chemical products. 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, or IARC, and the National Toxicology Program, or 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, or 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 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 EPA has nominated formaldehyde for further risk evaluation. Effective January 1, 2016, ECHA classified 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. These additional costs and reduced demand could have a material adverse effect on our operations and profitability.
BPA, which is manufactured and used as an intermediate at our Deer Park, Texas, Pernis, Netherlands and Duisburg, Germany manufacturing facilities, and is also sold directly to third parties, is currently considered under certain state and international regulatory programs as a reproductive toxicant and an “endocrine disrupter,” meaning BPA could disrupt normal biological processes. BPA continues to be subject to scientific, regulatory and legislative review and negative media attention. In Europe, the EU Committee for Risk Assessment adopted an opinion to change the existing harmonized classification and labeling of BPA from a category 2 reproductive Toxicant to a category 1B reproductive Toxicant. This classification change was effective beginning March 1, 2018. The EU Member State Committee agreed to add BPA to the Substance of Very High Concern (“SVHC”) candidate list based upon its classification as a reproductive toxicant, as well as for its endocrine disrupting properties to both human health and the environment. The REACH Risk Management Option Analysis (RMOA) was released July 6, 2017, in which BPA is identified as an endocrine disruptor for the environment due to its aquatic toxicity with no safe threshold, and REACH restrictions are identified as the preferred risk management measure. In addition, certain BPA-containing products (phenolic hardeners for epoxy resins) have been proposed for authorization under REACH. The decision to initiate the authorization process has not been taken yet, but may occur. The California Environmental Protection Agency’s Office of Environmental Health Hazard Assessment (“OEHHA”) listed BPA under Proposition 65 as a developmental and reproductive toxicant, requiring warning labels unless BPA exposures are shown to be less than a risk-based level (the maximum allowable dose level (“MADL”)). As of May 11, 2016, products containing BPA sold into California must comply with Proposition 65’s requirements. Despite these hazard designations and listings, the US Food and Drug Administration (“FDA”) is also actively engaged in the scientific and regulatory review of BPA and, in a letter submitted to OEHHA dated April 6, 2015, reaffirmed that BPA is safe as currently permitted in FDA-regulated food contact uses and concluded that FDA’s National Center for Toxicological Research study did not support the listing of BPA as a reproductive toxicant. In 2018, NTP released the results of the CLARITY Core Study. Senior scientists at FDA’s National Center for Toxicological Research (NCTR) conducted the study with funding from NTP. The study involved exposure of laboratory animals to BPA beginning and during pregnancy and continuing in the offspring throughout their entire lifetime. A wide range of dose levels were examined, from low doses close to actual consumer exposure to doses about 250,000 times higher. As stated in the conclusion of the study report, “BPA produced minimal effects that were distinguishable from background.” NTP selected a panel of six independent expert scientists to conduct a formal peer review of the study. In general, the peer review panel supported the design and conduct of the study and agreed with the overall conclusion that the study found minimal effects for the range of doses studied. In December 2012, France enacted a law that bans direct contact of packaging containing BPA with food and consumer products. In January 2015, the European Food Safety Authority (“EFSA”) concluded that BPA poses no health risk to consumers of any age group (including unborn children, infants and adolescents) at currently permitted exposure levels. EFSA confirmed this conclusion in October 2016. EFSA is concluding its re-evaluation of BPA in food contact applications and the results are expected in 2021.Regulatory and legislative initiatives such as these, or product de-selection resulting from such regulatory actions, may result in a reduction in demand for BPA and our products containing BPA and could also result in additional liabilities as well as an increase in operating costs to meet more stringent regulations. Such increases in operating costs and/or reduction in 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 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.
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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 NPC. 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.
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, 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.
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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
•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 54% of our net sales originated outside the United States. 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 4% of our total cost of sales for the year ended December 31, 2020.
Hexion Inc. | 23 | 2020 Form 10-K
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 condition.
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 time 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 greenhouse gases (“GHGs”), such as carbon dioxide and methane. The European Union (the “EU”) GHG Emissions Trading System (“ETS”), 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 40% below the 1990 level by 2030 and a binding target to increase the share of renewable energy to at least 32% of the EU’s energy consumption by 2030. The European Commission proposed to increase the greenhouse gas emission reduction target to at least 55% in September 2020, and expects to complete the associated legislative proposals by June 2021. Additionally, Domestic efforts to curb GHG emissions are being led by the U.S. Environmental Protection Agency’s (the “EPA”) GHG regulations and similar programs of certain states. To the extent that our foreign or domestic operations are subject to either the EU’s or the EPA’s GHG regulations, we may face increased capital and operating costs associated with our current, new or expanded facilities.
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.
We expect substantial cost savings from our ongoing strategic initiatives, and if we are unable to achieve these cost savings, or sustain our current cost structure, it could have a material adverse effect on our business operations, results of operations and financial condition.
We have not yet realized all of the cost savings and synergies we expect to achieve from our ongoing strategic initiatives. A variety of risks could cause us not to realize the expected cost savings and synergies, including but not limited to, higher than expected severance costs related to staff reductions; higher than expected retention costs for employees that will be retained; higher than expected stand-alone overhead expenses; delays in the anticipated timing of activities related to our cost-savings plans; and other unexpected costs associated with operating our business. During 2020, we achieved $23 in cost savings related to our cost reduction programs and as of December 31, 2020, we had approximately $6 of additional in-process cost savings.
If we are unable to achieve these cost savings or synergies it could adversely affect our profitability and financial condition. In addition, while we have been successful in reducing costs and generating savings, factors may arise that may not allow us to sustain our current cost structure. As market and economic conditions change, we may also make changes to our operating cost structure.
Hexion Inc. | 24 | 2020 Form 10-K
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 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, continuing 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.
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-individual 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, approximately 35% 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.
Hexion Inc. | 25 | 2020 Form 10-K
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.
Certain of our pension plans are unfunded or 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 and $154, 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 and $33 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.
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. 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.
Cyber security attacks and other disruptions to our 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.
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, 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.
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 protecting the privacy of personal information, disrupt operations, and damage our reputation which could adversely affect our business, financial condition and results of operations.
Hexion Inc. | 26 | 2020 Form 10-K
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 the recently announced Purchase Agreement for the sale of our PSR, Hexamine and European-based Forest Products Resins businesses. 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 net operating losses which could result in our U.S. Company incurring 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. 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.
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.
Section 404 of the Sarbanes-Oxley Act of 2002 requires companies to conduct a comprehensive evaluation of their internal control over financial reporting. To comply with this statute, each year we are required to document and test our internal control over financial reporting, our management is required to assess and issue a report concerning our internal control over financial reporting.
The existence of one or more material weaknesses has previously resulted in, and could continue to result in, errors in our financial statements, and substantial costs and resources may be required to rectify these errors or other internal control deficiencies and may cause us to incur other costs, including potential legal expenses. If we cannot produce reliable financial reports, investors could lose confidence in our reported financial information, and we may be unable to obtain additional financing to operate and expand our business and our business and financial condition could be harmed.
We have an established process to remediate identified control deficiencies timely and we continue to take appropriate actions to strengthen our internal control over financial reporting, but we cannot assure you that the measures we have taken to date, or any measures we may take in the future, will be sufficient to avoid potential future material weaknesses.
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.
Hexion Inc. | 27 | 2020 Form 10-K
Our financial condition or results of operations will not be 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 or results of operations reflected in our historical financial statements included in this Annual Report on Form 10-K.
Risks Related to Our Parent’s Equity
Ownership of our Parent Company’s common stock is concentrated in the hands of certain shareholders and their affiliates may have significant influence on corporate decisions
Hexion Holdings has a relatively small number of shareholders that collectively have a large concentration of ownership. This large concentration of ownership could collectively have significant influence over the outcome of actions requiring shareholder approval, including the election of directors and the approval of mergers, consolidations and the sale of all or substantially all of the Company’s assets. They collectively could be in a position to prevent or cause a change in control of the Company.
Additionally, any future change in control of the Company could result in events that would have an adverse effect on our business or financial condition. For example, a change in ownership control could place further limitations on our ability to the use our tax net operating losses in the future.
Actions of activist shareholders, and such activism could adversely impact our business.
We may be subject to proposals by shareholders urging us to take certain corporate actions. Responding to actions by activist shareholders 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.
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. 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 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 and (y) 10% of the lesser of (i) the borrowing base and (ii) the total ABL Facility commitments at such time.
Our substantial 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 consolidated outstanding indebtedness, including payments due within the next twelve months and short-term borrowings.
Our substantial 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 substantial 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;
•it may make it more difficult for us to satisfy our obligations with respect to our existing indebtedness;
Hexion Inc. | 28 | 2020 Form 10-K
•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 substantial 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 debt;
•pay dividends and make other distributions to our shareholders;
•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 us 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 and (y) 10% of the lesser of (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, our direct parent company will have the right, but not the obligation, to cure such default through the purchase of additional equity in up to two of any four consecutive quarters and seven total during the term of the ABL 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 (see definition at Note 12 in Item 8 of Part II of this Annual Report on Form 10-K), 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 our notes;
any or all of which could result in an event of default under our 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 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.
Hexion Inc. | 29 | 2020 Form 10-K
Repayment of our debt, 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.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B - UNRESOLVED STAFF COMMENTS
None.
Hexion Inc. | 30 | 2020 Form 10-K

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ITEM 2. PROPERTIES
ITEM 2 - PROPERTIES
Our headquarters are in Columbus, Ohio and we have executive offices in Rotterdam, Netherlands and Shanghai, China. Our major manufacturing facilities are primarily located in North America and Europe. As of December 31, 2020, we operated 21 domestic production and manufacturing facilities in 12 states and 23 foreign production and manufacturing facilities in Australia, Brazil, Canada, Finland, Germany, Italy, Korea, Netherlands, New Zealand, Spain, the United Kingdom and Uruguay. As of December 31, 2020, we had 10 facilities that related to our Held for Sale Business.
The majority of our facilities are used for the production of thermosetting resins, and most of them manufacture more than one type of thermosetting resin, the nature of which varies by site. These facilities typically use batch technology, and range in size from small sites, with a limited number of reactors, to larger sites, with dozens of reactors. One exception to this is our plants in Deer Park, Texas and Pernis, Netherlands are the only continuous-process epoxy resins plants in the world, which provides us with a cost advantage over conventional technology.
In addition, we have the ability to internally produce key intermediate materials such as formaldehyde, BPA, ECH, and versatic acid. This backward integration provides us with cost advantages and facilitates our adequacy of supply. These facilities are usually co-located with downstream resin manufacturing facilities they serve. As these intermediate materials facilities are often much larger than a typical resins plant, we can capture the benefits of manufacturing efficiency and scale by selling material that we do not use internally to third parties.
We believe our production and manufacturing facilities are well maintained and effectively utilized and are adequate to operate our business. Following are our more significant production and manufacturing facilities and executive offices:
Location Nature of Ownership Reporting Segment
Argo, IL* Owned Coatings and Composites
Barry, UK*w
Owned Coatings and Composites
Deer Park, TX* Owned Coatings and Composites
Duisburg-Meiderich, Germany Owned Coatings and Composites
Iserlohn-Letmathe, Germanyw
Owned Coatings and Composites
Lakeland, FL Owned Coatings and Composites
Louisville, KYw
Owned Coatings and Composites
Moerdijk, Netherlands* Owned Coatings and Composites
Onsan, South Korea Owned Coatings and Composites
Pernis, Netherlands* Owned Coatings and Composites
Solbiate Olona, Italyw
Owned Coatings and Composites
Curitiba, Brazil Owned Adhesives
Montenegro, Brazil Owned Adhesives
Edmonton, AB, Canada Owned Adhesives
Fayetteville, NC Owned Adhesives
Kitee, Finlandw
Owned Adhesives
Luling, LA* Owned Adhesives
Geismar, LA‡ Owned Adhesives
Gonzales, LA Owned Adhesives
Hope, AR Owned Adhesives
Springfield, OR Owned Adhesives
St. Romuald, QC, Canada Owned Adhesives
Columbus, OH† Leased Corporate and Other
Rotterdam, Netherlands† Leased Corporate and Other
Shanghai, China† Leased Corporate and Other
__________________________________
* We own all of the assets at this location. The land is leased.
‡ A portion of this location is leased.
w Facilities that are held for sale as a part of discontinued operations. Other sites not listed above that are being held for sale as a part of discontinued operations are included in Note 4 in Item 8 of Part II of this Annual Report on Form 10-K.
† Executive offices.
Hexion Inc. | 31 | 2020 Form 10-K

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3 - LEGAL PROCEEDINGS
Legal Proceedings
In the ordinary course of business, we are, from time to time, subject to various legal proceedings, including matters involving local or federal environmental regulatory agencies, customer actions, tax audits and unclaimed property audits by states. We may enter into discussions regarding settlement of these and other types of legal proceedings, and may enter into settlement agreements, if we believe settlement is in the best interest of our Company. We do not believe that any such existing legal proceedings or settlements, individually or in the aggregate, will have a material effect on our financial condition, results of operations or liquidity.
Other Litigation
For a discussion of certain other legal contingencies, refer to Note 14 in Item 8 of Part II of this Annual Report on Form 10-K.

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ITEM 4. MINE SAFETY DISCLOSURE
ITEM 4 - MINE SAFETY DISCLOSURES
This item is not applicable to the registrant.
Hexion Inc. | 32 | 2020 Form 10-K
PART II
(dollars in millions, except per share data, or as otherwise noted)

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5 - MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
There is no established public trading market for our common stock. As of March 1, 2021, 100 common shares were held by our direct parent, Hexion Intermediate.
We have no compensation plans that authorize issuing our common stock to employees or non-employees. In addition, there have been no sales or repurchases of our equity securities during the past fiscal year. However, our Parent Company, Hexion Holdings, has issued and may issue from time to time equity awards to our employees and directors that are denominated in or based upon the Class B Common Stock of Hexion Holdings. The impact of these awards are included in our Consolidated Financial Statements. For a discussion of these equity plans, see Note 16. in Item 8 of Part II and Item 11 of Part III of this Annual Report on Form 10-K.
Hexion Inc. | 33 | 2020 Form 10-K

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ITEM 6. SELECTED FINANCIAL DATA
ITEM 6 - SELECTED FINANCIAL DATA
The following table presents our selected historical consolidated and combined financial data. The following information should be read in conjunction with, and is qualified by reference to, our “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and our audited Consolidated Financial Statements, as well as the other financial information included elsewhere herein.
The consolidated balance sheet data at December 31, 2020 and 2019 and the consolidated statement of operations data for the year ended December 31, 2020 and for the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018 have been derived from our audited Consolidated Financial Statements included elsewhere herein. The consolidated balance sheet data at December 31, 2018, 2017 and 2016 and the consolidated statement of operations data for the years ended December 31, 2017 and 2016 have been derived from audited consolidated financial statements not included herein.
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31,
(In millions) 2018 2017 2016
Statements of Operations:
Net sales (1)
$ 2,510 $ 1,323 $ 1,481 $ 3,137 $ 3,006 $ 2,932
Cost of sales (1)(2)(3)
2,043 1,117 1,211 2,559 2,470 2,370
Selling, general and administrative expense (1)(2)(3)
231 124 128 243 250 272
Depreciation and amortization (3)(4)
191 93 43 98 97 115
Gain on dispositions - - - (44) (2) (233)
Asset impairments 16 - - 28 28 130
Business realignment costs 69 22 14 27 39 51
Other operating expense, net 24 16 17 37 27 14
Operating (loss) income (64) (49) 68 189 97 213
Interest expense, net 100 55 89 365 330 310
Loss (gain) on extinguishment of debt - - - - 3 (48)
Reorganization items, net - - (2,970) - - -
Other non-operating income, net (2)
(15) - (11) (12) (9) (15)
(Loss) income from continuing operations before income tax and earnings from unconsolidated entities (149) (104) 2,960 (164) (227) (34)
Income tax expense (benefit) 14 (10) 201 31 15 31
(Loss) income from continuing operations before earnings from unconsolidated entities (163) (94) 2,759 (195) (242) (65)
Earnings from unconsolidated entities, net of taxes 2 2 1 4 4 4
(Loss) income from continuing operations, net of taxes (161) (92) 2,760 (191) (238) (61)
(Loss) income from discontinued operations, net of taxes (69) 4 135 28 4 23
Net (loss) income (230) (88) 2,895 (163) (234) (38)
Net (income) loss attributable to noncontrolling interest - (1) (1) 1 - -
Net (loss) income attributable to Hexion Inc. $ (230) $ (89) $ 2,894 $ (162) $ (234) $ (38)
Cash Flows provided by (used in):
Operating activities $ 131 $ 224 $ (173) $ (23) $ (153) $ (20)
Investing activities (5)
(126) (58) (42) (40) (110) 219
Financing activities (57) (38) 212 81 174 (235)
Balance Sheet Data (at end of period):
Cash and cash equivalents $ 204 $ 254 $ 128 $ 115 $ 196
Total assets(1)
4,002 4,146 1,961 2,097 2,055
Total debt (6)
1,792 1,785 3,815 3,709 3,504
Total liabilities(1)
3,179 3,071 4,875 4,839 4,594
Total equity (deficit) 823 1,075 (2,914) (2,742) (2,539)
(1)ASC 606 Revenue from Contracts with Customers and ASC 842 Leases, were effective for the year ending December 31, 2018 and the year ended December 31, 2019, respectively.
(2)“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.
(3)As a result of the application of fresh start accounting upon the Company’s emergence from Chapter 11, the Company elected to change its income statement presentation 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, the Company will no longer present “Gross profit” as a subtotal caption.
Hexion Inc. | 34 | 2020 Form 10-K
(4)Depreciation and amortization for the years ended December 31, 2020, 2018, 2017 and 2016 include accelerated depreciation of $2, $4, $14, and $129 respectively, related to facility rationalizations. There was no accelerated depreciation for the year ended December 31, 2019.
(5)“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.
(6)Total debt represents the sum of “Debt payable within one year” and “Long-term debt” on the Consolidated Balance Sheets. See Note 12 in Item 8 of Part II of this Annual Report on Form 10-K.
Hexion Inc. | 35 | 2020 Form 10-K

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(in millions, except share data)
You should read the following discussion and analysis of our results of operations and financial condition for the years ended December 31, 2020, 2019 and 2018 with the audited Consolidated Financial Statements and related notes included elsewhere herein. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, and which involve numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, “Risk Factors.” Actual results may differ materially from those contained in any forward-looking statements.
Overview and Outlook
We are a large participant in the specialty chemicals industry, one of the world’s largest producers of thermosetting resins, or thermosets, and a leading producer of adhesive and structural resins and coatings. Thermosets are a critical ingredient for most paints, coatings, glues and other adhesives produced for consumer or industrial uses. We provide a broad array of thermosets and associated technologies and have significant market positions in all of the key markets that we serve.
Our products are used in thousands of applications and are sold into diverse markets, such as forest products, architectural and industrial paints, packaging, consumer products and automotive coatings, as well as higher growth markets, such as wind energy and electrical composites. Major industry sectors that we serve include industrial/marine, construction, consumer/durable goods, automotive, wind energy, aviation, electronics, architectural, civil engineering, repair/remodeling and oil and gas drilling. Key drivers for our business include general economic and industrial conditions, including housing starts and auto build rates. In addition, due to the nature of our products and the markets we serve, competitor capacity constraints and the availability of similar products in the market may impact our results. As is true for many industries, our financial results are impacted by the effect on our customers of economic upturns or downturns, as well as by the impact on our own costs to produce, sell and deliver our products. Our customers use most of our products in their production processes. As a result, factors that impact their industries can and have significantly affected our results.
Through our worldwide network of strategically located production facilities, we serve more than 2,900 customers in approximately 86 countries. Our global customers include large companies in their respective industries, such as Akzo Nobel, BASF, Norbord, Louisiana Pacific, Bayer, Owens Corning, PPG Industries, Sherwin Williams, Sinoma, Aeolon and Weyerhaeuser.
Business Strategy
As a significant player in the specialty chemicals industry, we believe we have opportunities to strategically grow our business over the long term. Our products are well aligned with global mega-trends. We believe growth in many of our key applications is being driven by an increasing need for lighter, stronger, higher performance and engineered materials in many end markets such as aerospace, automotive, energy, and construction. Population growth is expected to result in ever increasing demands for more sustainable solutions in energy, such as wind turbines, agriculture, low-emitting coatings, carbon efficient buildings through engineered structural wood, lightweighting composite applications, and improved fire, smoke and toxicity performance. Through these growth strategies, we strive to create shareholder value and generate solid operating cash flow.
COVID-19 Impact
In March 2020, the World Health Organization categorized COVID-19 as a global pandemic. Around the world, local governments’ responses to COVID-19 continue to evolve, which has led to stay-at-home orders, social distancing guidelines and other preventative measures that have disrupted various industries in the global economy and the markets in which our products are manufactured, distributed and sold.
During this pandemic, we have implemented additional guidelines to further protect the health and safety of our employees as we continue to operate with our suppliers and customers. We have committed to maintaining a paramount focus on the safety of our employees while minimizing potential disruptions caused by COVID-19. For example, we are following all legislatively-mandated travel directives in the various countries where we operate, and we have also put additional travel restrictions in place for our associates designed to reduce the risk from COVID-19. Additionally, we are utilizing extended work from home options to protect our office associates, while adjusting our meeting protocols and processes at our manufacturing sites.
Our businesses have been designated by many governments as essential businesses and our operations have continued through December 31, 2020. While we have continued to operate during the pandemic, we did incur adverse financial impacts to our sales and profitability results during the year ended December 31, 2020 from COVID-19, primarily related to reduced volumes. The pandemic has impacted global economic conditions and lowered demand in many of the end use markets in which the Company operates such as automotive, aerospace, industrial products, oil and gas, construction and housing. The ultimate impact that COVID-19 will have on our future financial position, operating results and cash flows involves numerous risks and uncertainties, including new information which may emerge concerning the severity and duration of COVID-19 and actions to contain the virus or treat its impact.
Hexion Inc. | 36 | 2020 Form 10-K
Sale of Phenolic Specialty Resins Business
On September 27, 2020, we entered into a definitive agreement (the “Purchase Agreement”) for the sale of our Phenolic Specialty Resins ("PSR"), Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business”) to Black Diamond Capital Management, LLC and Investindustrial (the “Buyers”) for a purchase price of approximately $425. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future contingent proceeds based on the performance of the Held for Sale Business. The sale is subject to customary closing conditions, including European Works Council consultation, and is expected to close in the first quarter of 2021.
As of December 31, 2020, we reclassified the assets and liabilities of our Held for Sale Business as held for sale on the Consolidated Balance Sheets and reported the results of the operations for the year ended December 31, 2020 as “(Loss) income from discontinued operations, net of taxes” on the Consolidated Statements of Operations. Amounts for prior periods have similarly been retrospectively reclassified for all periods presented.
Unless otherwise noted, the tables and discussion below represent the Company’s continuing operations and excludes the Held for Sale Business.
Realignment of Reportable Segments in 2020
As part of the our continuing efforts to drive growth and greater operating efficiencies, in January 2020 we changed our reportable segments to align around our two growth platforms: Adhesives; and Coatings and Composites. These new segments consist of the following businesses:
•Adhesives: these businesses focus on the global adhesives market. They include the Company’s global wood adhesives business, which now also includes the oilfield technologies group, including: forest products resin assets in North America, Latin America, Australia and New Zealand; and global formaldehyde.
•Coatings and Composites: these businesses focus on the global coatings and composites market. They include our base and specialty epoxy resins and Versatic™ Acids and Derivatives businesses.
We modified our internal reporting processes and systems to accommodate the new structure and the change to segment reporting is effective starting in the first quarter of 2020. Corporate and Other will continue to be a reportable segment with this segment realignment in 2020.
Emergence from Chapter 11 Bankruptcy
On April 1, 2019, the Company, Hexion Holdings LLC, Hexion LLC and certain of the Company’s subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware, (the “Bankruptcy Court”). The Chapter 11 proceedings were jointly administered under the caption In re Hexion TopCo, LLC, No. 19-10684 (the “Chapter 11 Cases”). The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
On June 25, 2019, the Court entered an order (the “Confirmation Order”) confirming the Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the “Plan”). On the morning of July 1, 2019, in accordance with the terms of the Plan and the Confirmation Order, the Plan became effective and the Debtors emerged from bankruptcy (the “Emergence”)
The Company filed for Chapter 11 bankruptcy protection on the Petition Date and as we previously disclosed, based on our financial condition and our projected operating results, the defaults under our debt agreements, and the risks and uncertainties surrounding our Chapter 11 proceedings, that there was substantial doubt as to the our ability to continue as a going concern as of the issuance of our 2018 Annual Report on Form 10-K. After our Emergence from Chapter 11 on July 1, 2019, based on our new capital structure, current liquidity position and projected operating results, we expect to continue as a going concern for the next twelve months. Refer to Note 5 in Item 8 of Part II of this Annual Report on Form 10-K for more information.
Fresh Start Accounting
On the Effective Date, in accordance with ASC 852, the Company applied fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting was applied to the Company’s consolidated financial statements as of July 1, 2019, the date it emerged from bankruptcy, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result, the Company allocated the reorganization value of the Company to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill. Refer to Note 6 in Item 8 of Part II of this Annual Report on Form 10-K for more information.
Hexion Inc. | 37 | 2020 Form 10-K
Financial Results Summary
Our financial results for the period from January 1, 2019 through July 1, 2019 and for fiscal year ended December 31, 2018 are referred to as those of the “Predecessor” period. Our financial results for the fiscal year ended December 31, 2020 and for the period from July 2, 2019 through December 31, 2019 are referred to as those of the “Successor” period. Our results of operations as reported in our Consolidated Financial Statements for these periods are prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), which requires that we report on our results for the period from January 1, 2019 through July 1, 2019 and the period from July 2, 2019 through December 31, 2019 separately.
We do not believe that reviewing the results of these periods in isolation would be useful in identifying any trends in or reaching any conclusions regarding our overall operating performance. Management believes that the key performance metrics such as Net sales, Operating income and Segment EBITDA for the Successor period when combined with the Predecessor period provides more meaningful comparisons to other periods and are useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our Consolidated Financial Statements in accordance with U.S. GAAP, the tables and discussions below also present the combined results for the year ended December 31, 2019.
The combined results (referenced 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 is 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.
2020 Overview
Following are highlights from our results of continuing operations for the years ended December 31, 2020 and 2019:
Successor Predecessor Non-GAAP Combined
(in millions) Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2019 $ Change % Change
Statements of Operations:
Net sales $ 2,510 $ 1,323 $ 1,481 $ 2,804 $ (294) (10) %
Operating (loss) income (64) (49) 68 19 (83) (437) %
(Loss) income before income tax (149) (104) 2,960 2,856 (3,005) (105) %
Net (loss) income from continuing operations (161) (92) 2,760 2,668 (2,829) (106) %
Segment EBITDA:
Adhesives 214 116 135 251 (37) (15) %
Coatings and Composites 151 60 96 156 (5) (3) %
Corporate and Other (71) (37) (30) (67) (4) (6) %
Total $ 294 $ 139 $ 201 $ 340 $ (46) (14) %
•Net Sales-Net sales in 2020 were $2,510, a decrease of 10% compared with $2,804 in 2019. Overall, COVID-19’s global impact on demand across various industries and markets in 2020 was the main driver of the decrease in net sales. Pricing negatively impacted sales by $182 due largely due to raw material decreases contractually passed through to customers across many of our businesses, as well as unfavorable product mix and continued competitive market conditions in our base epoxy resins and specialty epoxy resins businesses. Volume negatively impacted sales by $70 primarily related to volume decreases in our North American and Latin America forest products resins businesses and our North American formaldehyde business driven by COVID-19’s negative impact on global demand. These decreases were partially offset by volume increases in our specialty epoxy business driven by strong global demand in wind energy. Foreign exchange translation negatively impacted net sales by $42 due to the weakening of the Brazilian real and the Chinese Yuan against the U.S. dollar in 2020 compared to 2019, partially offset by the overall strengthening of the euro against the U.S. dollar in 2020 compared to 2019.
Hexion Inc. | 38 | 2020 Form 10-K
•Net Loss-Net loss from continuing operations in 2020 was $161, a decrease of $2,829 as compared with a net income of $2,668 in 2019. This decrease was driven by a $2,970 reorganization gain in 2019 as a result of the restructuring of our debt through our Chapter 11 proceedings. The decrease was also driven by a reduction in operating income of $83, primarily related to an increase of $55 in depreciation and amortization expense related to the step up of our fixed and intangible assets as a result of the application of fresh-start accounting, $16 of asset impairments in our oilfield and phenolic specialty resins businesses in the first quarter 2020, a $33 increase in business realignment costs driven by higher severance expenses related to current cost reduction actions and a decrease in gross profit due primarily to the impacts of COVID-19 on volumes in our businesses. These were partially offset by a reduction in interest expense of $44 as a result of the restructuring of our debt through our Chapter 11 proceedings and lower selling, general and administrative expense of $21 mainly driven by $29 of costs related to our Chapter 11 proceedings incurred in 2019 both prior to filing for bankruptcy and post-emergence and lower variable compensation expense in 2020.
•Segment EBITDA-In 2020, Segment EBITDA from continuing operations was $294, a decrease of 14% compared with $340 in 2019. This decrease was primarily due to the impacts of COVID-19 on our businesses, most notably in our forest products resins and formaldehyde businesses, and continued competitive market conditions in our base epoxy resins business. The decrease was also impacted by $18 of previously recorded deferred contract revenue that was accelerated as a result of the application of fresh start accounting in 2019, and temporary manufacturing disruptions at our Pernis site, which negatively impacted our 2020 Segment EBITDA by approximately $15. These Segment EBITDA decreases were partially offset by favorability in our specialty epoxy business driven by strong global demand in wind energy and strong market conditions in our versatic acids business.
•Restructuring and Cost Reduction Programs-During 2020, we achieved $23 in cost savings related to our cost reduction programs. These activities include certain in-process facility rationalizations and the creation of a business service group within the Company to provide certain administrative functions for us going forward. Overall, we have $6 of in-process cost savings related to these activities, which we expect to realize over the next 12 months.
•Growth Initiatives and New Product Development- We continue to focus on new product development to further strengthen our industry-leading research and development, technical services capabilities, and to strategically invest in our R&D footprint to increase opportunities for innovation and stimulate growth. These growth activities include the following:
◦Our new Adhesives product Armorbuilt™, which is designed to protect the critical utility pole infrastructure against wildfires. We expect incremental growth in 2021 from this product.
◦Extensive conversions were initiated at several major customers in 2020 for next generation OSB PF technology for board surface applications and additional applications are scheduled for 2021 as productivity gains and further reduction in resin usage, positions our products favorably compared to pMDI.
◦As an alternative technology, we have also developed BPA-free alternative coating technologies to address changing consumer preferences.
2021 Outlook
As we look forward to 2021, we anticipate continued economic recovery from the COVID-19 global pandemic including increased demand in several key end markets - housing, wind energy and automotive. While our businesses have been designated by many governments as essential businesses, which has allowed our operations to continue during the pandemic, we saw weak economic conditions develop in the first half of 2020, specifically within automotive and certain industrial markets. In the second half of the year 2020, we saw sequential improvement in many of the industries in which our businesses operate and year-over-year Segment EBITDA improvement in the fourth quarter as the overall economy continued to recover from the global pandemic.
While we expect these current positive economic trends to continue into 2021, delays in COVID-19 vaccine distributions, increases in COVID-19 cases, hospitalizations, deaths, restrictions on trade or government lock-downs could disrupt the current recovery and our expectations. The ultimate impact that COVID-19 will have on our operating results will depend on the overall severity and duration of the COVID-19 pandemic and actions to contain the virus or treat its impact.
Within our Coatings and Composites segment, we continue to expect our epoxy specialty business to benefit from a strong overall global wind energy market in 2021. Our Versatic AcidsTM and Derivatives business should continue to benefit from modest growth in architectural coatings. We also expect significant year over year improvement in our base epoxy business in 2021 due to anticipated improvements in market conditions.
Within our Adhesives segment, we anticipate improvement in Segment EBITDA within our North American forest products resins business in 2021 based on the latest expectations in U.S. housing starts, remodeling and ongoing macroeconomic recovery from the COVID-19 pandemic. We also expect that continued economic recovery will positively impact our North American formaldehyde business in 2021.
Hexion Inc. | 39 | 2020 Form 10-K
We also anticipate that our businesses will continue to benefit from the savings associated with our restructuring and cost reduction initiatives. In addition, we expect lower raw material costs to continue to positively impact results across many of our businesses. Further, we are in the process of implementing various efficiency initiatives, which include process improvement and other productivity projects. The benefits of our new capital structure and decreasing working capital will continue to have a positive impact on free cash flow in 2021.
Lastly, our recent announcement of the sale of our Phenolic Specialty Resin, Hexamine and European-based Forest Products Resins businesses will further streamline our portfolio and improve our specialty product mix. We expect to use the proceeds to further reduce our indebtedness as well as for general corporate purposes including investments in our business. The sale is subject to customary closing conditions, including European Works Council consultation, and is expected to close in the first quarter of 2021.
Matters Impacting Comparability of Results
Chapter 11 Bankruptcy and Fresh Start Accounting Impacts
As a result of the emerging from Chapter 11 and qualifying for the application of fresh-start accounting, at the Effective Date, our assets and liabilities were recorded at their estimated fair values which, in some cases, are significantly different than amounts included in our financial statements prior to the Effective Date. Accordingly, our financial condition and results of operations on and after the Effective Date are not directly comparable to our financial condition and results of operations prior to the Effective Date. The total amount of reorganization and fresh start adjustments, as well as incremental costs incurred related to our Bankruptcy Petitions incurred while we were in bankruptcy resulted in a total gain of $2,970 for our continuing operations which is classified within “Reorganization items, net” in the Consolidated Statements of Operations.
In addition, we incurred costs related to our Chapter 11 proceedings both prior to filing for bankruptcy and post-emergence, which are not classified within “Reorganization items, net” as these costs were not incurred while in bankruptcy. These costs were $29 for the year ended December 31, 2019 and are classified within “Selling, general and administrative expense” in the Consolidated Statements of Operations.
Raw Material Prices
Raw materials comprised approximately 75% of our cost of sales (excluding depreciation expense) in 2020. The three largest raw materials used in our production processes are phenol, methanol and urea. These materials represented approximately 50% of our total raw material costs in 2020. Fluctuations in energy costs, such as volatility in the price of crude oil and related petrochemical products, as well as the cost of natural gas, have caused volatility in our raw material costs and utility costs. In 2020, the average price of methanol, urea and phenol decreased by approximately 15%, 7% and 11%, respectively, as compared to 2019. In 2019, the average price of methanol and urea decreased by approximately 22% and 5%, respectively, and the average price of phenol increased by 2%, as compared to 2018. The impact of passing through raw material price changes to customers can result in significant variances in sales comparisons from year to year.
We expect long-term raw material cost volatility to continue because of price movements of key feedstocks. To help mitigate raw material volatility, we have purchase and sale contracts and commercial arrangements with many of our vendors and customers that contain periodic price adjustment mechanisms. 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.
Other Comprehensive Income
Our other comprehensive income is primarily impacted by foreign currency translation and our derivative instruments designated as hedges. The impact of foreign currency translation is driven by the translation of assets and liabilities of our foreign subsidiaries which are denominated in functional currencies other than the U.S. dollar. The primary assets and liabilities driving the adjustments are cash and cash equivalents; accounts receivable; inventory; property, plant and equipment; accounts payable; pension and other postretirement benefit obligations and certain intercompany loans payable and receivable. The primary currencies in which these assets and liabilities are denominated are the euro, Brazilian real, Chinese yuan, Canadian dollar and Australian dollar.
In 2019, we entered into an interest rate swap agreement to hedge interest rate variability caused by quarterly changes in cash flow due to associated changes in LIBOR under our Senior Secured Term Loan. This swap is designed as a cash flow hedge and changes in fair value are recorded in “Accumulated other comprehensive loss”.
The impact of defined benefit pension and postretirement benefit adjustments is primarily driven by unrecognized prior service cost related to our defined benefit and other non-pension postretirement benefit plans (“OPEB”), as well as the subsequent amortization of these amounts from accumulated other comprehensive income in periods following the initial recording of such amounts. Upon the application of fresh start accounting, on the Effective date, all prior unrecognized service cost within accumulated other comprehensive income related to our defined benefit pension and OPEB plans were reset in accordance with ASC 852 (Refer to Note 6 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K).
Hexion Inc. | 40 | 2020 Form 10-K
Pension and OPEB MTM Adjustments
Under our accounting policy related to the recognition of gains and losses for pension and OPEB plans, upon the annual remeasurement of our pension and OPEB plans in the fourth quarter, or on an interim basis as triggering events warrant, we immediately recognize gains and losses as a mark-to-market (“MTM”) gain or loss through net income. The largest component of our pension and OPEB expense typically relates to these MTM adjustments. We recorded a MTM loss of $4 in 2020, a MTM loss of $5 for the Successor period July 2, 2019 to December 31, 2019 and a MTM gain of $13 in 2018. These MTM adjustments were largely driven by fluctuations in discount rates, which increased in 2018 and decreased in both 2019 and 2020. In addition, a MTM loss of $44 was recorded upon Emergence, driven by reductions in discount rates, which was included within “Reorganization items, net” on the Consolidated Statement of Operations for the Predecessor period January 1, 2019 through July 1, 2019. These MTM adjustments are recognized in “Other non-operating (income) expense, net” in the Consolidated Statements of Operations.
Hexion Inc. | 41 | 2020 Form 10-K
Results of Operations
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Predecessor Non-GAAP Combined Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31,
(In millions) 2019 2018
Net sales $ 2,510 $ 1,323 $ 1,481 $ 2,804 $ 3,137
Cost of sales (exclusive of depreciation and amortization shown below) 2,043 1,117 1,211 2,328 2,559
Selling, general and administrative expense 231 124 128 252 243
Depreciation and amortization(1)
191 93 43 136 98
Gain on dispositions - - - - (44)
Asset impairments 16 - - - 28
Business realignment costs 69 22 14 36 27
Other operating expense, net 24 16 17 33 37
Operating (loss) income (64) (49) 68 19 189
Operating (loss) income as a percentage of net sales (3) % (4) % 5 % 1 % 6 %
Interest expense, net 100 55 89 144 365
Reorganization items, net - - (2,970) (2,970) -
Other non-operating income, net (15) - (11) (11) (12)
Total non-operating expense (income) 85 55 (2,892) (2,837) 353
(Loss) income before income tax and earnings from unconsolidated entities (149) (104) 2,960 2,856 (164)
Income tax expense (benefit) 14 (10) 201 191 31
(Loss) income before earnings from unconsolidated entities (163) (94) 2,759 2,665 (195)
Earnings from unconsolidated entities, net of taxes 2 2 1 3 4
(Loss) income from continuing operations, net of taxes (161) (92) 2,760 2,668 (191)
(Loss) income from discontinued operations, net of taxes (69) 4 135 139 28
Net (loss) income (230) (88) 2,895 2,807 (163)
Net (income) loss attributable to noncontrolling interest - (1) (1) (2) 1
Net (loss) income attributable to Hexion Inc. $ (230) $ (89) $ 2,894 $ 2,805 $ (162)
Other comprehensive loss $ (26) $ (1) $ (8) $ (9) $ (10)
(1)For the years ended December 31, 2020 and 2018 accelerated depreciation of $2 and $4 has been included in “Depreciation and amortization.” There was no accelerated depreciation in the year ended December 31, 2019.
Net Sales
In 2020, net sales decreased by $294, or 10%, compared to 2019. Overall, COVID-19’s global impact on demand across various industries and markets in 2020 was the main driver of the decrease in net sales. Pricing negatively impacted sales by $182 due largely due to raw material decreases contractually passed through to customers across many of our businesses, as well as unfavorable product mix and continued competitive market conditions in our base epoxy resins and specialty epoxy resins businesses. Volume negatively impacted sales by $70 primarily related to volume decreases in our North American and Latin America forest products resins businesses and our North American formaldehyde business driven by COVID-19’s negative impact on global demand. These decreases were partially offset by volume increases in our specialty epoxy business driven by strong global demand in wind energy. Foreign exchange translation negatively impacted net sales by $42 primarily due to the weakening of the Brazilian real and the Chinese yuan against the U.S. dollar in 2020 compared to 2019, and partially offset by the overall strengthening of the euro against the U.S. dollar 2020 compared to 2019.
In 2019, net sales decreased by $333, or 11%, compared to 2018. This decrease was primarily driven by volume decreases which negatively impacted net sales by $149 primarily related to volume decreases in our North American resins business due to weaker demand driven by customer mill closures and the impact of competitive pricing pressures, and in our base epoxy resins business due to an overall weakness in the market, primarily in the automotive and construction industries. These decreases were partially offset by increased volumes in our epoxy specialty business due to strong demand in China wind energy. Pricing negatively impacted sales by $102 due primarily to softer market conditions in our base epoxy resins business and raw material price decreases contractually passed through to customers across many of our businesses. Foreign currency translation negatively impacted net sales by $82 due to the weakening of various foreign currencies against the U.S. dollar in 2019.
Hexion Inc. | 42 | 2020 Form 10-K
Operating Income
In 2020, operating (loss) income decreased by $83 from operating income of $19 in 2019 to an operating loss of $64 in 2020. This decrease was driven by an increase of $55 in depreciation and amortization expense related to the step up of our fixed and intangible assets as a result of the application of fresh-start accounting, a $33 increase in business realignment costs driven by higher severance expenses related to current cost reduction actions, an increase in asset impairments of $16 due to an impairment charge in our oilfield and phenolic specialty resins businesses in the first quarter of 2020 and a decrease in gross profit due primarily to the impacts of COVID-19 on volumes in our businesses. These reductions to operating income were partially offset by a reduction in selling, general and administrative expense driven by $29 of costs related to our Chapter 11 proceedings incurred in 2019 both prior to filing for bankruptcy and post-emergence and lower variable compensation expense in 2020.
In 2019, operating income decreased by $170 compared to 2018, primarily driven by margin reductions in our base epoxy resins business discussed above, the gain on the disposition of our ATG business of $44 that occurred in the first quarter 2018, $27 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, increases in depreciation and amortization of $38 and increases in business realignment costs of $9 and in selling, general and administrative expense of $9. The increase in depreciation and amortization is due to the step up of our fixed and intangible assets as a result of fresh start adjustments and the increase in business realignment costs is driven by higher severance expenses related to recent cost reduction actions. The increase in selling, general and administrative expense is driven by $29 of certain professional fees and other expenses incurred in the first, third and fourth quarters of 2019 related to our Chapter 11 proceedings, as well as the timing of variable compensation costs, partially offset by savings related to our ongoing cost savings and productivity actions. These decreases to operating income were partially offset by an asset impairment of $28 that occurred in third quarter of 2018 within our oilfield assets, as well as decreases in our other operating expense of $4. The decrease in other operating expense is due to lower realized and unrealized foreign currency losses.
Non-Operating Expense
In 2020, total non-operating expense increased by $2,922 from a non-operating income of $2,837 in 2019 to a non-operating loss of $85 due primarily to $2,970 of reorganization gains related to our Chapter 11 proceedings in 2019. This increase in non-operating expense was partially offset by and a decrease in interest expense of $44 as a result of our the restructuring of our debt through our Chapter 11 proceedings in 2019 and an increase of $4 in other non-operating income driven by a lower negative impact of MTM adjustment on pension and OPEB liabilities compared to 2019 and higher realized and unrealized foreign currency gains.
In 2019, total non-operating income increased by $3,190 from a non-operating expense of $353 in 2018 to a non-operating income of $2,837, due to a $2,970 of reorganization items, net primarily related to reorganization and fresh start adjustments associated with our emergence from bankruptcy and a decrease in interest expense of $221 as a result of our the restructuring of our debt through our Chapter 11 proceedings. These items were partially offset by an decrease in other non-operating income of $1 driven by the negative impact of MTM adjustments on pension and OPEB liabilities, partially offset by an increase in realized and unrealized foreign currency gains.
Income Tax Expense
During 2018, the Company recognized income tax expense of $31, primarily as a result of income from certain foreign operations. In the United States, disallowed interest expense resulted in current year taxable income which utilized a net operating loss carryforward. The disallowed interest expense carryforward of $283 generated a deferred tax asset. The decrease in the valuation allowance due to the net operating loss utilization was offset by an increase in the valuation allowance recorded on the interest expense carryforward deferred tax asset. The Company had a Global Intangible Low Tax Income (“GILTI”) inclusion of $21, which was fully offset by our net operating loss. This further reduced our valuation allowance.
During the Predecessor period January 1, 2019 through July 1, 2019, the Predecessor Company recorded income tax expense of $40 for reorganization adjustments, primarily consisting of tax expense of $50 for the gain recognized between fair value and tax basis (the gain in Predecessor Company will be substantially offset by the Predecessor Company’s tax attributes, including net operating losses and previously disallowed interest expense). A tax benefit of $10 was recorded for the removal of a valuation allowance for certain foreign jurisdictions. Pursuant to the Plan, the Successor Company is obligated to indemnify the Predecessor Company for any tax related liabilities. The Predecessor Company recorded income tax expense of $201 in the Predecessor period, primarily related to the increase in deferred tax liabilities resulting from fresh start accounting.
The Predecessor Company’s U.S. net operating loss carryforward of $1,053 and certain state net operating loss carryforwards, along with other tax attributes, have been utilized or forfeited as a result of the taxable gain realized upon Emergence. Certain foreign net operating losses and other carryforwards of the Predecessor Company were forfeited upon Emergence.
Hexion Inc. | 43 | 2020 Form 10-K
Upon the Emergence, the Successor Company applied fresh start accounting (see Note 6 for more information regarding fresh start accounting) and therefore the deferred tax assets and liabilities were adjusted based on the revised U.S. GAAP financial statements. As a result of the step-up in U.S. GAAP basis in the Successor Company’s foreign assets without a corresponding step-up in the tax basis of the foreign assets, the Successor Company’s deferred tax liability increased. An Internal Revenue Code §338(h)(10) election was made to treat the Emergence as an asset sale for U.S. income tax purposes. As a result, the Emergence was treated as a deemed sale of assets of the Predecessor Company while the Successor Company received a step-up in U.S. tax basis to fair value. The Successor Company elected bonus depreciation on the stepped-up U.S. eligible fixed assets. The Successor Company elected to amortize the stepped-up basis of intangibles over a 15-year period and the Successor Company’s depreciation and amortization expense generated a U.S. net operating loss for both the tax years ended December 31, 2020 and 2019. The U.S. net operating loss will be carried forward indefinitely, but will be subject to an 80% limitation on U.S. taxable income starting in 2021.
During the Successor period July 2, 2019 through December 31, 2019, the Successor Company recognized income tax benefit of $10, primarily as a result of losses from certain foreign operations of which the deferred tax asset created is not offset by a valuation allowance. Losses in the United States created a deferred tax asset which was completely offset by an increase to the valuation allowance. The Successor Company recognized a GILTI inclusion of $5, which was fully offset by our net operating loss and further reduced our valuation allowance. As previously discussed above, the Successor Company elected bonus depreciation in 2019.
During the year ended December 31, 2020, the Successor Company recognized income tax expense of $14, primarily as a result of income from certain foreign operations in jurisdictions that do not currently have a NOL to offset income. Losses in the United States created a deferred tax asset which was completely offset by an increase to the valuation allowance. The Successor Company recognized a GILTI inclusion of $9, which was fully offset by our net operating loss and further reduced our valuation allowance.
Other Comprehensive Loss
In 2020, foreign currency translation negatively impacted other comprehensive loss by $8, due to an overall weakening of various foreign currencies against the U.S. dollar in 2020, and the impact of an unrealized loss of $18 on an interest rate swap designated as a cash flow hedge recorded to other comprehensive loss.
In 2019, foreign currency translation negatively impacted other comprehensive loss by $11, due to an overall weakening of various foreign currencies against the U.S. dollar in 2019, partially offset by an unrealized gain of $2 on an interest rate swap designated as a cash flow hedge recorded to other comprehensive loss.
In 2018, foreign currency translation negatively impacted other comprehensive loss by $8, primarily due to overall weakening of various foreign currencies against the U.S. dollar in 2018, as well as the impact of $2 of amortization of prior service costs on defined benefit pension and postretirement benefits.
Results of Operations by Segment
Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items, other income and expenses and discontinued operations. 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. Segment EBITDA should not be considered a substitute for net loss or other results reported in accordance with U.S. GAAP. Segment EBITDA may not be comparable to similarly titled measures reported by other companies.
The combined results (referenced 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 is 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. See Note 20 in Part I of this Annual Report on Form 10-K and below for reconciliation of net (loss) income to Segment EBITDA for the Successor and Predecessor.
Hexion Inc. | 44 | 2020 Form 10-K
Successor Predecessor Non-GAAP Combined Predecessor
(in millions) Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31,
Net Sales(1):
2019 2018
Adhesives $ 1,188 $ 693 $ 761 $ 1,454 $ 1,641
Coatings and Composites 1,322 630 720 1,350 1,496
Total $ 2,510 $ 1,323 $ 1,481 $ 2,804 $ 3,137
Segment EBITDA:
Adhesives $ 214 $ 116 $ 135 $ 251 $ 252
Coatings and Composites 151 60 96 156 $ 200
Corporate and Other (71) (37) (30) (67) $ (71)
Total $ 294 $ 139 $ 201 $ 340 $ 381
(1)Intersegment sales are not significant and, as such, are eliminated within the selling segment.
Hexion Inc. | 45 | 2020 Form 10-K
2020 vs. 2019 Segment Results
Following is an analysis of the percentage change in sales by segment from 2019 to 2020:
Volume Price/Mix Currency
Translation Total
Adhesives (10) % (5) % (3) % (18) %
Coatings and Composites 5 % (7) % - % (2) %
Adhesives
Net sales in 2020 decreased by $266, or 18%, when compared to 2019. Volume negatively impacted net sales by $141, driven by COVID-19’s global economic impact across various industries and markets primarily related to volume decreases in our North American and Latin America forest products resins businesses and our North American formaldehyde business. Volume declines primarily occurred in the second quarter 2020 and improved in the second half of 2020 as the global economy continued to recover from the global pandemic in many end markets. Pricing negatively impacted net sales by $80, which was primarily due to raw material price decreases contractually passed through to customers across many of our businesses. Foreign exchange translation negatively impacted net sales by $45, due largely to the strengthening of the U.S. dollar against the Brazilian real in 2020 compared to 2019.
Segment EBITDA in 2020 decreased by $37 to $214 compared to 2019. This decrease was primarily driven by COVID-19 impacts on volumes in our forest products resins and formaldehyde businesses, as discussed above, as well as $18 of previously recorded deferred contract revenue that was accelerated as a result of the application of fresh start accounting in 2019.
Coatings and Composites
Net sales in 2020 decreased by $28, or 2%, compared to 2019. Pricing negatively impacted net sales by $102 due to raw material decreases contractually passed through to customers across many of our businesses, as well as unfavorable product mix and continued competitive market conditions in our base epoxy resins and specialty epoxy resins businesses. Volumes positively impacted net sales by $71, which was primarily related to volume increases in our specialty epoxy business driven by continued strong global demand in wind energy. Foreign exchange translation positively impacted net sales by $3, due primarily to the overall strengthening of the euro against the U.S. dollar and partially offset by the weakening of the Chinese yuan in 2020 compared to 2019.
Segment EBITDA in 2020 decreased by $5 to $151 compared to 2019. The decrease was primarily due to COVID-19 impacts and continued competitive market conditions in our base epoxy resins business, as well as temporary manufacturing disruptions at our Pernis site, which negatively impacted our current year Segment EBITDA by approximately $15. These Segment EBITDA decreases were partially offset by favorability in our specialty epoxy business driven by strong global demand in wind energy and strong market conditions in our versatic acids business.
Corporate and Other
Corporate and Other is primarily corporate, general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions, unallocated foreign exchange gains and losses and legacy company costs not allocated to the other segments. Corporate and Other charges increased by $4 to $71 compared to 2019, due primarily to the termination of our Shared Services Agreement with MPM, project fees and unfavorable foreign exchange impacts. These increased costs were partially offset by our ongoing cost reduction efforts, lower compensation costs and travel expenses.
2019 vs. 2018 Segment Results
The table below provides additional detail of the percentage change in sales by segment from 2018 to 2019:
Volume Price/Mix Currency
Translation Total
Adhesives (5) % (4) % (2) % (11) %
Coatings and Composites (4) % (3) % (3) % (10) %
Adhesives
Net sales in 2019 decreased by $187, or 11%, when compared to 2018. Volume negatively impacted net sales by $84, primarily related to volume decreases in our North American resins business due to weaker demand driven by customer mill closures and competitive pricing pressures. Pricing negatively impacted net sales by $64, which was primarily due to raw material price decreases contractually passed through to customers across many of our businesses. Foreign exchange translation negatively impacted net sales by $39, due largely to the strengthening of the U.S. dollar against various currencies in 2019 compared to 2018.
Segment EBITDA in 2019 decreased by $1 to $251 compared to 2018. This increase was primarily driven by the volume decreases in our North American resins business discussed above, largely offset by $18 of previously recorded deferred contract revenue that was accelerated during the period as a result of the application of fresh start accounting.
Hexion Inc. | 46 | 2020 Form 10-K
Coatings and Composites
Net sales in 2019 decreased by $146, or 10%, compared to 2018. Volumes negatively impacted net sales by $65, which was primarily related to volume decreases in our base epoxy resins and versatic acids businesses driven by overall weakness in the market, primarily in the automotive and construction industries. These decreases were partially offset by increased volumes in our epoxy specialty business due to stronger demand in China wind energy. Pricing negatively impacted net sales by $38 primarily due to softer market conditions in our base epoxy resins business as compared to 2018. Foreign exchange translation negatively impacted net sales by $43, due primarily to the strengthening of the U.S. dollar against various foreign currencies in 2019 compared to 2018.
Segment EBITDA in 2019 decreased by $44 to $156 compared to 2018. The decrease was primarily driven by the margin reductions in our base epoxy resins business due to softer market conditions discussed above.
Corporate and Other
Corporate and Other is primarily corporate, general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions, unallocated foreign exchange gains and losses and legacy company costs not allocated to the other segments. Corporate and Other charges decreased by $4 to $67 compared to 2018, due primarily to our ongoing cost reduction efforts, the timing of variable compensation costs and favorable foreign exchange impacts.
Reconciliation of Net Loss to Segment EBITDA:
Successor Predecessor Non-GAAP Combined Predecessor
Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31,
2019 2018
Reconciliation:
Net (loss) income attributable to Hexion Inc. $ (230) $ (89) $ 2,894 $ 2,805 $ (162)
Add: Net income (loss) attributable to noncontrolling interest - 1 1 2 (1)
Less: Net (loss) income from discontinued operations (69) 4 135 139 28
Net (loss) income from continued operations (161) (92) 2,760 2,668 (191)
Income tax expense (benefit) 14 (10) 201 191 31
Interest expense, net 100 55 89 144 365
Depreciation and amortization (1)
191 93 43 136 98
EBITDA 144 46 3,093 $ 3,139 303
Adjustments to arrive at Segment EBITDA: -
Asset impairments and write-downs $ 16 $ - $ - $ - $ 32
Business realignment costs (2)
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 4 5 - 5 (13)
Transaction costs (3)
6 11 26 37 13
Reorganization items, net (4)
- - (2,943) (2,943) -
Non-cash impact of inventory step-up(5)
- 27 (27) - -
Accelerated deferred revenue (6)
- - 18 18 -
Other non-cash items (7)
43 10 9 19 14
Other (8)
12 14 18 32 21
Total adjustments 150 93 (2,892) (2,799) 78
Segment EBITDA $ 294 $ 139 $ 201 $ 340 $ 381
Segment EBITDA:
Adhesives 214 116 135 $ 251 252
Coatings and Composites 151 60 96 156 200
Corporate and Other (71) (37) (30) (67) (71)
Total $ 294 $ 139 $ 201 $ 340 $ 381
(1)For the year ended December 31, 2020 and 2018 accelerated depreciation of $2 and $4, respectively, has been included in “Depreciation and amortization.” There was no accelerated depreciation during the Successor period July 2, 2019 to December 31, 2019 or the Predecessor period January 1, 2019 through July 1, 2019.
Hexion Inc. | 47 | 2020 Form 10-K
(2)Business realignment costs for the Successor and Predecessor periods below included:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Severance costs $ 16 $ 9 $ 8 $ 9
In-process facility rationalizations 11 5 3 11
Contractual costs from exited business 8 - - -
Business services implementation 22 - - -
Legacy environmental reserves 9 7 1 5
Other 3 1 2 2
(3)For the year ended December 31, 2020, transaction costs included certain professional fees related to strategic projects. For the Successor period July 2, 2019 through December 31, 2019 and the Predecessor period January 1, 2019 through July 1, 2019, transaction costs primarily included $6 and $23, respectively, of certain professional fees and other expenses related to the Company’s Chapter 11 proceedings.
(4)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.
(5) Represents $27 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.
(6) For the Predecessor period from January 1, 2019 through July 1, 2019, $18 of deferred revenue was accelerated on July 1 as part of Fresh Start accounting.
(7) Other non-cash items for the Successor and Predecessor periods presented below included:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Fixed asset write-offs $ 13 $ 6 $ 3 $ 6
Stock-based compensation costs 17 8 - -
Long-term retention programs 9 (2) 5 8
One-time capitalized variance impact of inventory fresh start step-up - (4) - -
Other 4 2 1 -
(8) Other for Successor and Predecessor periods presented below included:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Legacy and other non-recurring items $ 8 $ 7 $ 3 $ 7
IT outage (recoveries) costs, net (4) - 9 -
Financing fees and other 8 7 6 14
Hexion Inc. | 48 | 2020 Form 10-K
Liquidity and Capital Resources
2021 Outlook
We believe we are favorably positioned to fund our ongoing liquidity requirements for the foreseeable future through cash generated from operations, as well as available borrowings under our ABL Facility. We have the operational and financial flexibility to make strategic capital investments, leverage our leadership positions with both our customers and suppliers, optimize our portfolio and drive new growth programs. As the impact of the COVID-19 pandemic on the global economy and our operations evolves, we will continue to assess our liquidity needs.
The following factors will impact 2021 cash flows:
•Sales of Assets: During the third quarter of 2020, we entered in a Purchase Agreement to sell our Phenolic Specialty Resins, Hexamine and European-based Forest Products Resins businesses. We expect to complete the transaction in the first quarter of 2021. We plan to use the proceeds from the transaction to reinvest in our businesses and reduce the absolute amount of our debt. We will continue to explore options to optimize our portfolio.
•Interest and Income Taxes: We expect cash outflows in 2021 related to interest payments on our debt of approximately $85 to $95 and income tax payments between $20 to $30.
•Capital Spending: Capital spending in 2021 is expected to be between $120 and $140, an increase from 2020 due to our commitment to future investments to productivity and growth projects in our businesses, as well as the expected timing of plant turnarounds.
•Working Capital: We anticipate working capital to increase modestly during 2021, as compared to 2020, based on expected increased volumes as key end markets continue to recover from COVID-19. During the year, we expect an increase in the first half and a decrease in the second half, consistent with historical trends.
•Restructuring Activities: We expect that the 2021 cost savings associated with our in-process facility rationalizations and the creation of a business service group within the Company to provide certain administrative functions for us going forward will have a net positive impact on our liquidity.
Our short-term cash needs are expected to include funding operations as currently planned and we believe that we will be able to meet our liquidity needs over the next 12 months based on our current projections of cash flow from operations and borrowing availability under financing arrangements.
At December 31, 2020, we had $1,792 of outstanding debt and $561 in liquidity consisting of the following:
•$200 of unrestricted cash and cash equivalents (of which $113 is maintained in foreign jurisdictions);
•$297 of borrowings available under our ABL Facility ($350 borrowing base less $53 of outstanding letters of credit; there were no outstanding borrowings); and
•$64 of time drafts and borrowings available under credit facilities at certain international subsidiaries.
Our net working capital (defined as accounts receivable and inventories less accounts payable) from continuing operations at December 31, 2020 and 2019 was $257 and $320, respectively. A summary of the components of our net working capital as of December 31, 2020 and 2019 is as follows:
Successor Predecessor
December 31, 2020 % of LTM Net Sales December 31, 2019 % of LTM Net Sales (1)
Accounts receivable $ 331 13 % $ 316 11 %
Inventories 265 11 % 293 10 %
Accounts payable (339) (14) % (289) (10) %
Net working capital (1)
$ 257 10 % $ 320 11 %
(1) Management believes that this non-GAAP measure is useful supplemental information. This non-GAAP measure should be considered by the reader in addition to but not instead of, the financial statements prepared in accordance with GAAP.
The decrease in net working capital of $63 from December 31, 2019 was driven by a decrease in inventory of $28, primarily the result of lower raw material costs in 2020, and an increase in accounts payable of $50. The increase in accounts payable was largely related to improved vendor terms and the timing of vendor payments. The increase in accounts payable and decrease in inventories were partially offset by an increase of $15 in accounts receivable driven by overall higher volumes in the fourth quarter of 2020 compared to the fourth quarter of 2019. Based on our new capital structure, we expect continued structural improvement in our vendor terms going forward. Consistent with the historical seasonality of our businesses, we expect an increase in net working capital in the first quarter of 2021 compared to the fourth quarter 2020.
Hexion Inc. | 49 | 2020 Form 10-K
Sources and Uses of Cash
Following are highlights from our Consolidated Statements of Cash Flows for continuing operations:
Successor Predecessor Non-GAAP Combined Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 December 31,
2019 2018
Sources (uses) of cash:
Operating activities $ 116 $ 174 $ (163) $ 11 $ (63)
Investing activities (105) (47) (40) (87) (31)
Financing activities (57) (38) 212 174 81
Effect of exchange rates on cash flow 2 1 - 1 (5)
Net increase (decrease) in cash and cash equivalents $ (44) $ 90 $ 9 $ 99 $ (18)
Operating Activities
In 2020, operating activities provided $116 of cash. Net loss of $161 included non cash adjustments for depreciation and amortization of $191, deferred tax expense of $9, loss on sale of assets of $9, unrealized losses related to the remeasurement of our pension and OPEB liabilities of $4, non cash asset impairments of $16 and non-cash stock based compensation expense of $17, partially offset by unrealized foreign currency gains of $3 and other non-cash income adjustments of $1. Net working capital generated $76, which was largely driven by an increase in accounts payable due to improved vendor terms and the timing of vendor payments offset by increases in accounts receivable due to higher year-over-year volumes in the fourth quarter of 2020. Changes in other assets and liabilities and income taxes payable used $41 due to the timing of when items were expensed versus paid, which primarily included interest expense, employee retention programs, restructuring reserves, incentive compensation, pension plan contributions and taxes.
In 2019, operating activities provided $11 of cash. Net income of $2,668 included $3,156 of net non-cash income items related to our reorganization, unrealized foreign currency gains of $8 and other non-cash income adjustments of $3, partially offset by depreciation and amortization of $136, deferred tax expense of $131, deferred financing fees of $136, non-cash impact of inventory step-up of $27, loss on sale of assets of $7, unrealized losses related to the remeasurement of our pension and OPEB liabilities of $5, and non cash stock based compensation expense of $8. Net working capital remained flat, which was largely driven by a decrease in accounts payable due to the timing of vendor payments offset by decreases in accounts receivable due to lower volumes and lower raw material prices. Changes in other assets and liabilities and income taxes payable provided $60 due to the timing of when items were expensed versus paid, which primarily included interest expense, employee retention programs, restructuring reserves, incentive compensation, pension plan contributions and taxes.
In 2018, operating activities used $63 of cash. Net loss of $191 included $135 of net non-cash expense items, consisting of depreciation and amortization of $98, non-cash asset impairments and accelerated depreciation of $28, amortization of deferred financing fees of $49, deferred tax expense of $12, loss on sale of assets of $6 and unrealized foreign currency losses of $2, partially offset by the gain on the sale of ATG of $44 and unrealized gains related to the remeasurement of our pension and OPEB liabilities of $13. Net working capital used $24, which was largely driven by increases in inventories due to raw material price inflation and decreases in accounts receivable due to lower volumes. Changes in other assets and liabilities and income taxes payable provided $17 due to the timing of when items were expensed versus paid, which primarily included interest expense, employee retention programs, restructuring reserves, incentive compensation, pension plan contributions and taxes.
Investing Activities
In 2020, investing activities used $105, primarily driven by capital expenditures of $108, partially offset by proceeds from sale of assets of $3.
In 2019, investing activities used $87, primarily driven by capital expenditures of $88, partially offset by proceeds from sale of assets of $1.
In 2018, investing activities used $31, primarily driven by capital expenditures of $81, partially offset by net proceeds from the ATG disposition of $49 and proceeds from sale of assets of $1.
Financing Activities
In 2020, financing activities provided $57. Net short-term debt repayments were $7 and net long-term debt borrowings were $37. The Company distributed a $13 affiliate loan to its Parent for share repurchases, which was subsequently settled with a return of capital.
In 2019, financing activities provided $174. Net short-term debt repayments were $28 and net long-term debt borrowings were $40, proceeds received from the rights offering were $300 and we also paid $138 of financing fees. Our long-term debt borrowings primarily consisted of the proceeds from our new Senior Secured Term loans and Senior Notes, offset by the debt repayments made as part of the Plan.
Hexion Inc. | 50 | 2020 Form 10-K
In 2018, financing activities provided $81. Net short-term debt borrowings were $10 and net long-term debt borrowings were $72. Our long-term debt borrowings primarily consisted of $137 in borrowings under our Predecessor ABL Facility. We also paid $1 of financing fees.
There are certain restrictions on the ability of certain of our subsidiaries to transfer funds to Hexion Inc. in the form of cash dividends, loans or otherwise, which primarily arise as a result of certain foreign government regulations or as a result of restrictions within certain subsidiaries’ financing agreements limiting such transfers to the amounts of available earnings and profits or otherwise limit the amount of dividends that can be distributed. In either case, we have alternative methods to obtain cash from these subsidiaries in the form of intercompany loans and/or returns of capital in such instances where payment of dividends is limited to the extent of earnings and profits.
Outstanding Debt
Following is a summary of our cash and cash equivalents and outstanding debt at December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Cash and cash equivalents $ 204 $ 254
Senior Secured Credit Facility:
ABL Facility - -
Senior Secured Term Loan - USD due 2026 (includes $6 and $7 of unamortized debt discount at December 31, 2020 and 2019, respectively) 708 715
Senior Secured Term Loan - EUR due 2026 (includes $4 of unamortized debt discount at December 31, 2020 and 2019) 515 473
Senior Notes:
7.875% Senior Notes due 2027 450 450
Other Borrowings:
Australia Facility due 2021 at 4.0% and 3.9% at December 31, 2020 and 2019, respectively 30 31
Brazilian bank loans at 10.2% and 9.2% at December 31, 2020 and 2019, respectively 24 41
Lease obligations(1)
56 64
Other at 3.9% and 5.0% at December 31, 2020 and 2019, respectively 9 11
Total $ 1,792 $ 1,785
(1) Lease obligations include finance leases and sale leaseback financing arrangements.
(2) The foreign exchange translation impact of the Company’s foreign currency denominated debt instruments was an increase of $46 and a decrease of $10 as of December 31, 2020 and 2019, respectively.
We regularly review our portfolio for optimization through potential divestitures and potential bolt-on acquisitions or mergers. While there is no guarantee of any future transactions, it could include a specific business unit or combination of several businesses. We expect that a portion of the proceeds from any future divestiture transaction or transactions upon completion would be used to help reduce the absolute amount of our debt.
Further, depending upon market, pricing and other conditions, including the current state of the high yield bond market, as well as cash balances and available liquidity, we or our affiliates, may seek to acquire notes or other indebtedness of the Company through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we or our affiliates may determine (or as may be provided for in the indentures governing the notes), for cash or other consideration.
Covenant Compliance
Credit Facilities and Senior Notes
The instruments that govern our indebtedness contain, among other provisions, restrictive covenants (and incurrence tests in certain cases) regarding indebtedness, dividends and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and, in the case of our ABL Facility, the maintenance of a financial ratio (depending on certain conditions). Payment of borrowings under the ABL Facility and our notes may be accelerated if there is an event of default as determined under the governing debt instrument. Events of default under the credit agreement governing our ABL Facility includes the failure to pay principal and interest when due, a material breach of representations or warranties, events of bankruptcy, a change of control, and most covenant defaults. Events of default under the indentures governing our notes include the failure to pay principal and interest, a failure to comply with covenants, subject to a 30-day grace period in certain instances, and certain events of bankruptcy.
The indenture that governs our 7.875% Senior Notes due 2027 (the “Indenture”) contains a Pro Forma EBITDA to Fixed Charges ratio incurrence test which may restrict our ability to take certain actions such as incurring additional debt or making acquisitions if we are unable to meet this ratio (measured on a last twelve months, or LTM, basis) of at least 2.0:1. The Pro Forma EBITDA to Fixed Charges Ratio under the Indenture is generally defined as the ratio of (a) Pro Forma EBITDA to (b) net interest expense excluding the amortization or write-off of deferred financing costs, each measured on an LTM basis. See below for our Pro Forma EBITDA to Fixed Charges Ratio calculation.
Hexion Inc. | 51 | 2020 Form 10-K
Our ABL Facility, which is subject to a borrowing base, does not have any financial maintenance covenant other than a minimum fixed charge coverage ratio of 1.0 to 1.0 that would only apply if our availability under the ABL Facility at any time is less than the greater of (a) $30 and (b) 10.0% of the lesser of the borrowing base and the total ABL Facility commitments at such time. The fixed charge coverage ratio under the credit agreement governing the ABL Facility is generally defined as the ratio of (a) Pro Forma EBITDA minus non-financed capital expenditures and cash taxes 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.
Hexion Inc. | 52 | 2020 Form 10-K
Reconciliation of Last Twelve Months Net Loss to Pro Forma EBITDA
Pro Forma EBITDA is defined as EBITDA adjusted for certain non-cash and certain non-recurring items and other adjustments calculated on a pro-forma basis, including the expected future cost savings from business optimization programs or other programs and the expected future impact of acquisitions, in each case as determined under the governing debt instrument. We believe that including the supplemental adjustments that are made to calculate Pro Forma EBITDA provides additional information to investors about our ability to comply with our financial covenants and to obtain additional debt in the future. Pro Forma EBITDA and Fixed Charges are not defined terms under U.S. GAAP. Pro Forma EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not take into account certain items such as interest and principal payments on our indebtedness, depreciation and amortization expense (because we use capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures. Fixed Charges under the Indenture should not be considered an alternative to interest expense.
The following table reconciles net loss to EBITDA and Pro Forma EBITDA from continuing operations for the twelve month period and calculates the ratio of Pro Forma EBITDA to Fixed Charges as calculated under our Indenture for the period presented:
December 31, 2020
LTM Period
Net loss $ (230)
Net loss from discontinued operations (69)
Net loss from continuing operations (161)
Income tax expense 14
Interest expense, net 100
Depreciation and amortization 191
EBITDA $ 144
Adjustments to arrive at Pro Forma EBITDA:
Asset impairments 16
Business realignment costs (1)
Realized and unrealized foreign currency gains -
Unrealized loss on pension and OPEB plan liabilities (2)
Transaction costs (3)
Other non-cash items (4)
Other (5)
Cost reduction programs savings (6)
Pro Forma EBITDA $ 304
Pro forma fixed charges (7)
$ 84
Ratio of Pro Forma EBITDA to Fixed Charges(8)
3.62
(1)Primarily represents costs related to certain in-process cost reduction activities, including severance costs of $16, $11 related to certain in-process facility rationalizations, $8 of contractual costs for exited businesses, $9 for future 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 $22.
(2)Represents non-cash losses from pension and postretirement benefit plan liability remeasurements.
(3)Represents certain professional fees related to strategic projects.
(4)Primarily include expenses for retention programs of $9, fixed asset disposals of $13, and share-based compensation costs of $17.
(5)Primarily includes legacy and other non-recurring expenses of $8, financing fees and other expenses of $8 and business optimization expense of $4, offset by IT outage recoveries of $4.
(6)Represents pro forma impact of in-process cost reduction programs savings. Cost reduction program savings represent the unrealized headcount reduction savings and plant rationalization savings related to cost reduction programs and other unrealized savings associated with the Company’s business realignments activities, and represent our estimate of the unrealized savings from such initiatives that would have been realized had the related actions been completed at the beginning of the period presented. The savings are calculated based on actual costs of exiting headcount and elimination or reduction of site costs. We expect the savings to be realized within the next 12 months.
(7)Reflects pro forma interest expense based on interest rates at December 31, 2020 and expected 2021 debt pay downs.
(8)The Company’s ability to incur additional indebtedness, among other actions, is limited under our Senior Secured Term Loans and Senior Notes, unless the Company has a Pro Forma EBITDA to Fixed Charges ratio of at least 2.0 to 1.0.
Hexion Inc. | 53 | 2020 Form 10-K
Contractual Obligations
The following table presents our contractual cash obligations at December 31, 2020. Our contractual cash obligations consist of legal commitments at December 31, 2020 that require us to make fixed or determinable cash payments, regardless of the contractual requirements of the specific vendor to provide us with future goods or services. This table does not include information about most of our recurring purchases of materials used in our production; our raw material purchase contracts do not meet this definition since they generally do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless a cancellation would result in a major disruption to our business. For example, we have contracts for information technology support that are cancellable, but this support is essential to the operation of our business and administrative functions; therefore, amounts payable under these contracts are included. These contractual obligations are grouped in the same manner as they are classified in the Consolidated Statements of Cash Flows in order to provide a better understanding of the nature of the obligations.
Payments Due By Year
Contractual Obligations 2021 2022 2023 2024 2025 2026 and beyond
Total
Operating activities:
Purchase obligations (1)
$ 190 $ 134 $ 94 $ 50 $ 49 $ 253 $ 770
Interest on fixed rate debt obligations 53 52 51 51 50 71 328
Interest on variable rate debt obligations (2)
13 12 12 11 11 20 79
Operating lease obligations 23 16 11 9 9 58 126
Funding of pension and other postretirement obligations (3)
43 45 46 46 46 - 226
Financing activities:
Long-term debt, including current maturities 79 33 16 7 8 1,650 1,793
Finance lease obligations (4)
2 1 1 1 1 3 9
Total $ 403 $ 293 $ 231 $ 175 $ 174 $ 2,055 $ 3,331
(1)Purchase obligations are comprised of the fixed or minimum amounts of goods and/or services under long-term contracts and assumes that certain contracts are terminated in accordance with their terms after giving the requisite notice which is generally two to three years for most of these contracts; however, under certain circumstances, some of these minimum commitment term periods could be further reduced which would significantly decrease these contractual obligations.
(2)Based on applicable interest rates in effect at December 31, 2020.
(3)Pension and other postretirement contributions have been included in the above table for the next five years. These amounts include estimated contributions to our funded defined benefit plans as well as estimated benefit payments to be made for unfunded foreign defined benefit pension plans. The assumptions used by our actuaries in calculating these projections includes a weighted average annual return on pension assets of approximately 3.5% for the years 2021 - 2025 and the continuation of current law and plan provisions. These estimated payments may vary based on the actual return on our plan assets or changes in current law or plan provisions. See Note 15 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for more information on our pension and postretirement obligations.
(4)Sale leaseback financing arrangements are included in “Long-term debt, including current maturities” because they are not considered leases under Topic 842.
The table above excludes payments for income taxes and environmental obligations since, at this time, we cannot determine either the timing or the amounts of all payments beyond 2020. At December 31, 2020, we recorded unrecognized tax benefits and related interest and penalties of $194. We estimate that we will pay between $20 and $30 in 2021 for U.S. Federal, state and foreign income taxes. We expect non-capital environmental expenditures for 2021 through 2026 totaling $10. See Notes 14 and 17 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on 10-K for more information on these obligations.
Off Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2020.
Hexion Inc. | 54 | 2020 Form 10-K
Critical Accounting Estimates
In preparing our financial statements in conformity with U.S. GAAP, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of these accounting policies require the application of significant judgment by management to select the appropriate assumptions to determine these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, actual results may differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K.
Our most critical accounting policies, which reflect significant management estimates and judgment to determine amounts in our audited Consolidated Financial Statements, are as follows:
Fresh Start Accounting
On the Effective Date, in accordance with ASC 852, the Company applied fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting was applied to the Company’s consolidated financial statements as of July 1, 2019, the date it emerged from bankruptcy, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result, the Company allocated the reorganization value of the Company to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill.
Environmental Remediation and Restoration Liabilities
Accruals for environmental matters are recorded when we believe that it is probable that a liability has been incurred and we can reasonably estimate the amount of the liability. We have accrued $47 and $51 at December 31, 2020 and 2019, respectively, for all probable environmental remediation and restoration liabilities, which is our best estimate of these liabilities. Based on currently available information and analysis, we believe that it is reasonably possible that the costs associated with these liabilities may fall within a range of $34 to $93. This estimate of the range of reasonably possible costs is less certain than the estimates that we make to determine our reserves. To establish the upper limit of this range, we used assumptions that are less favorable to Hexion among the range of reasonably possible outcomes, but we did not assume that we would bear full responsibility for all sites to the exclusion of other potentially responsible parties.
Some of our facilities are subject to environmental indemnification agreements, where we are generally indemnified against damages from environmental conditions that occurred or existed before the closing date of our acquisition of the facility, subject to certain limitations. In other cases we have sold facilities subject to an environmental indemnification agreement pursuant to which we retain responsibility for certain environmental conditions that occurred or existed before the closing date of the sale of the facility.
Income Tax Assets and Liabilities and Related Valuation Allowances
At December 31, 2020, we had a valuation allowance of $217 against our deferred income tax assets. This valuation allowance is made up of a $120 valuation allowance against all of our net U.S. federal and state deferred income tax assets, as well as a valuation allowance of $97 against a portion of our net foreign deferred income tax assets, primarily in the Netherlands.
At December 31, 2019, we had a valuation allowance of $122 against our deferred income tax assets. This valuation allowance is made up of a $59 valuation allowance against all of our net U.S. federal and state deferred income tax assets, as well as a valuation allowance of $63 against a portion of our net foreign deferred income tax assets, primarily in Germany and the Netherlands.
The valuation allowances require an assessment of both negative and positive evidence, such as operating results during the most recent three-year period. This evidence is given more weight than our expectations of future profitability, which are inherently uncertain.
The Company considered all available evidence, both positive and negative, in assessing the need for a valuation allowance for deferred tax assets. The Company evaluated four possible sources of taxable income when assessing the realization of deferred tax assets:
•Taxable income in prior carryback years;
•Future reversals of existing taxable temporary differences;
•Tax planning strategies; and
•Future taxable income exclusive of reversing temporary differences and carryforwards.
For 2020, previous and current losses in the U.S. and in certain foreign operations for recent periods continue to provide sufficient negative evidence requiring a valuation allowance against the net federal, state, and certain foreign deferred tax assets.
Hexion Inc. | 55 | 2020 Form 10-K
Uncertainty in income taxes is recognized in the financial statements in accordance with the applicable accounting guidance. The guidance prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of tax positions taken or expected to be taken in its tax return. We also apply the guidance relating to de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
The calculation of our income tax liabilities involves dealing with uncertainties in the application of complex domestic and foreign income tax regulations. Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the Consolidated Financial Statements. Tax benefits are recognized in the Consolidated Financial Statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely to be realized upon settlement. To the extent we prevail in matters for which liabilities have been established, or are required to pay amounts in excess of our liabilities, our effective income tax rate in a given period could be materially impacted. An unfavorable income tax settlement may require the use of cash and result in an increase in our effective income tax rate in the year it is resolved. A favorable income tax settlement would be recognized as a reduction in the effective income tax rate in the year of resolution. At December 31, 2020 and 2019, we recorded unrecognized tax benefits and related interest and penalties of $194 and $186, respectively.
Pensions and Non-Pension Postretirement Benefit Plans
The amounts that we recognize in our financial statements for pension benefit obligations are determined by actuarial valuations. Inherent in these valuations are certain assumptions, the more significant of which are:
•The weighted average rate used for discounting the liability;
•The weighted average expected long-term rate of return on pension plan assets;
•The method used to determine market-related value of pension plan assets;
•The weighted average rate of future salary increases; and
•The anticipated mortality rate tables.
The discount rate reflects the rate at which pensions could be effectively settled. When selecting a discount rate, our actuaries provide us with a cash flow model that uses the yields of high-grade corporate bonds with maturities consistent with our anticipated cash flow projections. Our pension and OPEB liabilities and related service and interest cost are calculated using a split-rate interest discounting methodology, whereby expected future cash flows related to these liabilities are discounted using multiple interest rates on a forward curve that correspond to the timing of the expected cash flows.
The expected long-term rate of return on plan assets is determined based on the various plans’ current and projected asset mix. To determine the expected overall long-term rate of return on assets, we take into account the rates on long-term debt investments that are held in the portfolio, as well as expected trends in the equity markets, for plans including equity securities.
The market-related value of pension plan assets is determined based on the nature of the investment. Equity and fixed income securities are primarily in pooled asset and mutual funds and are valued based on underlying net asset value multiplied by the number of shares held. The underlying asset values are based on observable inputs and quoted market prices. Cash equivalents represent investments in a collective short term investment fund, which is a cash sweep for uninvested cash that earns interest monthly. For these investments, book value is assumed to equal fair value due to the short duration of the investment term. Investments in commingled funds with exposure to a variety of hedge fund strategies, which are not publicly traded and have ongoing redemption restrictions, are measured at net asset value per share as a practical expedient for fair value, which is derived from the underlying asset values in these funds, only some of which represent observable inputs and quoted market prices.
The rate of increase in future compensation levels is determined based on salary and wage trends in the chemical and other similar industries, as well as our specific compensation targets.
The mortality tables that are used represent the most commonly used mortality projections for each particular country, and reflect projected mortality improvements.
We believe the current assumptions used to estimate plan obligations and pension expense are appropriate in the current economic environment. However, as economic conditions change, we may change some of our assumptions, which could have a material impact on our financial condition and results of operations.
Hexion Inc. | 56 | 2020 Form 10-K
The following table presents the sensitivity of our projected pension benefit obligation (“PBO”), accumulated benefit obligation (“ABO”), deficit (“Deficit”) and 2020 pension expense to the following changes in key assumptions:
Increase / (Decrease) at Increase /
(Decrease)
December 31, 2020
PBO ABO 2020 Expense
Assumption:
Increase in discount rate of 0.5% $ (87) $ (81) $ (3)
Decrease in discount rate of 0.5% 100 93 4
Increase in estimated return on assets of 1.0% N/A N/A (8)
Decrease in estimated return on assets of 1.0% N/A N/A 8
Impairment of Long-Lived Assets, Goodwill and Other Intangible Assets
Goodwill
Our reporting units in continuing operations include epoxy, versatics and forest products. Our reporting units are generally one level below our operating segments for which discrete financial information is available and reviewed by segment management. However, components of an operating segment can be aggregated as one reporting unit if the components have similar economic characteristics. Our consolidated goodwill balance from continuing operations was $164 as of December 31, 2020, including $127 related to the forest products reporting unit, $36 related to the versatics reporting unit and $1 related to the epoxy reporting unit.
We test goodwill annually for impairment of value or more frequently when potential impairment triggering events are present. Our annual impairment testing date is October 1. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit to its carrying value. We use a weighted market and income approach to estimate the fair value of our reporting units. The market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA (earnings before interest, income taxes, depreciation and amortization) multiple technique, and the income approach is based on a discounted cash flow model. The key assumptions and estimates utilized in the market and income approaches primarily include market multiples, discount rates and future levels of revenue growth and operating margins, and to a lesser extent, estimates and assumptions related to working capital investment, taxes, depreciation and amortization and capital spending projections. If the carrying value of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the difference.
As of October 1, 2020 and 2019, the estimated fair value of each of our reporting units containing goodwill were deemed to be in excess of the carrying amount of assets and liabilities assigned to each unit. The step-up of fixed and intangible asset values during fresh start accounting resulted in an increase of the carrying amounts of net assets for the Company’s reporting units that have goodwill, thereby reducing the amount of headroom between the fair value and carrying value of these reporting units. As a result, future unfavorable changes to business results and/or discounted cash flows for these reporting units are more likely to result in asset impairments.
Other Intangible Assets
We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be a change in circumstances, indicating that the carrying value of our amortizable intangible assets may not be recoverable, include goodwill impairment, idling of a plant and a reduction to the estimated useful life. We may in the future be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our amortizable intangible assets is determined, negatively affecting our results of operations.
Long-Lived Assets
As events warrant, we evaluate the recoverability of long-lived assets, other than goodwill, by assessing whether the carrying value can be recovered over their remaining useful lives through the expected future undiscounted operating cash flows of the underlying business. Our evaluation of long-lived asset recoverability includes our operating and financing lease right of use assets. Impairment indicators include, but are not limited to, a significant decrease in the market price of a long-lived asset; a significant adverse change in the manner in which the asset is being used or in its physical condition; a significant adverse change in legal factors or the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; current period operating or cash flow losses combined with a history of operating or cash flow losses associated with the use of the asset; or a current expectation that it is more likely than not that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. As a result, future decisions to change our manufacturing process, exit certain businesses, reduce excess capacity, temporarily idle facilities and close facilities could result in material impairment charges. Long-lived assets are grouped together at the lowest level for which identifiable cash flows are largely independent of cash flows of other groups of long-lived assets. Any impairment loss that may be required is determined by comparing the carrying value of the assets to their estimated fair value. We do not have any indefinite-lived intangible assets, other than goodwill.
Recently Issued Accounting Standards
See Note 2 in Item 8 of Part II of this Annual Report on Form 10-K for a detailed description of recently issued accounting pronouncements.
Hexion Inc. | 57 | 2020 Form 10-K

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk, including changes in currency exchange rates, interest rates and certain commodity prices. To manage the volatility related to these exposures we use various financial instruments, including some derivatives, to help us hedge our foreign currency exchange risk and interest rate risk. We also use raw material purchasing contracts and pricing contracts with our customers to help mitigate commodity price risks. These contracts generally do not contain minimum purchase requirements.
We do not use derivative instruments for trading or speculative purposes. We manage counterparty credit risk by entering into derivative instruments only with financial institutions with investment-grade ratings.
Foreign Exchange Risk
Our international operations accounted for 54% and 53% of our sales in 2020 and 2019, respectively. As a result, we have significant exposure to foreign exchange risk on transactions that can potentially be denominated in many foreign currencies. These transactions include foreign currency denominated imports and exports of raw materials and finished goods (both intercompany and third party) and loan repayments. The functional currency of our operating subsidiaries is the related local currency.
We reduce foreign currency cash flow exposure from exchange rate fluctuations where economically feasible by hedging firmly committed foreign currency transactions. Our use of forward contracts is designed to protect our cash flows against unfavorable movements in exchange rates, to the extent of the amount that is under contract. We do not attempt to hedge foreign currency exposure in a manner that would entirely eliminate the effect of changes in foreign currency exchange rates on net income and cash flow. We do not speculate in foreign currency nor do we hedge the foreign currency translation of our international businesses to the U.S. dollar for purposes of consolidating our financial results, or other foreign currency net asset or liability positions.
We are party to various foreign exchange rate swaps in Brazil in order to reduce the foreign currency risk associated with certain assets and liabilities of our Brazilian subsidiary that are denominated in U.S. dollars. The counter-parties to the foreign exchange rate swap agreements are financial institutions with investment grade ratings. We do not apply hedge accounting to these derivative instruments.
Our foreign exchange risk is also mitigated because we operate in many foreign countries, which reduces the concentration of risk in any one currency. In addition, our foreign operations have limited imports and exports, which reduces the potential impact of foreign currency exchange rate fluctuations.
A 5% strengthening of the U.S. dollar against the primary currencies in which we conduct our non-U.S. operations in 2020 would generate an approximate $104 negative impact to our estimated net sales. Conversely, a 5% weakening of the U.S. dollar against the same currencies would benefit our estimated net sales by an equal amount.
Interest Rate Risk
We have exposure to interest rate risk through our variable rate borrowing activities. As a result of our emergence from Chapter 11, the interest rates of approximately 28% of our outstanding debt are fixed. On October 10, 2019, we executed an interest rate swap agreement to hedge interest rate variability caused by quarterly changes in cash flow due to associated changes in LIBOR under the Company’s Senior Secured Term Loan. In this arrangement, we receive a variable 3-month LIBOR and pay fixed interest rate swaps, effective January 1, 2020 and expiring January 1, 2025, and we have designated $300 of our variable rate Senior Secured Term Loan as the notional amount for the future interest rate payments. As a result of this transaction, 46% of our outstanding debt is at fixed interest rates and approximately 54% of our outstanding debt is exposed to changes in variable interest rates. An increase of 1% in the interest rates on our variable rate debt would increase our 2020 estimated debt service requirements by approximately $10.
Following is a summary of our outstanding debt as of December 31, 2020 and 2019 (see Note 12 in Item 8 of Part II of this Annual Report on Form 10-K for additional information on our debt). The fair value of our publicly held debt is based on the price at which the bonds are traded or quoted at December 31, 2020 and 2019. All other debt fair values are based on other similar financial instruments, or based upon interest rates that are currently available to us for the issuance of debt with similar terms and maturities.
2020 2019
Year Debt
Maturities Weighted
Average
Interest
Rate Fair Value Debt
Maturities Weighted
Average
Interest
Rate Fair Value
2020 $ 70 5.8 % $ 71
2021 $ 82 5.0 % $ 82 55 5.9 % 54
2022 34 5.0 % 34 32 5.8 % 32
2023 17 4.9 % 17 16 5.9 % 15
2024 9 5.0 % 9 8 5.8 % 8
2025 9 4.9 % 9 8 5.9 % 8
2026 and beyond
1,651 5.0 % 1,671 1,607 5.9 % 1,627
$ 1,802 $ 1,822 $ 1,796 $ 1,815
Hexion Inc. | 58 | 2020 Form 10-K
Our cash equivalent investments and short-term investments are made in instruments that meet the credit quality standards that are established in our investment policies, which also limits the exposure to any one investment. At December 31, 2020 and 2019, we had $20 and $74, respectively, invested at average rates of 2.0% and 2.1%, respectively, primarily in interest-bearing money-market investments. Due to the short maturity of our cash equivalents, the carrying value of these investments approximates fair value. Our short-term investments are recorded at cost which approximates fair value. Our interest rate risk is not significant; a 1% increase or decrease in interest rates on invested cash would not have had a material effect on our net income or cash flows for the years ended December 31, 2020 and 2019.
Commodity Risk
We are exposed to price risks on raw material purchases, most significantly with phenol, methanol, urea, acetone, propylene and chlorine. For our commodity raw materials, we have purchase contracts that have periodic price adjustment provisions. Commitments with certain suppliers, including our phenol and urea suppliers, provide up to 100% of our estimated requirements but also provide us with the flexibility to purchase a certain portion of our needs in the spot market, when it is favorable to us. We rely on long-term agreements with key suppliers for most of our raw materials. The loss of a key source of supply or a delay in shipments could have an adverse effect on our business. Should any of our suppliers fail to deliver or should any key long-term supply contracts be cancelled, we would be forced to purchase raw materials in the open market, and no assurances can be given that we would be able to make these purchases or make them at prices that would allow us to remain competitive. Our largest supplier provided approximately 9% of our raw material purchases in 2020, and we could incur significant time and expense if we had to replace this supplier. In addition, several feedstocks at various facilities are transported through a pipeline from one supplier. If we were unable to receive these feedstocks through these pipeline arrangements, we may not be able to obtain them from other suppliers at competitive prices or in a timely manner. See the discussion about the risk factor on raw materials in Item 1A of Part I of this Annual Report on Form 10-K.
Natural gas is essential in our manufacturing processes, and its cost can vary widely and unpredictably. To help control our natural gas costs, we hedge a portion of our natural gas purchases for North America by entering into futures contracts for natural gas. These contracts are settled for cash each month based on the closing market price on the last day that the contract trades on the New York Mercantile Exchange. We also enter into fixed price forward contracts for the purchase of electricity at certain of our manufacturing plants to offset the risk associated with increases in the prices of the underlying commodities.
We recognize gains and losses on these contracts each month as gas and electricity is used. Our future commitments are marked-to-market on a quarterly basis. We have not applied hedge accounting to these contracts.
Our commodity risk is moderated through our selected use of customer contracts with selling price provisions that are indexed to publicly available indices for the relevant commodity raw materials.
Hexion Inc. | 59 | 2020 Form 10-K

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Number
Consolidated Financial Statements of Hexion Inc.
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive (Loss) Income
Consolidated Statements of Cash Flows
Consolidated Statements of Equity (Deficit)
Notes to Consolidated Financial Statements
Reports of Independent Registered Public Accounting Firm
Schedule II - Valuation and Qualifying Accounts
Hexion Inc. | 60 | 2020 Form 10-K
HEXION INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data) December 31, 2020 December 31, 2019
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $4)
$ 204 $ 254
Accounts receivable (net of allowance for doubtful accounts of $3)
331 316
Inventories:
Finished and in-process goods 180 211
Raw materials and supplies 85 82
Current assets held for sale (see Note 4)
114 99
Other current assets 39 40
Total current assets 953 1,002
Investments in unconsolidated entities 10 14
Deferred income taxes (see Note 17)
7 6
Long-term assets held for sale (see Note 4)
342 400
Other long-term assets 85 44
Property and equipment:
Land 79 82
Buildings 122 114
Machinery and equipment 1,270 1,148
1,471 1,344
Less accumulated depreciation (212) (63)
1,259 1,281
Operating lease assets (see Note 13)
103 110
Goodwill (see Note 10)
164 164
Other intangible assets, net (see Note 10)
1,079 1,125
Total assets $ 4,002 $ 4,146
Liabilities and Equity
Current liabilities:
Accounts payable $ 339 $ 289
Debt payable within one year (see Note 12)
82 70
Interest payable 30 35
Income taxes payable 6 17
Accrued payroll and incentive compensation 42 43
Current liabilities associated with assets held for sale (see Note 4)
70 69
Current portion of operating lease liabilities (see Note 13)
19 20
Other current liabilities 111 95
Total current liabilities 699 638
Long-term liabilities:
Long-term debt (see Note 12)
1,710 1,715
Long-term pension and postretirement benefit obligations (see Note 15)
250 223
Deferred income taxes (see Note 17)
161 149
Operating lease liabilities (see Note 13)
76 82
Long-term liabilities associated with assets held for sale (see Note 4)
74 56
Other long-term liabilities 209 208
Total liabilities 3,179 3,071
Commitments and contingencies (see Note 14)
Equity
Common stock-$0.01 par value; 100 shares authorized, issued and outstanding
at both December 31, 2020 and 2019
- -
Paid-in capital 1,169 1,165
Accumulated other comprehensive loss (27) (1)
Accumulated deficit (319) (89)
Total equity 823 1,075
Total liabilities and equity $ 4,002 $ 4,146
See Notes to Consolidated Financial Statements
Hexion Inc. | 61 | 2020 Form 10-K
HEXION INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
(In millions)
Net sales $ 2,510 $ 1,323 $ 1,481 $ 3,137
Cost of sales (exclusive of depreciation and amortization shown below)
2,043 1,117 1,211 2,559
Selling, general and administrative expense
231 124 128 243
Depreciation and amortization
191 93 43 98
Gain on dispositions (see Note 18)
- - - (44)
Asset impairments (see Note 8)
16 - - 28
Business realignment costs 69 22 14 27
Other operating expense, net 24 16 17 37
Operating (loss) income (64) (49) 68 189
Interest expense, net 100 55 89 365
Reorganization items, net (see Note 7)
- - (2,970) -
Other non-operating income, net (15) - (11) (12)
(Loss) income from continuing operations before income tax and earnings from unconsolidated entities (149) (104) 2,960 (164)
Income tax expense (benefit) (see Note 17)
14 (10) 201 31
(Loss) income from continuing operations before earnings from unconsolidated entities (163) (94) 2,759 (195)
Earnings from unconsolidated entities, net of taxes 2 2 1 4
(Loss) income from continuing operations, net of taxes (161) (92) 2,760 (191)
(Loss) income from discontinued operations, net of taxes (69) 4 135 28
Net (loss) income (230) (88) 2,895 (163)
Net (income) loss attributable to noncontrolling interest - (1) (1) 1
Net (loss) income attributable to Hexion Inc. $ (230) $ (89) $ 2,894 $ (162)
See Notes to Consolidated Financial Statements
Hexion Inc. | 62 | 2020 Form 10-K
HEXION INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
(In millions)
Net (loss) income $ (230) $ (88) $ 2,895 $ (163)
Other comprehensive loss, net of tax:
Foreign currency translation adjustments (8) (3) (8) (8)
Unrealized (loss) gain on cash flow hedge (18) 2 - -
Loss recognized from pension and postretirement benefits - - - (2)
Other comprehensive loss (26) (1) (8) (10)
Comprehensive (loss) income (256) (89) 2,887 (173)
Comprehensive (income) loss attributable to noncontrolling interest - (1) (1) 1
Comprehensive (loss) income attributable to Hexion Inc. $ (256) $ (90) $ 2,886 $ (172)
See Notes to Consolidated Financial Statements
Hexion Inc. | 63 | 2020 Form 10-K
HEXION INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Successor Predecessor
(In millions) Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Cash flows provided by (used in) operating activities
Net (loss) income $ (230) $ (88) $ 2,895 $ (163)
Less: (Loss) income from discontinued operations, net of taxes (69) 4 135 28
(Loss) income from continuing operations (161) (92) 2,760 (191)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization 191 93 43 98
Non-cash asset impairments 16 - - 28
Non-cash reorganization items, net - - (3,156) -
Non-cash impact of inventory step-up - 27 - -
Deferred tax expense (benefit) 9 (9) 140 12
Gain on dispositions (see Note 18)
- - - (44)
Loss on sale of assets 9 4 3 6
Amortization of deferred financing fees - - - 49
Unrealized foreign currency (gains) losses (3) (1) (7) 2
Non-cash stock based compensation expense 17 8 - -
Unrealized losses (gains) on pension and postretirement benefit plan liabilities 4 5 - (13)
Financing fees included in net loss - - 136 -
Other non-cash adjustments (1) (2) (1) (3)
Net change in assets and liabilities:
Accounts receivable (3) 108 (73) 9
Inventories 35 15 (20) (30)
Accounts payable 44 (15) (15) (3)
Income taxes payable (9) (3) 15 8
Other assets, current and non-current (21) 25 3 3
Other liabilities, current and non-current (11) 11 9 6
Net cash provided by (used in) operating activities from continuing operations 116 174 (163) (63)
Net cash provided by (used in) operating activities from discontinued operations 15 50 (10) 40
Net cash provided by (used in) operating activities 131 224 (173) (23)
Cash flows used in investing activities
Capital expenditures (108) (47) (41) (81)
Proceeds from dispositions, net - - - 49
Proceeds from sale of assets, net 3 - 1 1
Net cash used in investing activities from continuing operations (105) (47) (40) (31)
Net cash used in investing activities from discontinued operations (21) (11) (2) (9)
Net cash used in investing activities (126) (58) (42) (40)
Cash flows (used in) provided by financing activities
Net short-term debt (repayments) borrowings (7) (24) (4) 10
Borrowings of long-term debt 256 118 2,313 540
Repayments of long-term debt (293) (130) (2,261) (468)
Return of capital to parent (see Note 9)
(13) - - -
Proceeds from rights offering - - 300 -
Financing fees paid - (2) (136) (1)
Net cash (used in) provided by financing activities (57) (38) 212 81
Effect of exchange rates on cash and cash equivalents, including restricted cash 2 1 - (5)
(Decrease) increase in cash and cash equivalents, including restricted cash (50) 129 (3) 13
Cash, cash equivalents and restricted cash at beginning of period 254 125 128 115
Cash, cash equivalents and restricted cash at end of period $ 204 $ 254 $ 125 $ 128
Hexion Inc. | 64 | 2020 Form 10-K
Successor Predecessor
(In millions) Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Supplemental disclosures of cash flow information
Cash paid for:
Interest, net $ 103 $ 22 $ 71 $ 318
Income taxes, net of cash refunds 16 10 10 17
Reorganization items, net - - 188 -
See Notes to Consolidated Financial Statements
Hexion Inc. | 65 | 2020 Form 10-K
HEXION INC.
CONSOLIDATED STATEMENTS OF EQUITY (DEFICIT)
(In millions) Common
Stock Paid-in
Capital Treasury
Stock Note
Receivable
From Parent Accumulated
Other
Comprehensive
Loss Accumulated
(Deficit) Equity Total Hexion Inc. (Deficit) Equity Non-controlling Interest Total Shareholder’s (Deficit) Equity
Predecessor
Balance at December 31, 2017
$ 1 $ 526 $ (296) - $ (8) $ (2,964) $ (2,741) $ (1) $ (2,742)
Net loss - - - - - (162) (162) (1) (163)
Other comprehensive loss - - - - (10) - (10) - (10)
Impact of change in accounting policy (ASC 606) - - - - - 1 1 - 1
Balance at December 31, 2018
$ 1 $ 526 $ (296) $ - $ (18) $ (3,125) $ (2,912) $ (2) $ (2,914)
Net income - - - - - 2,894 2,894 1 2,895
Other comprehensive loss - - - - (8) - (8) - (8)
Elimination of Predecessor Equity (1) (526) 296 - - 231 - - -
Elimination of Predecessor accumulated other comprehensive loss - - - - 26 - 26 - 26
Balance at July 1, 2019 $ - $ - $ - $ - $ - $ - $ - $ (1) $ (1)
Issuance of Successor Company common stock - 1,157 - - - - 1,157 - 1,157
Successor
Balance at July 2, 2019 $ - $ 1,157 $ - - $ - $ - $ 1,157 $ (1) $ 1,156
Net loss - - - - - (89) (89) 1 (88)
Stock-based compensation - 8 - - - - 8 - 8
Other comprehensive loss - - - - (1) - (1) - (1)
Balance at December 31, 2019
$ - $ 1,165 $ - - $ (1) $ (89) $ 1,075 $ - $ 1,075
Net loss - - - - - (230) (230) - (230)
Stock-based compensation - 17 - - - - 17 - 17
Other comprehensive loss - - - - (26) - (26) - (26)
Return of capital to parent (see Note 9)
- (13) - - - - (13) - (13)
Distribution of affiliate loan (see Note 9)
- - - (10) - - (10) - (10)
Settlement of affiliate loan (see Note 9)
- - - 10 - - 10 - 10
Balance at December 31, 2020
$ - $ 1,169 $ - $ - $ (27) $ (319) $ 823 $ - $ 823
See Notes to Consolidated Financial Statements
Hexion Inc. | 66 | 2020 Form 10-K
HEXION INC.
Notes to Consolidated Financial Statements
(In millions, except share data)
1. Background and Basis of Presentation
Based in Columbus, Ohio, Hexion Inc. (“Hexion” or the “Company”), serves global industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. At December 31, 2020, the Company had 44 production and manufacturing facilities, with 21 located in the United States. The Company’s business is organized based on the products offered and the markets served. At December 31, 2020, the Company had three reportable segments: Adhesives; Coatings and Composites; and Corporate and Other.
Sale of Phenolic Specialty Resins Business
On September 27, 2020, the Company entered into a definitive agreement (the “Purchase Agreement”) for the sale of its Phenolic Specialty Resins ("PSR"), Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business”) to Black Diamond Capital Management, LLC and Investindustrial (the “Buyers”) for a purchase price of approximately $425. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future contingent proceeds based on the performance of the Held for Sale Business. For more information, see Note 4 “Discontinued Operations”.
As of December 31, 2020, the Company reclassified the assets and liabilities of the Held for Sale Business as held for sale on the Consolidated Balance Sheets and reported the results of the operations for the year ended December 31, 2020 as “(Loss) income from continuing operations, net of taxes” on the Consolidated Statements of Operations. Amounts for prior periods have similarly been retrospectively reclassified for all periods presented.
Additionally, the Company has included $15, $9, $10 and $24 in both “Net sales” and “Cost of sales” within the Company’s continuing operations for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and year ended December 31, 2018, respectively, which represents sales from the Company’s continuing operations to the Held for Sale Business that were previously eliminated in consolidation. These reclassifications had no impact on “Net (loss) income” in the Consolidated Statements of Operations for any of the periods presented.
Emergence from Chapter 11 and Fresh Start Accounting
As a result of the Company’s reorganization and emergence from Chapter 11 (as defined in Note 5) on the morning of July 1, 2019 (the “Effective Date”), the Company’s direct parent is Hexion Intermediate Holding 2, Inc. (“Hexion Intermediate”), a holding company and wholly owned subsidiary of Hexion Intermediate Holding 1, Inc., a holding company and wholly owned subsidiary of Hexion Holdings Corporation, the ultimate parent of Hexion (“Hexion Holdings” or “Parent”). Prior to its reorganization, the Company’s parent was Hexion LLC, a holding company and wholly owned subsidiary of Hexion Holdings LLC (now known as Hexion TopCo, LLC or “TopCo”), the previous ultimate parent entity of Hexion, which was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, Inc. and its subsidiaries, “Apollo”). On the Effective Date, the Company’s existing common stock were cancelled and 100 new shares of common stock were issued at a par value of $0.01 to the Company’s new direct parent Hexion Intermediate in accordance with the Plan (as defined in Note 5). See Note 5 for more information.
The Company filed for Chapter 11 bankruptcy protection on April 1, 2019 (the “Petition Date”) and as the Company previously disclosed, based on its financial condition and its projected operating results, the defaults under its debt agreements, and the risks and uncertainties surrounding its Chapter 11 proceedings (see Note 5), that there was substantial doubt as to the Company’s ability to continue as a going concern as of the issuance of the Company’s 2018 Annual Report on Form 10-K. Since the Company’s emergence from Chapter 11 on July 1, 2019, based on its new capital structure, liquidity position and projected operating results, the Company expects to continue as a going concern for the next twelve months. See Note 5 for more information.
On the Effective Date, in accordance with ASC 852, the Company applied fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting was applied to the Company’s consolidated financial statements as of July 1, 2019, the date it emerged from bankruptcy, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result, the Company allocated the reorganization value of the Company to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill.
As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Consolidated Financial Statements after the Effective Date are not comparable with the Consolidated Financial Statements prior to that date. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the Company after the Effective Date. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on or before the Effective Date. Refer to Note 6 for more information.
Hexion Inc. | 67 | 2020 Form 10-K
Financial Reporting in Reorganization
Effective on the Petition Date, the Company applied Accounting Standard Codification, No. 852, “Reorganizations,” (“ASC 852”) which is applicable to companies under Chapter 11 bankruptcy protection. It requires the financial statements for periods subsequent to the Chapter 11 filing to distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business. Expenses, realized gains and losses, and provisions for losses that are directly associated with reorganization proceedings must be reported separately as “Reorganization items, net” in the Consolidated Statements of Operations. In addition, the balance sheet must distinguish debtor pre-petition liabilities subject to compromise (“LSTC”) from liabilities of non-filing entities, pre-petition liabilities that are not subject to compromise and post-petition liabilities in the accompanying Consolidated Balance Sheet. LSTC are pre-petition obligations that are not fully secured and have at least a possibility of not being repaid at the full claim amount. LSTC related to debt, its related interest payable and certain affiliate payables were settled in accordance with the Plan, as applicable, on or shortly after the Company emerged from Chapter 11 bankruptcy on July 1, 2019. As of July 1, 2019, all remaining liabilities subject to compromise were not impaired and remain on the Company’s Consolidated Balance Sheets.
The Company’s Consolidated Balance Sheets as of December 31, 2020 and 2019 included in this Annual Report on Form 10-K were prepared under the basis of accounting assuming that the Company will continue as a going concern, which contemplated continuity of operations, realization of assets and satisfaction of liabilities and commitments in the normal course of business.
2. Summary of Significant Accounting Policies
Principles of Consolidation-The Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries in which minority shareholders hold no substantive participating rights. Intercompany accounts and transactions are eliminated in consolidation. The Company’s share of the net earnings of 20% to 50% owned companies, which are accounted for under the equity method of accounting as the Company has the ability to exercise significance influence over operating and financial policies (but not control), are included in “Earnings from unconsolidated entities, net of taxes” in the Consolidated Statements of Operations. Investments in the other companies are carried at cost.
The Company has recorded a noncontrolling interest for the equity interests in consolidated subsidiaries that are not 100% owned.
The Company’s unconsolidated investments accounted for under the equity method of accounting include the following as of December 31, 2020:
•49.99% interest in Momentive UV Coatings (Shanghai) Co., Ltd, a joint venture that manufactures UV-curable coatings and adhesives in China;
•50% ownership interest in Hexion Shchekinoazot Holding B.V., a joint venture that manufactures forest products resins in Russia (see Note 4 for discussion of Russia JV within discontinued operations);
•50% ownership interest in Hexion Australia Pty Ltd, a joint venture which provides urea formaldehyde resins and other products to industrial customers in western Australia.
Foreign Currency Translations and Transactions-Assets and liabilities of foreign affiliates are translated at the exchange rates in effect at the balance sheet date. Income, expenses and cash flows are translated at average exchange rates during the year. The Company did not recognize a transaction gain or loss for the year ended December 31, 2020. The Company recognized transaction gains (losses) of $5, $(8) and $30 for the Successor period July 2, 2019 through December 31, 2019, the Predecessor periods January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively, which are included as a component of “Net (loss) income.” In addition, gains or losses related to the Company’s intercompany loans payable and receivable denominated in a foreign currency other than the subsidiary’s functional currency that are deemed to be permanently invested are remeasured to cumulative translation and recorded in “Accumulated other comprehensive loss” in the Consolidated Balance Sheets. The effect of translation is included in “Accumulated other comprehensive loss.”
Use of Estimates-The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and also the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. The most significant estimates that are included in the financial statements are environmental remediation liabilities, legal liabilities, deferred tax assets and liabilities and related valuation allowances, income tax accruals, pension and postretirement assets and liabilities, reserves for uncollectible accounts receivable, general insurance liabilities, asset impairments, fair values of assets acquired and liabilities assumed in business acquisitions, and valuations associated with fresh start accounting. Actual results could differ from these estimates.
Cash and Cash Equivalents-The Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2020 and 2019, the Company had interest-bearing time deposits and other cash equivalent investments of $20 and $74, respectively. The Company’s restricted cash balances of $4 as of both December 31, 2020 and 2019, respectively represent deposits to secure certain bank guarantees issued to third parties to guarantee potential obligations of the Company primarily related to the completion of tax audits. These balances will remain restricted as long as the underlying exposures exist and are included in the Consolidated Balance Sheets as a component of “Cash and cash equivalents.”
Hexion Inc. | 68 | 2020 Form 10-K
Allowance for Doubtful Accounts-Under adoption of ASU 2016-13, the Company has updated its credit loss methodology to consider a broader range of reasonable and supportable information to determine its credit loss estimates. The Company utilizes a historical aging method disaggregated by portfolio segment of geographic region, and then the Company makes any necessary adjustments for current conditions and forecasts about future economic conditions for calculating its allowance for doubtful accounts. The Company evaluates each pooled receivables’ geographic region by differing regional industrial and economic conditions, overall end market conditions and groups of customers with similar risk profiles related to timing and uncertainty of future collections. If particular accounts receivable balances no longer display risk characteristics that are similar to other pooled receivables, the Company performs individual assessments of expected credit losses for those specific receivables. Receivables are charged against the allowance for doubtful accounts when it is probable that the receivable will not be collected.
As of December 31, 2020, the Company’s allowance for doubtful accounts provision for expected credit losses reflected the current business conditions, forecasts of future economic conditions and the impacts related to the global business and market disruptions of the coronavirus disease 2019 (“COVID-19”) pandemic, in accordance with ASU 2016-13 (see Note 3 for more information) which did not result in an increase for the year. The Company’s current expectations and assumptions regarding its business, the economy and other future events and conditions are based on currently available financial, economic and competitive data and current business plans as of December 31, 2020. Actual results could vary materially depending on risks and uncertainties that may affect the Company’s operations, markets, services, prices and other factors.
The Company recorded an allowance for doubtful accounts of $3 at both December 31, 2020 and 2019, to reduce accounts receivable to their estimated net realizable value. Accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. There were no write-offs or recoveries for the year ended December 31, 2020. Prior to adoption of ASU 2016-13, the Company’s policy for the allowance for doubtful accounts was estimated using factors such as customer credit ratings and past collection history.
Inventories-Inventories are stated at lower of cost or net realizable value using the first-in, first-out method. Costs include direct material, direct labor and applicable manufacturing overheads, which are based on normal production capacity. Abnormal manufacturing costs are recognized as period costs and fixed manufacturing overheads are allocated based on normal production capacity.
Deferred Expenses-Deferred debt financing costs are included in “Long-term debt” in the Consolidated Balance Sheets, with the exception of deferred financing costs related to revolving line of credit arrangements, which are included in “Other long-term assets” in the Consolidated Balance Sheets. These costs are amortized over the life of the related debt or credit facility using the effective interest method. Upon extinguishment of any debt, the related debt issuance costs are written off. Deferred debt financing costs included in “Long-term debt” in the Consolidated Balance Sheets were less than $1 at December 31, 2020.
During the year ended December 31, 2019, in connection with the application of fresh start accounting, any existing debt issuance costs were included in “Reorganization items, net” in the Consolidated Statements of Operations and there were no deferred debt financing costs included in “Long-term debt” in the Consolidated Balance Sheets as of December 31, 2019.
Property and Equipment-Land, buildings and machinery and equipment are stated at cost less accumulated depreciation. Depreciation is recorded on a straight-line basis over the estimated useful lives of properties (the range of estimated useful lives for buildings and machinery and equipment were 9 to 39 years and 1 to 20 years, respectively at December 31, 2020 and 2019). Assets under finance leases are amortized over the lesser of their useful life or the lease term. Major renewals and betterments are capitalized. Maintenance, repairs and minor renewals are expensed as incurred. When property and equipment is retired or disposed of, the asset and related depreciation are removed from the accounts and any gain or loss is reflected in operating income. The Company capitalizes interest costs that are incurred during the construction of property and equipment. Property and equipment was recorded at its estimated fair value in connection with the application of fresh start accounting, resulting in the remeasurement of accumulated depreciation to zero as of July 1, 2019 (see Note 6. Depreciation expense was $131, $90, $40 and $86 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively. Additionally, for the year ended December 31, 2020 and 2018, $2 and $4, respectively, of accelerated depreciation was recorded as a result of shortening the estimated useful lives of certain long-lived assets related to planned facility rationalizations. There was no accelerated depreciation in the Successor period July 2, 2019 through December 31, 2019 or in the Predecessor period January 1, 2019 through July 1, 2019. Lastly, for the year ended December 31, 2020 and the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, “Capitalized expenditures” in the Consolidated Statements of Cash Flows were increased by $2, decreased by $8, increased by $7 and increased by $5, respectively, to reflect the change in invoiced but unpaid capital expenditures at each respective year-end as a non-cash investing activity.
Leases-The Company adopted ASU 2016-02 using a modified retrospective adoption method at January 1, 2019. Under this method of adoption, there is no impact to the comparative Consolidated Statement of Operations and the Consolidated Balance Sheets. The Company also determined that there was no cumulative-effect adjustment to beginning retained earnings on the Consolidated Balance Sheet. The Company will continue to report periods prior to January 1, 2019 in its financial statements under prior guidance as outlined in Accounting Standards Codification Topic 840, “Leases”. In addition, the Company elected the package of practical expedients permitted under the transition guidance within the new standard, which allowed the Company to carry forward its historical lease classification. The Company also elected the hindsight practical expedient to determine the lease term for existing leases.
Hexion Inc. | 69 | 2020 Form 10-K
The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Nearly all of the Company’s lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company estimates the incremental borrowing rate to discount the lease payments based on information available at lease commencement. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines lease and non-lease components. See Note 13 for more information.
Capitalized Software-The Company capitalizes certain costs, such as software coding, installation and testing, that are incurred to purchase or create and implement computer software for internal use. Amortization is recorded on the straight-line basis over the estimated useful lives, which range from 1 to 5 years.
Goodwill and Intangibles-The excess of purchase price over net tangible and identifiable intangible assets of businesses acquired is carried as “Goodwill” in the Consolidated Balance Sheets. Separately identifiable intangible assets that are used in the operations of the business (e.g., patents and technology, tradenames, customer lists and contracts) are recorded at cost (fair value at the time of acquisition) and reported as “Other intangible assets, net” in the Consolidated Balance Sheets. Costs to renew or extend the term of identifiable intangible assets are expensed as incurred. The Company does not amortize goodwill. Intangible assets with determinable lives are amortized on a straight-line basis over the legal or economic life of the assets, which range from 15 to 25 years (see Note 6 and Note 10).
As a result of the application of fresh start accounting the Company established $178 of Successor goodwill and $1,219 of Successor intangibles upon Emergence. Refer to Note 6 for additional information related to Emergence. The amount of goodwill and intangibles related to continuing operations is $164 and $1,079, respectively. Refer to Note 10 for additional information.
Impairment-The Company reviews property and equipment, leases and all amortizable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. Recoverability is based on estimated undiscounted cash flows or other relevant observable measures. The Company tests goodwill for impairment annually, or when events or changes in circumstances indicate impairment may exist, by comparing the estimated fair value of each reporting unit with goodwill to its carrying value to determine if there is an indication that a potential impairment may exist.
Long-Lived Assets and Amortizable Intangible Assets
There were $16 long-lived asset impairments recorded during the year ended December 31, 2020 and there were no long-lived asset impairments for the Successor period July 2, 2019 through December 31, 2019 or the Predecessor period January 1, 2019 through July 1, 2019. During the year ended December 31, 2018, the Company recorded long-lived asset impairments of $28, which are included in “Asset impairments” in the Consolidated Statements of Operations (see Note 8 for more information).
Goodwill
The Company’s reporting units in continuing operations include epoxy, versatics and forest products. The Company’s reporting units are generally one level below the operating segments for which discrete financial information is available and reviewed by segment management. However, components of an operating segment can be aggregated as one reporting unit if the components have similar economic characteristics. The Company’s consolidated goodwill balance from continuing operations was $164 as of December 31, 2020, including $127 related to the forest products reporting unit, $36 related to the versatics reporting unit and $1 related to the epoxy reporting unit.
The Company tests goodwill annually for impairment of value or more frequently when potential impairment triggering events are present. The Company’s annual impairment testing date is October 1. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit to its carrying value. The Company uses a weighted market and income approach to estimate the fair value of its reporting units. The market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA (earnings before interest, income taxes, depreciation and amortization) multiple technique, and the income approach is based on a discounted cash flow model. The key assumptions and estimates utilized in the market and income approaches primarily include market multiples, discount rates and future levels of revenue growth and operating margins, and to a lesser extent, estimates and assumptions related to working capital investment, taxes, depreciation and amortization and capital spending projections. If the carrying value of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the difference.
As of October 1, 2020 and 2019, the estimated fair value of each of the Company’s remaining reporting units was deemed to be in excess of the carrying amount of assets (including goodwill) and liabilities assigned to each reporting unit. The step-up of fixed and intangible asset values during fresh start accounting resulted in an increase of the carrying amounts of net assets for the Company’s reporting units that have goodwill, thereby reducing the amount of headroom between the fair value and carrying value of these reporting units. As a result, future unfavorable changes to business results and/or discounted cash flows for these reporting units are more likely to result in asset impairments.
General Insurance-The Company is generally insured for losses and liabilities for workers’ compensation, physical damage to property, business interruption and comprehensive general, product and vehicle liability under high-deductible insurance policies. The Company records losses when they are probable and reasonably estimable and amortizes insurance premiums over the life of the respective insurance policies.
Hexion Inc. | 70 | 2020 Form 10-K
Legal Claims and Costs-The Company accrues for legal claims and costs in the period in which a claim is made or an event becomes known, if the amounts are probable and reasonably estimable. Each claim is assigned a range of potential liability and the most likely amount is accrued. If there is no amount in the range of potential liability that is most likely, the low end of the range is accrued. The amount accrued includes all costs associated with the claim, including settlements, assessments, judgments and fines. Legal fees are expensed as incurred (see Note 14).
Environmental Matters-Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. Environmental accruals are reviewed on a quarterly basis and as events and developments warrant (see Note 14).
Asset Retirement Obligations-Asset retirement obligations are initially recorded at their estimated net present values in the period in which the obligation occurs, with a corresponding increase to the related long-lived asset. Over time, the liability is accreted to its settlement value and the capitalized cost is depreciated over the useful life of the related asset. When the liability is settled, a gain or loss is recognized for any difference between the settlement amount and the liability that was recorded.
Revenue Recognition-The Company follows the principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Revenue, net of estimated allowances and returns, is recognized when the Company has completed its performance obligations under a contract and control of the product is transferred to the customer. Substantially all revenue is recognized at the time shipment is made or upon delivery as risk and title to the product transfer to the customer. Sales, value add, and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue. Contract terms for certain transactions, including sales made on a consignment basis, result in the transfer of control of the finished product to the customer prior to the point at which the Company has the right to invoice for the product. In these cases, timing of revenue recognition will differ from the timing of invoicing to customers and will result in the Company recording a contract asset. The Company adopted ASU 2014-09 as of January 1, 2018 utilizing a modified retrospective approach. A contract asset balance of $5 and $6 is recorded within “Other current assets” at December 31, 2020 and 2019, respectively, in the Consolidated Balance Sheet. Refer to Note 20 for additional discussion of the Company’s net sales by reportable segment disaggregated by geographic region.
Shipping and Handling-Freight costs that are billed to customers are included in “Net sales” in the Consolidated Statements of Operations. Shipping costs are incurred to move the Company’s products from production and storage facilities to the customer. Handling costs are incurred from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and prepare the products for shipment. Revenue from shipping and handling services is recognized when control of the product is transferred to the customer. Shipping and handling costs are recorded in “Cost of sales” in the Consolidated Statements of Operations.
Turnaround Costs-The Company periodically performs procedures at its major production facilities to extend the useful life, increase output and efficiency and ensure the long-term reliability and safety of plant machinery (“turnaround” or “turnaround costs”). As a result of the application of fresh start accounting upon the Company’s emergence from Chapter 11, the Successor Company adopted an accounting policy to capitalize certain turnaround costs and amortize on a straight-line basis over the estimated period until the next turnaround. Costs for routine repairs and maintenance are expensed as incurred. Capitalized turnaround costs were $7 and $2 at December 31, 2020 and 2019 and are included in “Machinery and equipment” in the Consolidated Balance Sheets.
Research and Development Costs-Funds are committed to research and development activities for technical improvement of products and processes that are expected to contribute to future earnings. We also provide customer service through our technical staff as part of our research and development program to discover new applications and processes. All costs associated with research and development and technical services are charged to expense as incurred. Research and development and technical service expense was $38, $20, $21 and $43 for the year ended December 31, 2020, the Successor period ended July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively, and is included in “Selling, general and administrative expense” in the Consolidated Statements of Operations.
Business Realignment Costs-The Company incurred “Business realignment costs” totaling $69, $22, $14 and $27 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively. These costs primarily included costs related to in-process cost reduction programs and certain in-process and recently completed facility rationalizations.
Pension and Other Non-Pension Postretirement Benefit Liabilities-Pension and other non-pension postretirement benefit (“OPEB”) assumptions are significant inputs to the actuarial models that measure pension and OPEB benefit obligations and related effects on operations. Two assumptions, discount rate and expected return on assets, are important elements of plan expense and asset/liability measurement. The Company evaluates these critical assumptions at least annually on a plan and country-specific basis. The Company periodically evaluates other assumptions involving demographic factors, such as retirement age, mortality and turnover, and updates them to reflect the Company's experience and expectations for the future. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors.
Accumulated and projected benefit obligations are measured as the present value of future cash payments. The Company discounts these cash payments using a split-rate interest approach. This approach uses multiple interest rates from market-observed forward yield curves which correspond to the estimated timing of the related benefit payments. Lower discount rates increase present values and higher discount rates decrease present values.
Hexion Inc. | 71 | 2020 Form 10-K
To determine the expected long-term rate of return on pension plan assets, the Company considers current and expected asset allocations, as well as historical and expected returns on various categories of plan assets. In developing future return expectations for the principal benefit plans’ assets, the Company evaluates general market trends as well as key elements of asset class returns such as expected earnings growth, yields and spreads across a number of potential scenarios.
Upon the Company’s annual remeasurement of its pension and OPEB liabilities in the fourth quarter, or on an interim basis as triggering events warrant remeasurement, the Company immediately recognizes gains and losses as a mark-to-market (“MTM”) gain or loss through earnings. As such, the Company’s net periodic pension and OPEB expense consists of i) service cost, interest cost, expected return on plan assets, amortization of prior service cost/credits recognized on a quarterly basis and ii) MTM adjustments recognized annually in the fourth quarter upon remeasurement of pension and OPEB liabilities or when triggering events warrant remeasurement.
The MTM adjustments were a loss of $4, loss of $5 and a gain of $13 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, and the year ended December 31, 2018, respectively, and are recognized in “Other non-operating (income) expense, net” in the Consolidated Statements of Operations. A MTM loss of $44 was recorded upon the Company’s emergence from bankruptcy (see Note 5 for more information) which was included within “Reorganization items, net” on the Consolidated Statement of Operations for the Predecessor period January 1, 2019 through July 1, 2019.
Income Taxes-The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of the assets and liabilities.
Deferred tax balances are adjusted to reflect tax rates, based on current tax laws, which will be in effect in the years in which temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized (see Note 17).
Unrecognized tax benefits are generated when there are differences between tax positions taken in a tax return and amounts recognized in the consolidated financial statements. Tax benefits are recognized in the consolidated financial statements when it is more likely than not that a tax position will be sustained upon examination. Tax benefits are measured as the largest amount of benefit that is greater than 50% likely of being realized upon settlement. The Company classifies interest and penalties as a component of tax expense.
The Company monitors changes in tax laws and reflects the impact of tax law changes in the period of enactment. See Note 17 for additional information on how the Company recorded the impacts of the U.S. tax reform.
Derivative Financial Instruments and Hedging Activities-Periodically, the Company is a party to forward exchange contracts, foreign exchange rate swaps, interest rate swaps, natural gas futures and electricity forward contracts to reduce its cash flow exposure to changes in interest rates and natural gas and electricity prices. The Company does not hold or issue derivative financial instruments for trading purposes. All derivatives, whether designated as hedging relationships or not, are recorded on our balance sheet at fair value. For fair value and cash flow hedges qualifying for hedge accounting, the Company formally documents at inception the relationship between hedging instruments and hedged items, the risk management objective, strategy and the evaluation of effectiveness for the hedge transaction. If the derivative is designated as a cash flow hedge, changes in the fair value of the derivative are recorded in accumulated other comprehensive income, to the extent effective, and will be recognized in the Consolidated Statement of Operations when settled. The effectiveness of a cash flow hedging relationship is established at the inception of the hedge, and after inception the Company performs effectiveness assessments at least every three months. For a derivative that does not qualify or has not been designated as a hedge, changes in fair value are recognized in earnings.
Stock-Based Compensation-All stock-based compensation activity relates to shares issued by Hexion Holdings, the ultimate parent of the Company. Stock-based compensation cost is measured at the grant date based on the fair value of the award which is amortized as expense over the requisite service period or derived service period on a graded-vesting basis. The expense is recorded net of forfeitures upon occurrence (see Note 16).
Transfers of Financial Assets-The Company executes factoring and sales agreements with respect to its trade accounts receivable to support its working capital requirements. The Company accounts for these transactions as either sales-type or financing-type transfers of financial assets based on the terms and conditions of each agreement. For the portion of the sales price that is deferred in a reserve account and subsequently collected, the Company’s policy is to classify the cash in-flows as cash flows from operating activities as the predominant source of the cash flows pertains to the Company’s trade accounts receivable. The remaining portion of the sales price not deferred is recognized as cash flows from operating activities. When the Company retains the servicing rights on the transfers of accounts receivable, it measures these rights at fair value, if material.
Concentrations of Credit Risk-Financial instruments that potentially subject the Company to concentrations of credit risk are primarily temporary investments and accounts receivable. The Company places its temporary investments with high quality institutions and, by policy, limits the amount of credit exposure to any one institution. Concentrations of credit risk for accounts receivable are limited due to the large number of customers in the Company’s customer base and their dispersion across many different industries and geographies. The Company generally does not require collateral or other security to support customer receivables.
Hexion Inc. | 72 | 2020 Form 10-K
Concentrations of Supplier Risk-The Company relies on long-term agreements with key suppliers for most of its raw materials. The loss of a key source of supply or a delay in shipments could have an adverse effect on its business. Should any of the suppliers fail to deliver or should any of the key long-term supply contracts be canceled, the Company would be forced to purchase raw materials at current market prices. The Company’s largest supplier provides approximately 9% of raw material purchases. In addition, several of the feedstocks at various facilities are transported through a pipeline from one supplier.
Subsequent Events-The Company has evaluated events and transactions subsequent to December 31, 2020 through the date of issuance of its Consolidated Financial Statements.
Reclassifications-Certain amounts in the Consolidated Financial Statements for prior periods have been reclassified to conform with the current presentation. These reclassifications were to record the assets and liabilities of the Held for Sale Business and the results of operations as discontinued operations. See Note 4 for more information.
Standard Guarantees / Indemnifications-In the ordinary course of business, the Company enters into a number of agreements that contain standard guarantees and indemnities where the Company may indemnify another party for, among other things, breaches of representations and warranties. These guarantees or indemnifications are granted under various agreements, including those governing (i) purchases and sales of assets or businesses, (ii) leases of real property, (iii) licenses of intellectual property, (iv) long-term supply agreements, (v) employee benefits services agreements and (vi) agreements with public authorities on subsidies for designated research and development projects. These guarantees or indemnifications are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords or lessors in lease contracts, (iii) licensors or licensees in license agreements, (iv) vendors or customers in long-term supply agreements, (v) service providers in employee benefits services agreements and (vi) governments or agencies subsidizing research or development. In addition, the Company guarantees some of the payables of its subsidiaries to purchase raw materials in the ordinary course of business.
These parties may also be indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. Additionally, in connection with the sale of assets and the divestiture of businesses, the Company may agree to indemnify the buyer for liabilities related to the pre-closing operations of the assets or businesses sold. Indemnities for pre-closing operations generally include tax liabilities, environmental liabilities and employee benefit liabilities that are not assumed by the buyer in the transaction.
Indemnities related to the pre-closing operations of sold assets normally do not represent additional liabilities to the Company, but simply serve to protect the buyer from potential liability associated with the Company’s existing obligations at the time of sale. The Company has accrued for those pre-closing obligations that it considers to be probable and reasonably estimable. The amounts recorded at December 31, 2020 and 2019 are not material.
While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless they are subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under its guarantees, nor is the Company able to estimate the maximum potential amount of future payments to be made under these guarantees because the triggering events are not predictable.
Our corporate charter also requires us to indemnify, to the extent allowed by New Jersey state corporate law, our directors and officers as well as directors and officers of our subsidiaries and other agents against certain liabilities and expenses incurred by them in carrying out their obligations.
Warranties-The Company does not make express warranties on its products, other than that they comply with the Company’s specifications; therefore, the Company does not record a warranty liability. Adjustments for product quality claims are not material and are charged against net sales.
Recently Issued Accounting Standards
Newly Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13: Financial Instruments - Credit Losses (Topic 820): Measurement of Credit Losses on Financial Instruments, (“ASU 2016-13”). The amendments in this update replace the incurred loss impairment methodology in current U.S. GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. New disclosures are also required with this standard. The standard is effective for annual and interim periods beginning after December 15, 2019. This standard impacts the Company’s accounts receivables and contract assets. The Company adopted ASU 2016-13 at January 1, 2020, using a modified retrospective adoption method. Under this method of adoption, there is no impact to the comparative Consolidated Statement of Operations and the Consolidated Balance Sheets. There was an immaterial impact of adopting ASU 2016-13 on the date of adoption.
In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”). ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for annual and interim periods beginning after December 15, 2019. The Company adopted ASU 2016-13 prospectively on January 1, 2020 and the adoption had an immaterial impact on its consolidated financial statements.
Hexion Inc. | 73 | 2020 Form 10-K
In March 2020, the FASB issued ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 will provide optional expedients and exceptions for a limited period of time to ease the potential burden in accounting for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company has adopted ASU 2020-04 and the initial adoption of this ASU did not have an impact on our consolidated financial statements.
Recently Issued Accounting Standards
In December 2019, the FASB issued ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in income tax accounting and improve consistent application of and simplify GAAP for other areas of income tax accounting by clarifying and amending existing guidance. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the potential impact ASU 2019-12 will have on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The standard is effective for fiscal years ending after December 15, 2020. The Company is currently assessing the potential impact of ASU 2018-14 on its financial statements.
3. COVID-19 Impacts
In March 2020, the World Health Organization categorized COVID-19 as a global pandemic. Around the world, local governments’ responses to COVID-19 continue to evolve, which has led to stay-at-home orders, social distancing guidelines and other preventative measures that have disrupted various industries in the global economy and the markets in which our products are manufactured, distributed and sold.
During this pandemic, the Company has implemented additional guidelines to further protect the health and safety of its employees as the Company continues to operate with its suppliers and customers. The Company has maintained a focus on the safety of its employees while minimizing potential disruptions caused by COVID-19. For example, the Company is following all legislatively-mandated travel directives in the various countries where it operates, and the Company has also put additional travel restrictions in place for its associates designed to reduce the risk from COVID-19. Additionally, the Company is utilizing extended work from home options to protect its office associates, while adjusting its meeting protocols and processes at its manufacturing sites.
The Company’s businesses have been designated by many governments as essential businesses and the Company’s operations have continued through December 31, 2020. While the Company has continued to operate during the pandemic, it did incur adverse financial impacts to its sales and profitability results during the year ended December 31, 2020 from COVID-19, primarily related to reduced volumes associated with the pandemic. The pandemic has impacted global economic conditions and lowered demand in many of the end use markets in which the Company operates such as automotive, aerospace, industrial products, oil and gas, construction and housing. The ultimate impact that COVID-19 will have on the Company’s future financial position, operating results and cash flows involves numerous risks and uncertainties, including new information which may emerge concerning the severity and duration of COVID-19 and actions to contain the virus or treat its impact.
The Coronavirus Aid, Relief, and Economic Security (the “CARES”) Act was enacted on March 27, 2020 in the U.S. The CARES Act includes several significant provisions, such as delaying certain payroll tax payments, mandatory transition tax payments under the Tax Cuts and Jobs Act, and estimated income tax payments. The Company does not currently expect the CARES Act to have a material impact on its financial results, including on its annual estimated effective tax rate but the Company delayed approximately $15 of certain income tax and non-income tax payments during 2020 and deferred an additional $5 of certain tax payments to future years. The Company continues to monitor and assess the CARES Act and similar legislation in the US and other jurisdictions where the Company operates which may impact the Company’s business and financial results.
Subsequent to December 31, 2020, the United States, and the global regions where the Company operates, continue to be affected by COVID-19. The Company is closely monitoring the COVID-19 pandemic on all aspects of its businesses and geographies, including the impact on its facilities, employees, customers, suppliers, vendors, business partners and distribution.
4. Discontinued Operations
On September 27, 2020, the Company entered into a Purchase Agreement for the sale of PSR, Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business” or the “Business”) to Black Diamond Capital Management, LLC and Investindustrial (the “Buyers”) for a purchase price of approximately $425. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future contingent proceeds based on the performance of the Held for Sale Business. The final purchase price is subject to customary post-closing adjustments. The Held for Sale Business was formerly included in the Company’s Adhesives reportable segment.
Hexion Inc. | 74 | 2020 Form 10-K
Assets included in the transaction are the Company’s manufacturing sites in Barry, United Kingdom; Cowie, United Kingdom; Lantaron, Spain; Botlek, Netherlands; Iserlohn, Germany; Frielendorf, Germany; Solbiate, Italy; Kitee, Finland; Louisville, Kentucky; Acme, North Carolina; and the Company's 50% ownership interest in Hexion Schekinoazot Holding B.V. (the “Russia JV”), a joint venture that manufactures forest products resins in Russia.
The Held for Sale Business produces phenolic specialty resins and engineered thermoset molding compounds used in applications that require extreme heat resistance and strength, such as after-market automotive and original equipment manufacturing (“OEM”) truck brake pads, filtration, aircraft components and foundry resins. The Business is also a significant producer of formaldehyde-based resins in Europe and merchant formaldehyde and formaldehyde derivatives in the Louisville and Acme plants, respectively. Formaldehyde-based resins, also known as forest products resins, are a key adhesive and binding ingredient used in the production of a wide variety of engineered lumber products, including medium density fiberboard (“MDF”), particleboard and oriented strand board (“OSB”). These products are used in a wide range of applications in the construction, remodeling and furniture industries. Merchant formaldehyde and formaldehyde derivatives are intermediate ingredients that are used in a variety of durable and industrial products. The Business generated annual sales of approximately $500 in 2020 and was historically reported within the Adhesives reportable segment. The sale is subject to customary closing conditions, including European Works Council consultation, and is expected to close in the first quarter of 2021.
Until the closing date, the Company has agreed to operate the Held for Sale Business in the ordinary course. The Company has agreed to provide certain transitional services to the Buyers for a limited period of time following the closing.
As of December 31, 2020, the Company reclassified the assets and liabilities of the Held for Sale Business as held for sale on the Consolidated Balance Sheets and reported the results of the operations for the year ended December 31, 2020 as “(Loss) income from discontinued operations, net of tax” on the Consolidated Statements of Operations. Amounts for prior periods have similarly been retrospectively reclassified for all periods presented.
The Held for Sale Business had $14 of goodwill at both December 31, 2020 and 2019, and $61 and $63 of other intangible assets at December 31, 2020 and 2019, respectively. Goodwill was allocated based on the relative fair value of the European-based Forest Products Resins businesses, included in the Held for Sale Business, which is part of the Company’s Forest Product Resins reporting unit. Other intangible assets were specifically identified based on customer relationships within the Company’s Forest Products Resins reporting unit that are associated with the Held for Sale Business.
As a result of entering into the Purchase Agreement, the Company recognized a pre-tax charge of $75 within discontinued operations, representing the difference between the fair value of the Held for Sale Business, less costs to sell, and the carrying value of net assets held for sale as of December 31, 2020. Fair value represents the expected net cash proceeds, excluding any future contingent proceeds, from the sale of the Held for Sale Business. 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, 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. The contingent proceeds are based on performance targets of the Held for Sale Business over each of the next three years, as specified in the Purchase Agreement. Thus, for purposes of this impairment analysis the fair value of the future contingent proceeds was not considered in determination of the disposal group impairment. Further, the Company concluded that the impairment of the Held for Sale Business assets did not represent an impairment triggering event for the Company’s continuing operations.
The following table reconciles the carrying amounts of major classes of assets and liabilities of discontinued operations to total assets and liabilities of discontinued operations that are classified as held for sale in the Company’s Consolidated Balance Sheets:
December 31, 2020 December 31, 2019
Carrying amounts of major classes of assets held for sale:
Accounts receivable $ 66 $ 49
Finished and in-process goods 18 21
Raw materials and supplies 17 18
Other current assets 12 11
Total current assets 113 99
Investment in unconsolidated entities 5 3
Deferred tax assets 2 -
Other long-term assets 7 11
Property, plant and equipment, net 310 297
Operating lease assets 13 12
Goodwill 14 14
Other intangible assets, net 61 63
Discontinued operations impairment (75) -
Total long-term assets 337 400
Total assets held for sale $ 450 $ 499
Hexion Inc. | 75 | 2020 Form 10-K
Carrying amounts of major classes of liabilities held for sale:
Accounts payable $ 52 $ 52
Income taxes payable 1 -
Accrued payroll 3 5
Current portion of operating lease liabilities 2 2
Other current liabilities 9 10
Total current liabilities 67 69
Long-term pension and post employment benefit obligations 36 29
Deferred income taxes 22 15
Operating lease liabilities 5 4
Other long-term liabilities 8 8
Total long-term liabilities 71 56
Total liabilities held for sale $ 138 $ 125
In addition to the Held for Sale Business assets and liabilities classified as “held for sale” in the table above, the Company’s Consolidated Balance Sheets as of December 31, 2020 also includes $1 of current assets held for sale, noncurrent assets held for sale of $5, current liabilities associated with assets held for sale of $3 and noncurrent liabilities associated with assets held for sale of $3. These additional assets and liabilities classified as “held for sale” at December 31, 2020 are related to the Company’s other restructuring activities.
The following table shows the financial results of discontinued operations for the periods presented:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Major line items constituting pretax income of discontinued operations:
Net sales (1)
$ 493 $ 286 $ 309 $ 692
Cost of sales (exclusive of depreciation and amortization)(1)
412 245 263 600
Selling, general and administrative expense 42 15 17 34
Depreciation and amortization 26 17 9 19
Asset impairments 75 - - -
Business realignment costs 3 2 1 2
Other operating expense (income), net - 1 (1) (1)
Operating (loss) income (65) 6 20 38
Reorganization items, net - - (135) -
Other non-operating expense, net 5 1 - -
(Loss) income from discontinued operations before income tax, earnings from unconsolidated entities (70) 5 155 38
Income tax expense (benefit) 1 1 21 9
(Loss) income from discontinued operations, net of tax $ (71) $ 4 $ 134 $ 29
Earnings from unconsolidated entities, net of tax 2 - 1 (1)
Net (loss) income attributable to discontinued operations $ (69) $ 4 $ 135 $ 28
(1) The Held for Sale Business has included $4, $5, $2 and $9 in both “Net sales” and “Cost of sales” within the discontinued operations for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019 and the Predecessor periods January 1, 2019 through July 1, 2019 and year ended December 31, 2018, respectively, which represents sales from the Held for Sale Business to the Company’s continuing operations that were previously eliminated in consolidation. These reclassifications had no impact on “Net (loss) income” in the Consolidated Statements of Operations for any of the periods presented.
Equity Method Investments
The Company's 50% ownership interest in the Russia JV, accounted for using the equity method of accounting, is included in the Held for Sale Business. Summarized financial data for the Russia JV are shown in the following tables:
December 31, 2020 December 31, 2019
Current assets $ 7 $ 9
Non-current assets 1 1
Current liabilities 2 11
Non-current liabilities 6 12
Hexion Inc. | 76 | 2020 Form 10-K
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Net sales $ 32 $ 14 $ 18 $ 43
Gross profit
12 3 4 7
Pre-tax income 5 1 2 2
Net income 4 - 2 2
5. Emergence from Chapter 11 Bankruptcy
Bankruptcy Petitions and Emergence from Chapter 11
On the Petition Date, the Company, Hexion Holdings LLC, Hexion LLC and certain of the Company’s subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware, (the “Bankruptcy Court”). The Chapter 11 proceedings were jointly administered under the caption In re Hexion TopCo, LLC, No. 19-10684 (the “Chapter 11 Cases”). The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.
On June 25, 2019, the Court entered an order (the “Confirmation Order”) confirming the Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the “Plan”). On the morning of July 1, 2019, in accordance with the terms of the Plan and the Confirmation Order, the Plan became effective and the Debtors emerged from bankruptcy (the “Emergence”).
Debtor-in-Possession Financing
DIP Term Loan Facility
In connection with the filing of the Bankruptcy Petitions, on April 3, 2019, the Company entered into a New York law-governed senior secured term loan agreement (the “DIP Term Loan Facility”), among Hexion LLC (“Holdings”), the Company, Hexion International Holdings B.V. (the “Dutch Borrower”), which was amended on April 17, 2019, the lenders party thereto and JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent and collateral agent (the “Term Loan Agent”). The proceeds of the DIP Term Loan Facility were loaned by the Dutch Borrower to the Company pursuant to an intercompany loan agreement (the “Intercompany Loan Agreement”) and were used in part to repay in full the outstanding obligations under the Company’s existing asset-based revolving credit agreement ABL Facility (the “Predecessor ABL Facility”). As of June 30, 2019, the Company had $350 borrowings outstanding under DIP Term Loan Facility. The Company’s remaining obligations under the DIP Term Loan Facility were repaid in full and the DIP Term Loan Facility was terminated upon consummation of the Plan by the Company on July 1, 2019.
DIP ABL Facility
In connection with the filing of the Bankruptcy Petitions, on April 3, 2019, Holdings, the Company and certain of its subsidiaries (collectively, the “Borrowers”), the lenders party thereto, JPMorgan, as administrative agent, and JPMorgan, as collateral agent (the “DIP ABL Collateral Agent” and together with the DIP Term Loan Facility, the “ DIP Credit Facilities”), entered into an amended and restated senior secured debtor-in-possession asset-based revolving credit agreement, which was further amended on May 10, 2019 (the “DIP ABL Facility”), which amended and restated the Company’s Predecessor ABL Facility among Holdings, the Company, the Borrowers, the lenders party thereto, JPMorgan, as administrative agent, and JPMorgan, as collateral agent. As of June 30, 2019, the Company had no outstanding borrowings under the DIP ABL Facility and the DIP ABL Facility was terminated upon consummation of the Plan by the Company on July 1, 2019.
Restructuring Support Agreement
On April 1, 2019, the Debtors entered into a Restructuring Support Agreement (the “Support Agreement”) with equityholders that beneficially owned more than a majority of the Company’s outstanding equity (the “Consenting Sponsors”) and creditors that held more than a majority of the aggregate outstanding principal amount of each of the Company’s 6.625% Notes and 10.00% Notes, (the “1L Notes”), 13.750% 1.5 lien notes due 2022 (the “1.5L Notes”), 9.00% second lien notes due 2020 (the “2L Notes”), 9.20% Debentures due 2021 and/or 7.875% Debentures due 2023 issued by Borden, Inc. (the “Unsecured Notes”) (the “Consenting Creditors” and, together with the Consenting Sponsors, the “Consenting Parties”). The Support Agreement incorporated the economic terms regarding a restructuring of the Debtors agreed to by the parties reflected in the Support Agreement. The restructuring transactions were effectuated through the Plan.
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Equity Backstop Agreement and Rights Offering
On April 25, 2019, the Debtors entered into the Equity Backstop Commitment Agreement, as subsequently amended (the “Equity Backstop”), among the Debtors and the equity backstop parties party thereto (the “Equity Backstop Parties”). The Equity Backstop provides that upon the satisfaction of certain terms and conditions, including the confirmation of the Plan, the Company will have the option to require the Equity Backstop Parties to backstop the common stock of the reorganized Company (the “New Common Stock”) that is not otherwise purchased in connection with the $300 rights offerings for New Common Stock of Hexion Holdings (the “Rights Offering”) to be made in connection with the Plan (the “Unsubscribed Shares”) on a several, and not joint and several, basis. In consideration for their commitment to purchase the Unsubscribed Shares, the Equity Backstop Parties will be paid a Premium of 8% of the Rights Offering Amount (the “Equity Backstop Premium”), which premium was earned in full upon entry of the Equity Backstop Approval Order and which is payable either in Cash or in New Common Equity at the option of each Equity Backstop Party. Pursuant to the terms of the Equity Backstop, the Equity Backstop Premium was deemed earned, nonrefundable and non-avoidable upon entry of the approval order by the Court. The Company incurred $24 for the Equity Backstop Premium, which is included in “Reorganization items, net” in the Consolidated Statements of Operations. The Company paid the Equity Backstop Premium on the Effective Date in accordance with the Plan.
Debt Backstop Agreement
On April 25, 2019, the Debtors entered into the Debt Backstop Commitment Agreement, as subsequently amended (the “Debt Backstop”), among the Debtors and the debt backstop parties party thereto (the “Debt Backstop Parties”). The Debt Backstop provides that upon satisfaction of certain terms and conditions, including the confirmation of the Plan, the Debt Backstop Parties will backstop the New Long-Term Debt on a several, and not joint and several, basis of an amount equal to such Debt Backstop Party’s commitment percentage, in exchange for (a) the Debt Backstop Premium of 3.375% of the backstop commitments thereunder payable either in Cash or in New Common Equity at the option of each Debt Backstop Party and (b) for certain Debt Backstop Parties, the Additional Debt Backstop Premium of 1.5% of the backstop commitments thereunder payable in Cash, both of which premiums (described in (a) and (b)) were earned in full upon entry of the Debt Backstop Approval Order. Pursuant to the terms of the Debt Backstop, the Backstop Commitment Premium was deemed earned, nonrefundable and non-avoidable upon entry of the approval order by the Court. The Company incurred $80 for the Backstop Commitment Premium, which is included in “Reorganization items, net” in the Consolidated Statements of Operations. The Company paid the Debt Backstop Premium on the Effective Date in accordance with the Plan.
Pre-Petition Claims
On June 7, 2019, the Debtors filed schedules of assets and liabilities and statements of financial affairs with the Court, which were amended on June 14, 2019. Prior to the Company’s emergence from Chapter 11 bankruptcy on the Effective Date, all pre-petition amounts were classified as “Liabilities subject to compromise” in the Consolidated Balance Sheets as of June 30, 2019 and have either been settled or reinstated pursuant to the terms of the Plan. See Note 4 for more information.
The Debt Instruments provide that as a result of the Bankruptcy Petitions the principal and interest due thereunder shall be immediately due and payable. Any efforts to enforce such payment obligations under the Debt Instruments are automatically stayed as a result of the Bankruptcy Petitions and the creditors’ rights of enforcement in respect of the Debt Instruments are subject to the applicable provisions of the Bankruptcy Code. Upon Emergence on July 1, 2019, these automatic stay provisions are no longer in effect.
Emergence from Chapter 11 Bankruptcy
On July 1, 2019, the Plan became effective and the Debtors emerged from the Chapter 11 proceedings.
On or following the Effective Date, and pursuant to the terms of the Plan, the following occurred:
•The restructuring of the Debtors’ pre-petition funded debt obligations with the proceeds of $1,658 in new long-term debt (“New Long-term Debt”) (see Note 12);
• A $300 Rights Offering for new common equity of Hexion Holdings;
•A percentage of the Rights Offering was issued in the form of warrants (“New Warrants”), these warrants represented 15% of the Rights Offering which are exercisable for shares of Common Stock, issued by Hexion Holdings under the Plan, and referred to as New Warrants under the Plan (together with New Common Stock, “Registrable Securities”);
•Certain of the Debtors entered into the $350 ABL Facility (the “ABL Facility) (see Note 12) ;
•General unsecured claims being paid in full or otherwise continuing unimpaired;
•Holders of claims with respect to the 1L Notes received their pro rata share of (a) cash in the amount of $1.450 billion (less the sum of adequate protection payments paid on account of the 1L Notes during the Chapter 11 cases), (b) 72.5% of new common equity of Hexion Holdings (“New Common Equity”) (subject to the Agreed Dilution), and (c) 72.5% of the rights to purchase additional New Common Equity pursuant to the Rights Offering. The dilution of the New Common Equity (“the Agreed Dilution”) resulted from the Rights Offering and the Management Incentive Plan, as defined in the Plan. 10% of the fully-diluted equity of Hexion Holdings is to be reserved for grant to key members of management and independent, non-employee members of the Board of Directors, (see Note 14 for further details on the Management Incentive Plan);
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•Holders of claims with respect to the 1.5L Notes, 2L Notes, and Unsecured Notes received their pro rata share of (a) 27.5% of the New Common Equity (subject to the Agreed Dilution) and (b) 27.5% of the rights to purchase additional New Common Equity pursuant to the Rights Offering;
•Holders of equity interests (i.e., any class of equity securities) in TopCo received no distributions and all such Equity Interests being cancelled;
•Reorganized Hexion issuing a $2.5 settlement note to the Consenting Sponsors; and
•Appointment of a new board of directors.
Cancellation of Prior Common Stock
In accordance with the Plan, each share of the Predecessor Company’s common stock outstanding prior to the Effective Date, including treasury stock, was canceled. Furthermore, all of the Company’s equity award agreements under prior incentive plans, and the awards granted pursuant thereto, were extinguished, canceled and discharged and have no further force or effect after the Effective Date. On the Effective Date, 100 new shares of common stock were issued at a par value of $0.01 to the Company’s new direct parent Hexion Intermediate in accordance with the Plan.
Issuance of New Common Stock
On the Effective Date, all previously issued and outstanding equity interests in TopCo were cancelled. Upon effectiveness of the Plan, Hexion Holdings issued 58,410,731 shares of a new class of common stock, par value $0.01 per share (“New Common Stock”), pursuant to the Rights Offering. The shares of New Common Stock were exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 1145 of the Bankruptcy Code, which generally exempts from such registration requirements the issuance of securities under a plan of reorganization.
New Warrant Agreement
In addition, Hexion Holdings entered into a warrant agreement (the “Warrant Agreement”) and upon effectiveness of the Plan, Hexion Holdings issued 10,307,778 New Warrants as a part of the Rights Offering on the Effective Date. The New Warrants represented 15% of the Rights Offering which are exercisable to purchase shares of New Common Stock. These New Warrants may be exercised, at any time on or after the initial exercise date for exercise price per share of the New Common Stock of $0.01. The Warrant Agreement contains customary anti-dilution adjustments in the event of any stock split, reverse stock split, reclassification, stock dividend or other distributions.
The holder or group of holders (the “Attribution Parties”) of New Warrants shall be permitted to exercise these New Warrants, at any time, in part or in whole, in amounts sufficient for the holder and Attribution Parties to maintain in the aggregate no less than the beneficial ownership limitation of 9.9% of the fully diluted shares outstanding. Fully diluted shares outstanding is calculated as (x) the aggregate number of shares of New Common Stock issued and outstanding plus (y) the aggregate number of shares of common stock issuable upon the conversion of any other issued and outstanding securities or rights convertible into, or exchangeable for (in each case, directly or indirectly), common stock (excluding, for the avoidance of doubt, any unexercised warrants or options to purchase common stock).
The New Warrants do not entitle the holder or group of holders of the New Warrants to any voting rights, dividends or other rights as a shareholder of the Company prior to exercise of the held New Warrants. If any shares of common stock are listed on a trading market, Hexion Holdings shall use its reasonable best efforts to cause the New Warrants shares issued upon exercise of these New Warrants to also be listed on such trading market, in accordance with the Warrant Agreement.
Registration Rights Agreement
On the Effective Date, Hexion Holdings entered into a registration rights agreement with certain of its shareholders (the “Registration Rights Agreement”).
Under the Registration Rights Agreement, upon delivery of a written notice by one or more shareholders holding, individually or in the aggregate, at least a majority of the outstanding Registrable Securities and New Warrants, voting together (as if such New Warrants had been exercised), Hexion Holdings is required to file a registration statement and effect an initial public offering and listing of its common stock, so long as the total offering size is at least $100 (a “Qualified IPO”).
Hexion Holdings is also required to file a registration statement at any time following 180 days after the closing of a Qualified IPO upon the delivery of a written notice by one or more shareholders proposing to sell, individually or in the aggregate, at least $50 of Registrable Securities. In addition, under the Registration Rights Agreement, Hexion Holdings is required to file a shelf registration statement as soon as practicable following the closing of a Qualified IPO to register the resale, on a delayed or continuous basis, of all Registrable Securities that have been timely designated for inclusion by the holders (specified in the Registration Rights Agreement). Any individual holder or holders of our outstanding common stock party thereto can demand up to four “shelf takedowns” in any 12-month period which may be conducted in underwritten offerings so long as the total offering size is at least $50. Furthermore, each shareholder party to the Registration Rights Agreement has unlimited piggyback registration rights with respect to underwritten offerings, subject to certain exceptions and limitations.
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The foregoing registration rights are subject to certain cutback provisions and customary suspension/blackout provisions. Hexion Holdings has agreed to pay all registration expenses under the Registration Rights Agreement.
Generally, “Registrable Securities” under the Registration Rights Agreement includes New Common Equity issued under the Plan, except that “Registrable Securities” does not include securities that have been sold under an effective registration statement or Rule 144 under the Securities Act.
6. Fresh Start Accounting
Upon Emergence, the Company applied fresh start accounting, in accordance with ASC 852, to its financial statements because (i) the holders of existing voting shares of the Predecessor Company prior to its emergence received less than 50% of the voting shares of the Successor Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company’s assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting was applied to the Company’s consolidated financial statements upon Emergence.
Under the principles of fresh start accounting, a new reporting entity was created, and, as a result, the Company allocated the reorganization value of the Company to its individual assets based on their estimated fair values in conformity with ASC 805, “Business Combinations”. Reorganization value represents the fair value of the Successor Company’s assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill. As a result of the application of fresh start accounting and the effects of the implementation of the Plan of Reorganization, the consolidated financial statements after the Effective Date are not comparable with the consolidated financial statements as of or prior to that date.
Reorganization Value
As set forth in the Plan of Reorganization and the Disclosure Statement filed with the Bankruptcy Court, the enterprise value of the Successor Company was estimated to be between $2,900 and $3,300 as of the Effective Date. Based on the estimates and assumptions discussed below, the Company estimated the enterprise value to be $3,100 for financial reporting purposes, which is the mid-point of the range of enterprise value per the Plan of Reorganization.
The Company estimated the enterprise value of the Successor Company utilizing three valuation methods: a comparable public company analysis, a selected precedent transactions analysis, and a discounted cash flow (“DCF”) method. The comparable public company analysis is based on the enterprise values of selected publicly traded diversified chemical companies with operating and financial characteristics comparable to the Company. Under this methodology, certain financial multiples that measure financial performance and value are calculated for each selected company and then applied to imply an estimated enterprise value of the Company.
The selected precedent transaction analysis is based on the implied enterprise values of companies and assets involved in publicly disclosed merger and acquisition transactions which the targets had operating and financial characteristics comparable to certain respects of the Company. Under this methodology, a multiple is derived using the enterprise value of each such target, calculated as the consideration paid and the net debt assumed in the merger or acquisition transaction relative to a financial metric, in this case, EBITDA (earnings before interest, income taxes, depreciation and amortization) for the Company, for the last twelve month period which financial results have been publicly announced. Utilizing these multiples a reference range was created to imply an estimated enterprise value range.
The DCF analysis is a forward-looking enterprise valuation methodology that estimates fair value by calculating the present value of expected future cash flows to be generated plus a present value of the estimated terminal value. The Company established a five year estimate of future cash flows based on the financial projections and assumptions utilized in the Company’s disclosure statement, which were derived from earnings forecasts and assumptions regarding growth and margin projections. A terminal value was included, and was calculated using the constant growth method based on the projected cash flows of the final year of the forecast period. While the Company considers such estimates and assumptions reasonable, they are inherently subject to significant business, economic and competitive uncertainties, many of which are beyond the Company’s control and, therefore, may not be realized. Changes in these estimates and assumptions may have a significant effect on the determination of the Company’s enterprise value. The assumptions used in the calculations for the DCF analysis included projected revenue, cost and cash flows representing the Company’s best estimates at the time the analysis was prepared. The DCF analysis has various complex considerations and judgments, including the discount rate and all of the other projections, etc. Due to the unobservable inputs to the valuation, the fair value would be considered Level 3 in the fair value hierarchy.
The estimated enterprise value is not necessarily indicative of the actual value and the financial results; changes in the economy or the financial markets could result in a different enterprise value. The calculated enterprise value relies on all three of the methodologies listed above collectively. The actual value of the business is subject to certain uncertainties and contingencies that are difficult to predict and will fluctuate with changes in various factors affecting the financial conditions and prospects of such a business.
The discount rate for each reporting unit was estimated based on an after-tax weighted average cost of capital (“WACC”) reflecting the rate of return that would be expected by a market participant and ranged between approximately 11% and 19%. The WACC also takes into consideration a company-specific risk premium, reflecting the risk associated with the overall uncertainty of the financial projections used to estimate future cash flows.
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The fair value of debt obligations represents $97 of debt payable within one year and $1,733 of long-term debt. The fair value of long-term debt was determined based on a market approach utilizing current market yields and was estimated to be approximately 100% of par value.
The fair value of pension liabilities of $239 was determined based upon assumptions related to discount rates and expected return on assets, as well as certain other assumptions related to various demographic factors.
The following table reconciles the enterprise value (including both continuing and discontinued operations) to the estimated reorganization value as of the Effective Date:
Enterprise value $ 3,100
Plus: Total cash 125
Plus: Fair value of non-debt and non-pension liabilities
Current liabilities 540
Long-term liabilities 527
Total non-debt and non-pension liabilities 1,067
Reorganization value of Successor assets $ 4,292
The fair value of non-debt and non-pension liabilities represents the total liabilities, less debt payable within one year, long-term debt and pension obligations, of the Successor Company as of the Effective Date.
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Condensed Consolidated Statement of Financial Position
The following balance sheet illustrates the impacts of the implementation of the Plan and the application of fresh start accounting, which results in the opening balance sheet of the Successor Company. The Company has reclassified assets and liabilities of the Held for Sale Business and the results of discontinued operations in the table below.
As of July 1, 2019 (in millions, except share data) Predecessor Company Reorganization Adjustments(a)
Fresh Start Adjustments(q)
Successor Company
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $15) 96 $ 29 (b) $ - $ 125
Accounts receivable (net of allowance for doubtful accounts of $16 and $0, respectively) 421 - 6 (r) 427
Inventories:
Finished and in-process goods 221 - 27 (s) 248
Raw materials and supplies 89 - - 89
Current assets held for sale 132 - 2 (aa) 134
Other current assets 56 2 (c) - 58
Total current assets 1,015 31 35 1,081
Investment in unconsolidated entities 20 - (6) (t) 14
Deferred tax assets - 12 (d) (3) (u) 9
Other long-term assets 34 4 (e) (1) (v) 37
Property and equipment:
Land 69 - 11 (w) 80
Buildings 228 - (118) (w) 110
Machinery and equipment 1,948 - (837) (w) 1,111
2,245 - (944) 1,301
Less accumulated depreciation (1,559) - 1,566 (w) 7
686 - 622 1,308
Operating lease assets 89 - 33 (x) 122
Goodwill 83 - 81 (y) 164
Other intangible assets, net 17 - 1,138 (z) 1,155
Noncurrent assets held for sale 187 - $ 215 (aa) $ 402
Total assets $ 2,131 $ 47 $ 2,114 $ 4,292
Liabilities and Deficit
Current liabilities:
Accounts payable $ 247 $ 49 (a) $ - $ 296
Debt payable within one year 438 (343) (f) 2 (ab) 97
Interest payable 7 (5) (g) - 2
Income taxes payable 5 11 (h) - 16
Accrued payroll and incentive compensation 32 - - 32
Current liabilities associated with assets held for sale 69 - 1 (aa) 70
Current portion of operating lease liabilities 19 - 6 (x) 25
Financing fees payable 104 (104) (i) - -
Other current liabilities 101 5 (j) - 106
Total current liabilities 1,022 (387) 9 644
Long-term liabilities:
Liabilities subject to compromise 3,664 (3,664) (k) - -
Long-term debt 90 1,622 (l) 21 (ab) 1,733
Long-term pension and post employment benefit obligations 160 33 (a) 39 (ac) 232
Deferred income taxes 11 1 (m) 148 (ad) 160
Operating lease liabilities 70 - 17 (x) 87
Other long-term liabilities 149 72 (n) (6) (r) 215
Noncurrent liabilities associated with assets held for sale 46 - 20 (aa) 66
Total liabilities 5,212 (2,323) 248 3,137
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As of July 1, 2019 (in millions, except share data) Predecessor Company Reorganization Adjustments(a)
Fresh Start Adjustments(q)
Successor Company
Equity (Deficit)
Common stock (Successor) - - (o) - -
Paid-in capital (Successor) - 1,156 (o) - 1,156
Common stock (Predecessor) 1 (1) (p) - -
Paid-in capital (Predecessor) 526 (526) (p) - -
Treasury stock (Predecessor), at cost-88,049,059 shares at December 31, 2018 (296) 296 (p) - -
Accumulated other comprehensive loss (26) - 26 (ae) -
Accumulated deficit (3,285) 1,445 (p) 1,840 (ae) -
Total Hexion Inc. equity (deficit) (3,080) 2,370 1,866 1,156
Noncontrolling interest (1) - - (1)
Total equity (deficit) (3,081) 2,370 (o) 1,866 1,155
Total liabilities and equity (deficit) $ 2,131 $ 47 $ 2,114 $ 4,292
Reorganization Adjustments
(a) The reorganization adjustments column reflects adjustments related to the consummation of the Plan, including the settlement of liabilities subject to compromise and related payments, other distributions of cash, issuance of new shares of common stock and the cancellation of the common equity of the Predecessor Company, as discussed in Note 5.
The following is a calculation of the total pre-tax gain on the settlement of the liabilities subject to compromise:
Liabilities subject to compromise (“LSTC”) (see (k) below) $ 3,664
Repayment of 1st Lien Notes (1,383)
Liabilities reinstated at emergence:
Accounts payable (49)
Pension and other post employment benefit obligations (33)
Other current liabilities (18)
Other long-term liabilities (32)
Total liabilities reinstated at emergence (132)
Fair value of equity issued in exchange for debt:
Fair value of equity (1,156)
Less: Proceeds from Rights Offering 300
Total fair value of equity issued in exchange for debt (856)
Gain on settlement of LSTC $ 1,293
(b) Reflects the net cash received as of the Effective Date from implementation of the Plan:
Sources:
Proceeds from the Rights Offerings $ 300
Proceeds from the Senior Notes 450
Proceeds from the Senior Secured Term Loan 1,196
Release of utility deposit 1
Total sources 1,947
Uses:
Repayment of 1st Lien Notes (1,383)
Repayment of DIP Term Loan Facility (350)
Repayment of DIP Term Loan interest (5)
Debt and Equity Backstop premiums (104)
Financing fees (19)
Success fees at emergence (31)
Other professional fees (26)
Total uses (1,918)
Net cash received $ 29
(c) Represents $3 of excess professional fees due to the Company offset by $1 for the settlement of certain amounts owed during reorganization.
(d) Reflects the adjustment to release the valuation allowance on deferred tax assets for certain non-U.S. subsidiaries which management believes more likely than not will be realized as a result of reorganization.
(e) Reflects the adjustments to capitalize the ABL Facility financing fees incurred upon Emergence.
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(f) Reflects the adjustments made on the Effective Date to repay $350 in outstanding DIP Term Loans and to incur $7 for the current portion of the new Senior Secured Term Loan (see Note 12).
(g) On the Effective Date, the Company repaid $5 of accrued unpaid interest on the DIP Term Loan Facility.
(h) Reflects the adjustment to record income taxes payable as a result of reorganization.
(i) On the Effective Date, the Company paid $24 of Equity Backstop premiums to the parties participating in the Rights Offering and $80 of Debt Backstop premiums. See Note 5 for more information.
(j) Represents $18 of other current liabilities that were reclassified from “Liabilities subject to compromise” and $13 of other current liabilities incurred as a result of emergence offset by $26 of professional fees paid at emergence.
(k) Liabilities subject to compromise represent unsecured liabilities incurred prior to the Petition Date. As a result of the Bankruptcy Petitions, actions to enforce or otherwise effect payment of pre-petition liabilities were generally stayed. These liabilities represent the amounts which have been allowed on known claims which were resolved through the Chapter 11 process, and have been approved by the Court as a result of the Confirmation Order.
The following table summarizes pre-petition liabilities that are classified as “Liabilities subject to compromise” in the Consolidated Balance Sheets:
June 30, 2019
Debt $ 3,420
Interest payable 99
Accounts payable 49
Environmental reserve 43
Pension and other post employment benefit obligations 33
Dividends payable to parent 13
Other 7
Total $ 3,664
(l) Represents the issuance of the new Senior Term Loan due 2026 of $1,208 and the new Senior Secured Notes due 2027 of $450 offset by $12 of debt discounts and $17 of debt issuance costs of which $7 is classified as “Debt due within one year” on the Consolidated Balance Sheets. The term loan and notes were recorded at estimated fair value, which was determined based on a market approach utilizing current yield.
(m) Represents deferred tax activity associated with Emergence.
(n) Reflects the adjustments made to reclassify $32 of other long-term liabilities from “Liabilities subject to compromise” and to record $40 of tax liability as a result of Emergence.
(o) The following table reconciles the enterprise value to the estimated fair value of the Successor equity as of the Emergence Date:
Enterprise value $ 3,100
Plus: Total cash 125
Less: Fair value of new debt (1,646)
Less: Fair value of remaining debt obligations (184)
Less: Pension obligations (239)
Fair value of equity 1,156
Plus: Fair value of noncontrolling interest 1
Fair value of Successor paid-in capital $ 1,157
At the Effective Date, 100 shares of Common Stock of Hexion Inc. held by new direct parent Hexion Intermediate were issued and outstanding at a par value of $0.01 per share.
(p) Reflects the cumulative impact of the reorganization adjustments discussed above:
Continuing Operations
Gain on settlement of LSTC $ 1,293
Success and other fees recognized at emergence (39)
Net gain on reorganization adjustments(1)
1,254
Tax impact on reorganization adjustments (40)
Cancellation of Predecessor common stock 1
Cancellation of Predecessor additional paid-in capital 526
Cancellation of Predecessor treasury stock (296)
Net impact to Accumulated Deficit 1,445
(1)The net gain on reorganization adjustments has been included in “Reorganization items, net” in the Consolidated Statements of Operations.
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Fresh Start Adjustments
(q) The Fresh Start Adjustments column reflects adjustments required to record the assets and liabilities of the Company at fair value, including the elimination of the accumulated deficit and accumulated other comprehensive (loss) of the Predecessor Company.
(r) Reflects the adjustments made to Predecessor deferred revenue in situations where it has been determined the Successor Company has no remaining legal performance obligation related to the arrangement that give rise to the deferred revenue for the Predecessor Company.
(s) Reflects the adjustment made to record finished goods inventory at its estimated fair value, which was determined based on the current acquisition cost, including disposal and holding period costs and a reasonable profit margin less costs to sell.
(t) Reflects the adjustments made to record the Predecessor Company’s investments in unconsolidated subsidiaries at fair value utilizing a cost approach method.
(u) Reflects the deferred tax asset impact of the fresh start adjustments, resulting primarily from the book adjustment made to foreign property, plant, and equipment and intangibles that increased the future taxable temporary differences recorded.
(v) Reflects the adjustments required to record the Predecessor Company’s long-term assets at fair value.
(w) Reflects the adjustments made to record property, plant and equipment at its estimated fair value and eliminate Predecessor accumulated depreciation. Depreciable lives were also revised to reflect the remaining estimated useful lives of the related property, plant and equipment, which range from 1 to 39 years. Fair value was determined as follows:
•The market, sales comparison or trended cost approach was utilized to estimate fair value for land and buildings. This approach relies upon recent sales, offerings of similar assets or a specific inflationary adjustment to original purchase price to arrive at a probable selling price.
•The cost approach was utilized to estimate fair value for machinery and equipment. This approach considers the amount required to construct or purchase a new asset of equal utility at current market prices, with adjustments in value for physical deterioration and functional and economic obsolescence. Physical deterioration is an adjustment made in the cost approach to reflect the real operating age of an asset with regard to wear and tear, decay and deterioration that is not prevented by maintenance. Functional obsolescence is an adjustment made to reflect the loss in value or usefulness of an asset caused by inefficiencies or inadequacies of the asset, as compared to a more efficient or less costly replacement asset with newer technology. Economic obsolescence is an adjustment made to reflect the loss in value or usefulness of an asset due to factors external to the asset, such as the economics of the industry, reduced demand, increased competition or similar factors.
Depreciable lives were revised to reflect the remaining estimated useful lives as follows (in years):
Buildings 9 to 39 years
Machinery and equipment 1 to 20 years
(x) Reflects $24 of adjustments made to bring the right-of-use operating leased assets, exclusive of $1 related to the Held of Sale Business, and their associated liabilities to fair value utilizing an average discount rate of approximately 6% and to record favorable leasehold interests of $9, exclusive of $5 related to the Held for Sale Business, which were valued using a rental analysis approach based on (i) fair market rent was determined based on rates for facilities comparable to the Company’s properties, (ii) discount rates ranging from 8.0% to 12.0%, which were based on the after-tax WACC; and (iii) market rental growth rates ranging from 0.0% to 5.0%.
(y) Reflects the adjustments made to record the elimination of the Predecessor goodwill balance of $83, exclusive of $25 related to the Held for Sale Business, and to record the Successor goodwill of $164, exclusive of $14 related to the Held for Sale Business, which represents the reorganization value of assets in excess of amounts allocated to identified tangible and intangible assets.
(z) Reflects the adjustments made to eliminate the Predecessor Company’s other intangible assets of $17, exclusive of $7 related to the Held for Sale Business, and to record $1,155, exclusive of $64 related to the Held for Sale Business, in estimated fair value of Successor other intangible assets. Fair value was comprised of the following:
•Customer related intangible assets of $904, exclusive of $64 related to the Held for Sale Business, were valued using the multi-period excess earnings income approach based on the following significant assumptions;
i.Forecasted net sales and profit margins attributable to the current customer base through the applicable economic useful life;
ii.Attrition rates ranging from 0.5% to 5.0%;
iii.Discount rates ranging from 13.0% to 17.5%, which were based on the after-tax WACC; and
iv.Economic lives of 20 to 25 years.
•Trademarks of $141 were valued using the relief from royalty income approach based on the following significant assumptions:
i.Forecasted net sales attributable to the trademarks through the applicable economic useful life;
ii.Royalty rates ranging from 0.2% to 2.0% of expected net sales determined with regard to comparable market transactions and profitability analysis;
iii.Discount rates ranging from 11.0% to 16.5%, which were based on the after-tax weighted average cost of capital (“WACC”); and
Hexion Inc. | 85 | 2020 Form 10-K
iv.Economic lives ranging from 15 to 20 years.
•Technology based intangible assets of $110 were valued used the relief from royalty income approach based on the following significant assumptions:
i.Forecasted net sales attributable to the respective technologies through the applicable economic useful life;
ii.Royalty rates ranging from 0.5% to 2.25% of expected net sales determined with regard to expected cash flows of respective technologies and the overall importance of respective technologies to product offering
iii.Discount rates ranging from 11.0% to 16.5%, which were based on the after-tax WACC; and
iv.Economic lives of 15 years.
(aa) Reflects the fresh start accounting adjustments related to the Held for Sale business:
Discontinued Operations
Finished and in-process goods $ 2
Total current assets held for sale 2
Investment in unconsolidated companies 3
Deferred tax assets (1)
Other long-term assets 3
Property and equipment, net 158
Operating lease assets (See endnote X) 6
Goodwill (See endnote Y) (11)
Other intangible assets (See endnote Z) 57
Total noncurrent assets held for sale 215
Current portion of operating lease liabilities (See endnote X) 1
Current liabilities associated with assets held for sale 1
Long-term pension and post employment benefit obligations 5
Deferred income taxes 15
Noncurrent liabilities associated with assets held for sale 20
(ab) Reflects the adjustments made to bring various sale-leaseback financing arrangements to fair value and to revalue debt obligations.
(ac) Reflects the remeasurement of the Predecessor Company’s pension liabilities. The increase in pension liabilities was driven by reductions in discount rates and changes in other actuarial assumptions as of the Effective Date, primarily impacting our unfunded German pension plans.
(ad) Represents the deferred tax liability impact of the fresh start adjustments, resulting primarily from the book adjustment made to foreign property, plant, and equipment and intangibles that increased the future taxable temporary differences recorded.
(ae) Reflects the cumulative impact of the fresh start accounting adjustments discussed above and the elimination of the Predecessor Company’s accumulated other comprehensive income:
Continuing Operations Discontinued Operations Total Hexion
Establishment of Successor goodwill $ 164 $ 14 $ 178
Elimination of Predecessor goodwill (83) (25) (108)
Establishment of Successor other intangible assets 1,155 64 1,219
Elimination of Predecessor other intangible assets (17) (7) (24)
Inventory fair value adjustments 27 2 29
Property, plant and equipment fair value adjustment 622 158 780
Pension liability fair value adjustment (39) (5) (44)
Other assets and liabilities fair value adjustment (8) 11 3
Elimination of Predecessor Company accumulated other comprehensive income 51 (77) (26)
Net gain on fresh start adjustments(1)
1,872 135 2,007
Tax impact on fresh start adjustments (151) (16) (167)
Net impact on accumulated deficit 1,721 119 1,840
(1)The net gain on fresh start adjustments has been included in “Reorganization items, net” in the Consolidated Statements of Operations.
Hexion Inc. | 86 | 2020 Form 10-K
7. Reorganization Items, Net
Incremental costs incurred directly as a result of the Bankruptcy Petitions, gains on the settlement of liabilities under the Plan and the net impact of fresh start accounting adjustments are classified as “Reorganization items, net” in the Consolidated Statements of Operations. The following table summarizes reorganization items:
January 1, 2019 through July 1, 2019
Continuing Operations Discontinued Operations
Net gain on reorganization adjustments (see Note 6) $ (1,254) $ -
Net gain on fresh start adjustments (see Note 6) (1,872) (135)
Financing fees 104 -
Professional fees 39 -
DIP ABL Facility fees 13 -
Total $ (2,970) $ (135)
8. Asset Impairments
During the first quarter of 2020, the Company indefinitely idled certain assets within its Adhesives segment. These represented triggering events resulting in impairment evaluations of the fixed assets within both the oilfield and phenolic specialty resins asset groups. As a result, asset impairments totaling $16 were recorded in “Asset impairments” in the Consolidated Statements of Operations during the year ended December 31, 2020. See Note 4 for discussion of the discontinued operations impairment charge recorded in 2020.
During the first quarter of 2018, the Company indefinitely idled an oilfield manufacturing facility within its Adhesives segment, and production was shifted to another facility within the oilfield manufacturing group. This represented a triggering event resulting in an impairment evaluation of the fixed and intangible assets within the U.S. oilfield asset group. As a result, an asset impairment of $20 was recorded in the first quarter of 2018 related to the fixed assets at the idled manufacturing facility. In addition, the remaining U.S. oilfield asset group was evaluated for impairment utilizing a discounted cash flow approach, resulting in an additional impairment of $5 that was recorded during the first quarter of 2018 related to an existing customer relationship intangible asset. Overall, the Company incurred $25 of total impairment related to these assets, which is included in “Asset impairments” in the Consolidated Statements of Operations for the year ended December 31, 2018.
9. Related Party Transactions
Transactions with Apollo
As of the Company’s emergence from bankruptcy on July 1, 2019, Apollo is no longer a related party to the Company. The disclosures below are through July 1, 2019 and only reflect the time period when Apollo was a related party. Sales to various Apollo affiliates were $1 and $2 for the Predecessor period January 1, 2019 through July 1, 2019 and for the year ended December 31, 2018. There were no purchases during the Predecessor period January 1, 2019 through July 1, 2019 and for the year ended December 31, 2018.
Management Consulting Agreement
The Company was party to a Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) pursuant to which the Company received certain structuring and advisory services from Apollo and its affiliates. Apollo was entitled to an annual fee equal to the greater of $3 or 2% of the Company’s Adjusted EBITDA. In conjunction with the Company’s Chapter 11 proceedings and the Support Agreement filed on April 1, 2019, Apollo agreed to waive its annual management fee for 2019. In connection with the Company’s emergence from Chapter 11, the Management Consulting Agreement was terminated pursuant to the Confirmation Order, as of the Effective Date.
Transactions with MPM
As of May 15, 2019, MPM was no longer under the common control of Apollo and, accordingly, is no longer a related party to the Company. During the year ended December 31, 2018, the Company sold less than $1 of products to MPM. There were no products sold to MPM during the Predecessor period January 1, 2019 through July 1, 2019. During the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, the Company earned less than $1 from MPM as compensation for acting as distributor of products and had purchases of $10 and $32, respectively.
Hexion Inc. | 87 | 2020 Form 10-K
Shared Services Agreement
The Company previously held a shared services agreement with MPM (the “Shared Services Agreement”). Under this agreement, the Company provided to MPM, and MPM provided to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. On March 14, 2019, MPM terminated the Shared Services Agreement, which triggered a transition period for the parties to work together to facilitate an orderly transition of services. The transition of services was completed on September 1, 2020. During the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, the Company incurred approximately $15 and $28, respectively, of net costs for shared services and MPM incurred approximately $14 and $21 of net costs for shared services. Included in the net costs incurred during the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018 were net billings from Hexion to MPM of $11 and $14, respectively.
Other Transactions and Arrangements
In March 2020, the Company entered into a $10 short term affiliate loan with its Parent at a 0% interest rate to fund Parent share repurchases. In June 2020, the Company made a $10 non-cash distribution to its Parent treated as a return of capital to settle this affiliate loan. The Company made an additional $3 return of capital distribution to its Parent to fund additional Parent share repurchases in December 2020. This return of capital reduced “Paid-in capital” in the Consolidated Balance Sheet at December 31, 2020.
The Company sells products and provides services to, and purchases products from, its other joint ventures which are accounted for under the equity method of accounting. Refer to the below table for a summary of the sales and purchases with the Company and its joint ventures which are recorded under the equity method of accounting:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Sales to joint ventures(1)(2)
$ 2 $ 2 $ 2 $ 9
Purchases from joint ventures(2)
1 2 2 6
(1)Sales to joint ventures includes sales to the Russia JV of $1, $1, $1, and $7 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, which are included in the Held for Sale Business.
(2)There were no sales to joint ventures or purchases from joint ventures for the Predecessor period July 1, 2019.
December 31, 2020 December 31, 2019
Accounts receivable from joint ventures(1)
$ <1 $ 1
Accounts payable to joint ventures - <1
(1) Accounts receivable from joint ventures is mostly comprised of receivables from the Russia JV included in the Held for Sale Business. Accounts receivable from the Company’s other joint ventures was less than $1 for both December 31, 2020 and 2019.
In addition to the accounts receivable from joint ventures disclosed above, the Company had a loan receivable of $4 and $7 as of December 31, 2020 and 2019, respectively, from the Russia JV. This loan receivable has been included in “Long-term assets held for sale” within the Consolidated Balance Sheets.
10. Goodwill and Intangible Assets
In connection with the Company’s emergence from Chapter 11 and application of fresh start accounting, the excess of reorganization value over the fair value of identified tangible and intangible assets of $178 was recorded as goodwill as of July 1, 2019. The Company’s gross carrying amount and accumulated impairments of goodwill consist of the following as of December 31, 2020 and 2019:
2020 2019
Gross
Carrying
Amount Accumulated
Impairments Accumulated
Foreign
Currency
Translation Net
Book
Value Gross
Carrying
Amount Accumulated
Impairments Accumulated
Foreign
Currency
Translation Net
Book
Value
Adhesives(1)
$ 127 $ - $ - $ 127 $ 127 $ - $ - $ 127
Coatings and Composites 37 - - 37 37 - - 37
Total $ 164 $ - $ - $ 164 $ 164 $ - $ - $ 164
(1)Excludes $14 of goodwill in the Adhesives segment associated with the Held for Sale Business at both December 31, 2020 and 2019 (See Note 4).
Hexion Inc. | 88 | 2020 Form 10-K
The changes in the net carrying amount of goodwill by segment for the years ended December 31, 2020 and 2019 are as follows:
Adhesives(3)
Coatings and Composites Total
Predecessor
Goodwill balance at December 31, 2018
$ 43 $ 41 $ 84
Divestitures - - -
Foreign currency translation (1) - (1)
Goodwill balance at June 30, 2019 42 41 83
Elimination of Predecessor Goodwill (42) (41) (83)
Goodwill balance at July 1, 2019 - - -
Recording of Successor Goodwill(1)
127 37 164
Successor
Goodwill balance at July 2, 2019 $ 127 $ 37 $ 164
Adjustments(2)
- - -
Goodwill balance at December 31, 2019
$ 127 $ 37 $ 164
Adjustments(2)
- - -
Goodwill balance at December 31, 2020
$ 127 $ 37 $ 164
(1)Recording of the Successor Company goodwill in accordance with the application of fresh start accounting. Refer to Note 6 for more details.
(2)There were no foreign currency adjustments nor impairments related to Successor Company goodwill for the year ended December 31, 2020 and the Successor period July 2, 2019 through December 31, 2019.
(3)Excludes $14 at both December 31, 2020 and 2019 and $25 at both June 30, 2019 and December 31, 2018 related in the Held for Sale Business (See Note 4).
The Company’s intangible assets with identifiable useful lives consist of the following as of December 31, 2020 and 2019:
Gross
Carrying
Amount Accumulated Foreign Exchange Accumulated
Amortization Net
Book
Value Gross
Carrying
Amount Accumulated Foreign Exchange Accumulated
Amortization Net
Book
Value
2020 2019
Customer relationships(1)
$ 903 $ 5 $ (61) $ 847 $ 903 $ (3) $ (19) $ 881
Trademarks 141 2 (12) 131 141 - (3) 138
Technology 110 2 (11) 101 110 - (4) 106
Total $ 1,154 $ 9 $ (84) $ 1,079 $ 1,154 $ (3) $ (26) $ 1,125
(1)Excludes net book value of $61 and $63 at December 31, 2020 and 2019, respectively, related to the Held of Sale Business (See Note 4).
On July 1, 2019, as part of the application of fresh start accounting, the Company’s existing intangible assets were eliminated and new intangible assets were established at their estimated fair value as of July 1, 2019. New intangible assets were established for customer relationships, trademarks, and technology. See Note 6 for more information.
Total intangible amortization expense related to continuing operations for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018 was $58, $26, $3 and $9, respectively.
Estimated annual intangible amortization expense for 2021 through 2025 is as follows:
2021 $ 58
2022 58
2023 58
2024 58
2025 58
Hexion Inc. | 89 | 2020 Form 10-K
11. Fair Value
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:
•Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
•Level 3: Unobservable inputs that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.
Recurring Fair Value Measurements
As of December 31, 2020, the Company had derivative liabilities related to foreign exchange, electricity and natural gas contracts of $1, which were measured using Level 2 inputs, and consist of derivative instruments transacted primarily in over-the-counter markets. There were no transfers between Level 1, Level 2 or Level 3 measurements during the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018.
The Company calculates the fair value of its Level 2 derivative liabilities using standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At December 31, 2020 and 2019, no adjustment was made by the Company to reduce its derivative liabilities for nonperformance risk.
When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.
Interest Rate Swap
The Company will from time to time use interest rate swaps to alter interest rate exposures between floating and fixed rates on certain long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated using an agreed-upon notional principal amount. The counter-parties to the interest rate swap agreements are financial institutions with investment grade ratings.
On October 10, 2019, the Company executed an interest rate swap syndication agreement with Credit Suisse International where Hexion receives a variable 3-month LIBOR, and pays fixed interest rate swaps, beginning January 1, 2020 through January 1, 2025 (the “Hedge”) for a total notional amount of $300. The purpose of this arrangement is to hedge the variability caused by quarterly changes in cash flow due to associated changes in LIBOR for $300 of the Company’s variable rate Senior Secured Term Loan denominated in USD ($701 at December 31, 2020.) The Company has evaluated this transaction and designated this derivative instrument as a cash flow hedge for hedge accounting under Accounting Standard Codification, No. 815, “Derivatives and hedging,” (“ASC 815”). For the Hedge, the Company recorded changes in the fair value of the derivative in other comprehensive income (“OCI”) and will subsequently reclassify gains and losses from these changes in fair value from OCI to the Consolidated Statement of Operations in the same period that the hedged transaction affects net (loss) income and in the same Consolidated Statement of Operations category as the hedged item, “Interest expense, net”.
The following tables summarize the Company’s derivative financial instrument designated as a hedging instrument:
December 31, 2020 December 31, 2019
Balance Sheet Location Notional Amount Fair Value Liability Notional Amount Fair Value Asset
Derivatives designated as hedging instruments
Interest Rate Swap Other current (liabilities)/assets $ 300 $ (15) $ 300 $ 3
Total derivatives designated as hedging instruments $ (15) $ 3
Amount of (Loss) Gain Recognized in OCI on Derivatives, net of tax
Successor Predecessor
Derivatives designated as hedging instruments Year ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
Interest Rate Swaps
Interest Rate Swap $ (18) $ 2 $ -
Total $ (18) $ 2 $ -
During the year ended December 31, 2020, the Company reclassified a loss of $2 from OCI to “Interest expense, net” on the Consolidated Statement of Operations related to the settlement of a portion of the Hedge.
Hexion Inc. | 90 | 2020 Form 10-K
Non-derivative Financial Instruments
The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:
Carrying Amount Fair Value
Level 1 Level 2 Level 3 Total
December 31, 2020
Debt $ 1,792 $ - $ 1,767 $ 55 $ 1,822
December 31, 2019
Debt $ 1,785 $ - $ 1,751 $ 64 $ 1,815
Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Level 3 amounts represent capital leases whose fair value is determined through the use of present value and specific contract terms. The carrying amounts of cash and cash equivalents, short term investments, accounts receivable, accounts payable and other accrued liabilities are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.
12. Debt Obligations
Debt outstanding at December 31, 2020 and 2019 is as follows:
December 31, 2020 December 31, 2019
Long-Term Due Within One Year Long-Term Due Within One Year
Senior Secured Credit Facility:
ABL Facility $ - $ - $ - $ -
Senior Secured Term Loan - USD due 2026 (includes $6 and $7 of unamortized debt discount at December 31, 2020 and 2019, respectively)
701 7 708 7
Senior Secured Term Loan - EUR due 2026 (includes $4 of unamortized debt discount at December 31, 2020 and 2019)
515 - 473 -
Senior Notes:
7.875% Senior Notes due 2027
450 - 450 -
Other Borrowings:
Australia Facility due 2021 at 4.0% and 3.9% at December 31, 2020 and 2019, respectively
- 30 27 4
Brazilian bank loans at 10.2% and 9.2% at December 31, 2020 and 2019, respectively
2 22 7 34
Lease obligations(1)
42 14 50 14
Other at 3.9% and 5.0% at December 31, 2020 and 2019, respectively
- 9 - 11
Total(2)
$ 1,710 $ 82 $ 1,715 $ 70
(1)Lease obligations include finance leases and sale leaseback financing arrangements.
(2)The foreign exchange translation impact of the Company’s foreign currency denominated debt instruments was an increase of $46 and a decrease of $10 as of December 31, 2020 and 2019, respectively.
In consummation of the Plan, on July 1, 2019, the 1L Note holders received their pro rata share of (a) cash in the amount of $1.450 billion (less the sum of adequate protection payments paid on account of the 1L Notes during the Chapter 11 cases), (b) 72.5% of new common equity of Hexion Holdings (“New Common Equity”) (subject to the Agreed Dilution), and (c) 72.5% of the rights to purchase additional New Common Equity pursuant to the Rights Offering.
Additionally, the owners of the 1.5L Notes, 2L Notes, and Unsecured Notes received their pro rata share of (a) 27.5% of the New Common Equity (subject to the Agreed Dilution) and (b) 27.5% of the rights to purchase additional New Common Equity pursuant to the Rights Offering. See Note 5 for more information.
In connection with the filing of the Bankruptcy Petitions, on April 3, 2019, as described in Note 5 the proceeds of the DIP Term Loan Facility were used in part to repay in full the outstanding obligations under the Company’s existing asset-based revolving credit agreement ABL Facility.
Hexion Inc. | 91 | 2020 Form 10-K
Credit Facilities and Senior Notes
ABL Facility
On July 1, 2019, in connection with the Emergence, the Company, Hexion Canada Inc., a Canadian corporation (the “Canadian ABL Borrower”), Hexion B.V., a company organized under the laws of The Netherlands (the “Dutch ABL Borrower”), Hexion GmbH, a company organized under the laws of Germany (the “German ABL Borrower”), Hexion UK Limited, a corporation organized under the laws of England and Wales ( the “U.K. ABL Borrower” and, together with the Company, the Canadian ABL Borrower, the Dutch ABL Borrower and the German ABL Borrower, the “ABL Borrowers”) entered into a senior secured ABL Facility with the lenders and other parties thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent, in an aggregate principal amount of $350, under which the ABL Borrowers may borrow funds from time to time and up to $150 amount of which is available through a subfacility in the form of letters of credit, in each case subject to a borrowing base, as further described below. In addition, the Company may request one or more incremental facilities in an aggregate amount equal to the greater of (i) $100 and (ii) the excess of the borrowing base over $350.
The ABL Facility will mature and the commitments thereunder will terminate on July 1, 2024 and bears interest based on an adjusted LIBOR rate, EURIBOR or an alternate base rate (depending on the currency of the borrowing), in each case plus an applicable initial margin of 1.50% or, in the case of the alternate base rate, 0.50%, which margin may increase or decrease depending on the average availability under the ABL Facility.
The borrowing base is, at any time of determination, an amount (net of reserves) equal to the sum of:
•in the case of the borrowing base for the Company’s U.S., U.K., Dutch and Canadian subsidiaries, 85% of the amount of eligible receivables (or 90% of the amount of “investment grade” eligible receivables) (including trade receivables), plus
•in the case of the borrowing base for the Company’s U.S., U.K., Dutch and Canadian subsidiaries, the lesser of (i) 70% of the amount of eligible inventory and (ii) 85% of the net orderly liquidation value of eligible inventory, plus
•in the case of the borrowing base for the Company’s U.K., Dutch, Canadian and German subsidiaries, the lesser of (i) the sum of (a) 80% of the amount of eligible machinery and equipment appraised on a net orderly liquidation basis and (b) 75% of the appraised fair market value of eligible real property of the loan parties in Canada, England and Wales, the Netherlands and Germany and (ii) the lesser of (x) 20% of the total commitments and (y) 20% of the borrowing base of the borrowers without giving effect to the additional borrowing base from the eligible machinery and equipment and eligible real property, plus
•in the case of the borrowing base for the Company’s U.S. and Canadian subsidiaries, 100% of unrestricted cash, in each case held in an account subject to the springing control of the agent; provided, that the cash component of the borrowing base shall not constitute more than the lesser of (x) 15.0% of the total commitments and (y) 15.0% of the borrowing base of the borrowers (calculated prior to giving effect to such limitation).
The borrowing base of the U.K., Dutch and German subsidiaries may not exceed the greater of 50% of the total commitments and 50% of the borrowing base of the ABL Borrowers. On the closing date of the ABL Facility, as adjusted for the consummation of the Plan and related transactions, the borrowing base reflecting various required reserves was determined to be approximately $350.
In addition to paying interest on outstanding principal under the ABL Facility, the Company is required to pay a commitment fee to the lenders in respect of the unutilized commitments thereunder at a rate equal to 0.50% or 0.375% per annum depending on the average utilization of the commitments. The Company also pays a customary letter of credit fee, including a fronting fee of 0.125% per annum of the daily average stated amount of each outstanding letter of credit, and customary agency fees.
Outstanding loans under the ABL Facility may be voluntarily repaid at any time without premium or penalty, other than customary “breakage” costs with respect to eurocurrency loans.
The obligations of the Company under the ABL Facility are unconditionally guaranteed by the Company’s direct parent, Hexion Intermediate, and each of the Company’s existing and future wholly-owned material U.S. subsidiaries, which the Company refers to as the “U.S. ABL Guarantors.” In addition, all obligations of the foreign subsidiary borrowers under the ABL Facility are guaranteed by the U.S. ABL Guarantors and certain other direct and indirect wholly-owned foreign subsidiaries, which the Company refers to collectively as the “Foreign ABL Guarantors” and, together with the U.S. ABL Guarantors, the “ABL Guarantors.”
In addition, the ABL Facility requires the Company to maintain a minimum fixed charge coverage ratio at any time when the excess availability is less than the greater of (x) $30 and (y) 10.0% of the lesser of (i) the borrowing base at such time and (ii) the aggregate amount of ABL Facility commitments at such time. In that event, the Company must satisfy a minimum fixed charge coverage ratio of 1.0 to 1.0. The Company was in compliance with all ABL Facility provisions as of December 31, 2020 and 2019.
Hexion Inc. | 92 | 2020 Form 10-K
New Senior Secured Term Loan Facility
Additionally, in connection with the completion of the Plan, on July 1, 2019, the Company and Hexion International Cooperatief U.A., a company organized under the laws of the Netherlands (the “Dutch Term Loan Borrower” and, together with the Company, the “Term Loan Borrowers”), entered into a senior secured term loan facility with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent (the “Term Loan Facility”), which consists of (i) a USD denominated tranche in an aggregate principal amount of $725 (“Senior Secured Term Loan - USD”) borrowed by the Company and (ii) a EUR denominated tranche in an aggregate principal amount of €425 (“Senior Secured Term Loan - EUR”) borrowed by the Dutch Term Loan Borrower (the Senior Secured Term Loans together with the ABL Facility represent the “Credit Facilities”). In addition, the Company may request one or more incremental facilities in an aggregate amount up to the sum of $425 and amounts that may be incurred pursuant to certain leverage and coverage ratios.
The Term Loan Facility will mature on July 1, 2026 and bears interest based on (i) in the case of the USD tranche, at the Company’s option, an adjusted LIBOR rate or an alternate base rate, in each case plus an applicable margin equal to 3.50% or, in the case of the alternate base rate, 2.50% and (ii) in the case of the EUR tranche, EURIBOR plus an applicable margin equal to 4.00%. As of December 31, 2020, the effective interest for the Company’s Term Loan Facility on the USD tranche and EUR tranche was 3.73% and 4.00%, respectively, and the effective interest rate as of December 31, 2019 for the Company’s Term Loan Facility on USD tranche and EUR tranche was 5.82% and 4.00%, respectively.
The obligations of the Company under the Term Loan Facility are unconditionally guaranteed by Hexion Intermediate and each of the Company’s existing and future wholly owned material U.S. subsidiaries, which subsidiaries the Company refers to collectively as “U.S. Term Guarantors”. In addition, all obligations of the Dutch Term Loan Borrower under the Term Loan Facility are guaranteed by Hexion Intermediate, the Company, the U.S. Term Guarantors and certain other direct and indirect wholly-owned foreign subsidiaries, which foreign subsidiaries the Company collectively refers to as the “Foreign Term Guarantors” (together with the U.S. Term Guarantors, the “Subsidiary Term Guarantors” and, together with Hexion Intermediate, the “Term Guarantors”).
The Credit Facilities contain among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. Events of default include the failure to pay principal and interest when due, a material breach of representation or warranty, covenant defaults, events of bankruptcy and a change of control. The Credit Facilities also contain certain other customary affirmative covenants and events of default. If the Company fails to perform its obligations under these and other covenants, the Credit Facilities could be terminated and any outstanding borrowings, together with accrued interest, under the Credit Facilities could be declared immediately due and payable. There were no covenant violations or events of default as of December 31, 2020 or 2019.
Indenture and 7.875% Senior Notes due 2027
The Company entered into an indenture, dated as of July 1, 2019 (the “Indenture”), among the Company, the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee, and issued $450 aggregate principal amount of 7.875% Senior Notes due 2027 (the “Senior Notes”) thereunder. The Senior Notes are guaranteed on a senior basis by the Company’s existing domestic subsidiaries that guarantee its obligations under its Credit Facilities (as defined below) (the “Guarantors”) on a full and unconditional basis. The following is a brief description of the material provisions of the Indenture and the Senior Notes.
The Senior Notes will mature on July 15, 2027. Interest on the Senior Notes will accrue at the rate of 7.875% per annum and will be payable semiannually in arrears on January 15 and July 15, commencing on January 15, 2020.
Optional Redemption. At any time prior to July 15, 2022, the Company may redeem the Senior Notes, in whole or in part, at a price equal to 100% of the principal amount of the Senior Notes redeemed, plus an applicable “make-whole” premium and accrued and unpaid interest, if any, to the redemption date.
In addition, at any time prior to July 15, 2022, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes at a redemption price of 107.875% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of certain equity offerings; provided that at least 50% of the aggregate principal amount of the Senior Notes originally issued under the Indenture remains outstanding immediately after the occurrence of such redemption (excluding Notes held by the Company and its subsidiaries); and provided, further, that such redemption occurs within 90 days of the date of the closing of such equity offering.
On and after July 15, 2022, the Company may redeem all or a part of the Senior Notes at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest, if any, thereon, to the applicable redemption date, if redeemed during the twelve-month period beginning on July 15 of the years indicated below:
Year Percentage
2022 103.94 %
2023 101.97 %
2024 and thereafter 100.00 %
Change of Control. If a change of control (as defined in the Indenture) occurs, holders of the Senior Notes will have the right to require the Company to repurchase all or any part of their Senior Notes at a purchase price equal to 101% of the aggregate principal amount of the Senior Notes repurchased, plus accrued and unpaid interest, if any, to the repurchase date.
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Certain Covenants. The Indenture governing the Senior Notes contains, among other provisions, restrictive covenants regarding indebtedness, payments and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and the maintenance of certain financial ratios. At such time as (1) the Senior Notes have an investment grade rating from both of Moody’s Investors Service, Inc. and Standard and Poor’s Ratings Services and (2) no default has occurred and is continuing under the Indenture, certain of these and other covenants will be suspended and cease to be in effect.
Events of Default. The Indenture also provides for certain customary events of default, including, among others, nonpayment of principal or interest, failure to pay final judgments in excess of a specified threshold, failure of a guarantee to remain in effect, bankruptcy and insolvency events, and cross acceleration, which would permit the principal, premium, if any, interest and other monetary obligations on all the then outstanding Senior Notes to be declared due and payable immediately.
Intercreditor Agreement
On July 1, 2019, in connection with the Emergence, JPMorgan Chase Bank, N.A., as collateral agent under each of the Credit Facilities, and the Company and certain of its subsidiaries entered into an ABL Intercreditor Agreement that, among other things, sets forth the relative lien priorities of the secured parties under the Credit Facilities on the collateral shared by the ABL Facility and the Term Loan Facility.
Other Borrowings
The Company’s Australian Term Loan Facility has a variable interest rate equal to the 90 day Australian or New Zealand Bank Bill Rates plus an applicable margin. The agreement also provides access to a $7 revolving credit facility of which there were no outstanding borrowings at December 31, 2020 and $1 at December 31, 2019. In February 2021, the Company extended its Australian Term Loan Facility through February 2026.
The Brazilian bank loans represent various bank loans, primarily for working capital purposes and to finance the construction of manufacturing facilities.
The Company’s other debt obligations represent various international credit facilities in China and Korea to fund working capital needs and capital expenditures. While these facilities are primarily unsecured, portions of the lines are collateralized by equipment and cash and short term investments at December 31, 2020.
The Company’s lease obligations classified as debt on the Consolidated Balance Sheets include finance leases and sale leaseback financing arrangements, which range from one to fifteen year terms for equipment, pipeline, land and buildings.
Scheduled Maturities
Aggregate maturities of debt, excluding amortization of debt discounts, at December 31, 2020 for the Company are as follows:
Year Debt
2021 $ 84
2022 35
2023 17
2024 9
2025 9
2026 and thereafter 1,651
Total minimum payments 1,805
Less: Amount representing interest (3)
Present value of minimum payments $ 1,802
13. Leases
The Company leases certain buildings, warehouses, rail cars, land and operating equipment under both operating and finance leases expiring on various dates through 2044. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, the Company combines lease and non-lease components.
The Company determines if a contract is a lease at the inception of the arrangement. The Company reviews all options to extend, terminate, or purchase its right of use assets at the inception of the lease and accounts for these options when they are reasonably certain of being exercised. Nearly all of the Company’s lease contracts do not provide a readily determinable implicit rate. For these contracts, the Company estimates the incremental borrowing rate to discount the lease payments based on information available at lease commencement.
The tables and discussion below represent the Company’s continuing operations and exclude the Held for Sale Business.
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Lease Costs
The table below summarizes the lease costs for the year ended December 31, 2020 and the Successor period July 2, 2019 through December 31, 2019 and the Predecessor period January 1, 2019 through July 1, 2019:
Classification Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
Operating lease expense Operating (loss) income $ 29 $ 18 $ 16
Short-term lease expense Operating (loss) income 5 2 5
Amortization expense Operating (loss) income 2 1 1
Interest expense from financing leases Interest expense, net <1 <1 <1
Variable lease expense Operating (loss) income 3 3 2
Balance Sheet Classification
The table below presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheets:
Successor
Classification December 31, 2020 December 31, 2019
Assets:
Operating(1)
Operating lease assets $ 103 $ 110
Finance(2)
Machinery and Equipment 13 10
Total leased assets $ 116 $ 120
Liabilities:
Current
Operating Current portion of operating lease liabilities $ 19 $ 20
Finance Debt payable within one year 2 4
Noncurrent
Operating Operating lease liabilities 76 82
Finance Long-term debt 6 3
Total leased liabilities $ 103 $ 109
(1) Operating lease assets include $8 and $9 of favorable leasehold interests as of December 31, 2020 and 2019, respectively.
(2) Finance lease assets are recorded net of accumulated amortization of $3 and $1 as of December 31, 2020 and 2019, respectively.
Other Lease Information
Cash paid for operating leases approximated operating lease expense and non-cash right-of-use asset amortization for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019 and the Predecessor period January 1, 2019 through July 1, 2019. The table below presents other cash and noncash consideration detail for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019 and the Predecessor period January 1, 2019 through July 1, 2019:
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
Cash paid for finance leases $ 4 $ 2 $ 2
Right-of-use assets obtained in exchange for operating lease 13 2 1
Right-of-use assets obtained in exchange for finance lease obligations 5 - 3
The tables below present supplemental information related to leases as of December 31, 2020 and 2019:
Successor December 31, 2020 December 31, 2019
Weighted-average remaining lease term (years)
Operating leases 10.0 10.7
Finance leases 4.8 1.7
Weighted-average discount rate
Operating leases 5.24 % 5.74 %
Finance leases 7.73 % 10.00 %
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The table below reconciles the undiscounted cash flows for each of the first five years and the total of the remaining years to the finance lease liabilities and operating lease liabilities recorded on the Company’s Consolidated Balance Sheet as of December 31, 2020:
Year Minimum Rentals Under Operating Leases Minimum Payments Under Finance Leases(1)
2021 $ 23 $ 2
2022 16 1
2023 11 1
2024 9 1
2025 9 1
2026 and thereafter 58 3
Total lease payments $ 126 $ 9
Less: Amount representing interest (31) (1)
Present value of lease liabilities $ 95 $ 8
(1) Amounts exclude sale leaseback financing arrangements which are not considered leases under Topic 842.
14. Commitments and Contingencies
Environmental Matters
The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.
The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at December 31, 2020 and 2019:
Liability Range of Reasonably Possible Costs as of December 31, 2020
Successor
Site Description December 31, 2020(1)
December 31, 2019(1)
Low High
Geismar, LA $ 12 $ 12 $ 9 $ 22
Superfund and offsite landfills - allocated share:
Less than 1% 3 3 2 6
Equal to or greater than 1% 6 6 5 14
Currently-owned 8 8 4 14
Formerly-owned:
Remediation 18 21 14 36
Monitoring only - 1 - 1
Total $ 47 $ 51 $ 34 $ 93
(1)The table includes approximately $2 of environmental remediation liabilities related to the Held for Sale Business at both December 31, 2020 and 2019. These associated liabilities have been included in “Long-term liabilities associated with assets held for sale” within the Consolidated Balance Sheets.
These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At December 31, 2020 and 2019, $14 and $18, respectively, has been included in “Other current liabilities” in the Consolidated Balance Sheets with the remaining amount included in “Other long-term liabilities.”
Following is a discussion of the Company’s environmental liabilities and the related assumptions at December 31, 2020
Geismar, LA Site-The Company formerly owned a basic chemicals and polyvinyl chloride business that was taken public as Borden Chemicals and Plastics Operating Limited Partnership (“BCPOLP”) in 1987. The Company retained a 1% interest, the general partner interest and the liability for certain environmental matters after BCPOLP’s formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the District of Delaware among the Company, BCPOLP, the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality, the Company agreed to perform certain of BCPOLP’s obligations for soil and groundwater contamination at BCPOLP’s Geismar, Louisiana site. The Company bears the sole responsibility for these obligations because there are no other potentially responsible parties (“PRP”) or third parties from whom the Company could seek reimbursement.
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A groundwater pump and treat system to remove contaminants is operational, and natural attenuation studies are proceeding. If closure procedures and remediation systems prove to be inadequate, or if additional contamination is discovered, costs that would approach the higher end of the range of possible outcomes could result.
Due to the long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, a portion of this liability was recorded at its net present value, assuming a 3% discount rate and a time period of 20 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 20 years, is approximately $16. Over the next five years, the Company expects to make ratable payments totaling $5.
Superfund Sites and Offsite Landfills-The Company is currently involved in environmental remediation activities at a number of sites for which it has been notified that it is, or may be, a PRP under the United States Comprehensive Environmental Response, Compensation and Liability Act or similar state “superfund” laws. The Company anticipates approximately 50% of the estimated liability for these sites will be paid within the next five years, with the remainder over the next twenty-five years. The Company generally does not bear a significant level of responsibility for these sites, and as a result, has little control over the costs and timing of cash flows.
The Company’s ultimate liability will depend on many factors including its share of waste volume, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. The range of possible outcomes takes into account the maturity of each project, resulting in a more narrow range as the project progresses. To estimate both its current reserves for environmental remediation at these sites and the possible range of additional costs, the Company has not assumed that it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The Company has limited information to assess the viability of other PRPs and their probable contribution on a per site basis. The Company’s insurance provides very limited, if any, coverage for these environmental matters.
Sites Under Current Ownership-The Company is conducting environmental remediation at a number of locations that it currently owns, of which ten sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The factors influencing the ultimate outcome include the methods of remediation elected, the conclusions and assessment of site studies remaining to be completed, and the time period required to complete the work. No other parties are responsible for remediation at these sites.
Formerly-Owned Sites-The Company is conducting, or has been identified as a PRP in connection with, environmental remediation at a number of locations that it formerly owned and/or operated. Remediation costs at these former sites, such as those associated with our former phosphate mining and processing operations, could be material. The Company has accrued those costs for formerly-owned sites which are currently probable and reasonably estimable. One such site is the Coronet Industries, Inc. Superfund Alternative Site in Plant City, Florida. The Company signed a settlement agreement in 2016 with the current site owner and a past site owner, pursuant to which the Company paid $10 for past remediation costs and accepted a 40% allocable share of specified future remediation costs at this site. The Company estimates its allocable share of future remediation costs to be approximately $8. The final costs to the Company will depend on natural variations in remediation costs, including unforeseen circumstances, agency requests, new contaminants of concern and the ongoing financial viability of the other PRPs.
Monitoring Only Sites-The Company is responsible for a number of sites that require monitoring where no additional remediation is expected. The Company has established reserves for costs related to these sites. Payment of these liabilities is anticipated to occur over the next ten or more years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.
Indemnifications-In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.
Non-Environmental Legal Matters
The Company is involved in various legal proceedings in the ordinary course of business and had reserves of $1 at both December 31, 2020 and 2019, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At December 31, 2020 and 2019, $2 and $1 has been included in “Other current liabilities” in the Consolidated Balance Sheets with the remaining amount included in “Other long-term liabilities.”
Other Legal Matters-The Company is involved in various other product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings in addition to those described above, including actions that allege harm caused by products the Company has allegedly made or used, containing silica, vinyl chloride monomer and asbestos. The Company believes it has adequate reserves and that it is not reasonably possible that a loss exceeding amounts already reserved would be material. Furthermore, the Company has insurance to cover claims of these types.
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Other Commitments and Contingencies
The Company has entered into contractual agreements with third parties for the supply of site services, utilities, materials and facilities and for operation and maintenance services necessary to operate certain of the Company’s facilities on a stand-alone basis. The duration of the contracts range from less than one year to 20 years, depending on the nature of services. These contracts may be terminated by either party under certain conditions as provided for in the respective agreements; generally, 90 days notice is required for short-term contracts and three years notice is required for longer-term contracts (generally those contracts in excess of five years). Contractual pricing generally includes a fixed and variable component.
In addition, the Company has entered into contractual agreements with third parties to purchase feedstocks or other services. The terms of these agreements vary from one to fifteen years and may be extended at the Company’s request and are cancelable by either party as provided for in each agreement. Feedstock prices are based on market prices less negotiated volume discounts or cost input formulas. The Company is required to make minimum annual payments under these contracts as follows:
Year Minimum Annual Purchase Commitments
2021 $ 190
2022 134
2023 94
2024 50
2025 49
2026 and beyond 253
Total minimum payments 770
Less: Amount representing interest (31)
Present value of minimum payments $ 739
15. Pension and Non-Pension Postretirement Benefit Plans
The Company sponsors defined benefit pension plans covering certain U.S. associates and certain non-U.S. associates primarily in Netherlands, Germany, Canada and Belgium. Benefits under these plans are generally based on eligible compensation and / or years of credited service. Retirement benefits in other foreign locations are primarily structured as defined contribution plans. During 2009, the Company implemented a change in its U.S. retirement benefits to shift to a defined contribution platform. Benefits under the defined benefit U.S. pension plan were frozen and the Company added an annual Company contribution to the U.S. defined contribution plan for eligible participants. Effective March 1, 2018, the Canadian pension plan was frozen to new entrants.
Certain active participants in the Company’s German defined benefit pension plan relate to the Held for Sale Business. These employees will transfer with the Held for Sale business at closing and therefore, the pension liability and expense associated with these employees is included within discontinued operations. As the Company’s German defined benefit pension plan is unfunded, there is no impact on the Company’s Pension Plan assets. See below table for a summary of the pension liability and expense amounts included in discontinued operations.
Pension Benefits
Successor
December 31, 2020 December 31, 2019
Discontinued Operations U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans
Benefit obligation $ - $ 36 $ - $ 29
Pension Benefits
Successor Predecessor
Year ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year ended December 31, 2018
Discontinued Operations U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans
Net expense $ - $ 5 $ - $ < 1 $ - $ 6 $ - $ 1
The Company also provides non-pension postretirement benefit plans to certain U.S. associates, to Canadian associates, to Brazilian associates and to certain associates in the Netherlands. The U.S. benefit primarily consists of a life insurance benefit for a grandfathered group of retirees, for which premiums are paid by the Company. Effective December 31, 2018, this life insurance benefit was transferred to a third party financial institution, which moved the liability from the Company to the third party. The Canadian plans provide retirees and their dependents with medical and life insurance benefits, which are supplemental benefits to the respective provincial healthcare plan in Canada. The Brazilian plan became effective in 2012 as a result of a change in certain regulations, and provides retirees that contributed towards coverage while actively employed with access to medical benefits, with the retiree being responsible for 100% of the premiums. In 2014, the
Hexion Inc. | 98 | 2020 Form 10-K
plan was amended such that 100% of the premiums of active employees are paid by the Company. The Netherlands’ plan provides a lump sum payment at retirement for grandfathered associates.
The following table presents the change in benefit obligation, change in plan assets and components of funded status for the Company’s defined benefit pension and non-pension postretirement benefit plans for the year ended December 31, 2020, the Successor period from July 2, 2019 through December 31, 2019, and the Predecessor period January 1, 2019 through July 1, 2019:
Pension Benefits
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans
Change in Benefit Obligation
Benefit obligation at beginning of period $ 225 $ 688 $ 228 $ 678 $ 216 $ 583
Service cost 2 18 2 8 2 7
Interest cost 6 6 3 4 4 4
Actuarial losses 17 43 3 12 14 93
Foreign currency exchange rate changes - 61 - (8) - (3)
Benefits paid (15) (13) (8) (6) (8) (6)
Expenses paid from assets (3) - (3) - - -
Employee contributions - 1 - - - -
Benefit obligation at end of period $ 232 $ 804 $ 225 $ 688 $ 228 $ 678
Benefit obligation at end of period - discontinued operations - 36 - 29 - 29
Benefit obligation at end of period - continuing operations $ 232 $ 768 $ 225 $ 659 $ 228 $ 649
Change in Plan Assets
Fair value of plan assets at beginning of period $ 197 $ 483 $ 196 $ 470 $ 185 $ 404
Actual return on plan assets 18 58 10 9 19 60
Foreign currency exchange rate changes - 45 - (5) - (2)
Employer contributions - 40 2 15 - 14
Benefits paid (15) (13) (8) (6) (8) (6)
Expenses paid from assets (3) - (3) - - -
Employee contributions - 1 - - - -
Fair value of plan assets at end of period 197 614 197 483 196 470
Funded status of the plan at end of period $ (35) $ (190) $ (28) $ (205) $ (32) $ (208)
Funded status of the plan at end of period - discontinued operations - (36) - (29) - (29)
Funded status of the plan at the end of period - continuing operations $ (35) $ (154) $ (28) $ (176) $ (32) $ (179)
Non-Pension Postretirement Benefits
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans
Change in Benefit Obligation
Benefit obligation at beginning of period $ - $ 13 $ - $ 17 $ - $ 13
Interest cost - 1 - - - -
Actuarial (gains) losses - (1) - (4) - 4
Foreign currency exchange rate changes - (1) - - - -
Plan settlements - - - - - -
Benefit obligation at end of period $ - $ 12 $ - $ 13 $ - $ 17
Change in Plan Assets
Fair value of plan assets at beginning of period $ - $ - $ - $ - $ - $ -
Employer contributions - - - - - -
Plan settlements - - - - - -
Fair value of plan assets at end of period - - - - - -
Funded status of the plan at end of period $ - $ (12) $ - $ (13) $ - $ (17)
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Pension Benefits Non-Pension Postretirement Benefits
December 31, 2020 December 31, 2019 December 31, 2020 December 31, 2019
U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans U.S.
Plans Non-U.S.
Plans
Amounts recognized in the Consolidated Balance Sheets consists of:
Noncurrent assets $ - $ 52 $ - $ 8 $ - $ - $ - $ -
Other current liabilities - (6) - (5) - (1) - (1)
Long-term pension and post employment benefit obligations (35) (236) (28) (208) - (11) - (12)
Accumulated other comprehensive loss - - - - - - - -
Net amounts recognized $ (35) $ (190) $ (28) $ (205) $ - $ (12) $ - $ (13)
Net amounts recognized - discontinued operations - (36) - (29) - - - -
Net amounts recognized - continued operations $ (35) $ (154) $ (28) $ (176) $ - $ (12) $ - $ (13)
Accumulated benefit obligation $ 232 $ 757 $ 225 $ 648
Accumulated benefit obligation for funded plans 232 525 225 446
Pension plans with underfunded or non-funded accumulated benefit obligations:
Aggregate projected benefit obligation(1)
$ 232 $ 258 $ 225 $ 224
Aggregate accumulated benefit obligation 232 250 225 216
Aggregate fair value of plan assets 197 16 197 13
Pension plans with projected benefit obligations in excess of plan assets:
Aggregate projected benefit obligation $ 232 $ 285 $ 225 $ 287
Aggregate fair value of plan assets 197 42 197 74
(1)Aggregate projected benefit obligation related to the Company’s Held for Sale Business was $36 at December 31, 2020 and is included in the table above with the Company’s continuing operations.
The foreign currency impact reflected in these rollforward tables are primarily for changes in the euro versus the U.S. dollar.
The Pension Protection Act of 2006 (the “2006 PPA”) provides for minimum funding levels on U.S. plans, and plans not meeting the minimum funding requirement may be subject to certain restrictions.
Following are the components of net pension and postretirement expense (benefit) recognized for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:
Pension Benefits
U.S. Plans
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Service cost $ 2 $ 2 $ 2 $ 3
Interest cost on projected benefit obligation 6 3 4 7
Expected return on assets (12) (7) (6) (14)
Unrealized actuarial loss(1)
11 - 1 11
Net expense (benefit) $ 7 $ (2) $ 1 $ 7
Non-U.S. Plans
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Service cost $ 18 $ 8 $ 7 $ 17
Interest cost on projected benefit obligation 6 4 4 10
Expected return on assets (13) (6) (6) (13)
Unrealized actuarial (gain) loss(1)
(2) 9 39 (26)
Net expense (benefit)(2)
$ 9 $ 15 $ 44 $ (12)
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Non-Pension Postretirement Benefits
U.S. Plans
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Interest cost on projected benefit obligation $ - $ - $ - $ -
Unrealized actuarial loss(1)
- - - -
Net (benefit) expense $ - $ - $ - $ -
Non-U.S. Plans
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Interest cost on projected benefit obligation $ 1 $ - $ - $ 1
Unrealized actuarial(gain) loss(1)
(1) (4) 4 2
Net (benefit) expense $ - $ (4) $ 4 $ 3
(1)Upon the application of fresh start accounting, the Company’s pension and other non-pension postretirement liabilities were remeasured as of the Predecessor period July 1, 2019. As a result, for the Predecessor period January 1, 2019 through July 1, 2019, total unrealized actuarial losses of $44 were recorded to “Reorganization, net” in the Consolidated Statements of Operations, $5 of which relate to the Company’s Held for Sale business.
(2)Net expense (benefit) related to the Company’s Held for Sale Business was $5, $<1, $6 and $1 for the year ended December 31, 2020, the Successor period from July 2, 2019 to December 31, 2019, the Predecessor period from January 1, 2019 through July 1, 2020 and the year ended December 31, 2018, respectively, and is included in the table above.
Determination of actuarial assumptions
The Company’s actuarial assumptions are determined based on the demographics of the population, target asset allocations for funded plans, regional economic trends, statutory requirements and other factors that could impact the benefit obligation and plan assets. For our European plans, most assumptions are set by country, as the plans within these countries have similar demographics, and are impacted by the same regional economic trends and statutory requirements.
The discount rates selected reflect the rate at which pension obligations could be effectively settled. The Company selects the discount rates based on cash flow models using the yields of high-grade corporate bonds or the local equivalent with maturities consistent with the Company’s anticipated cash flow projections. The Company’s pension and OPEB liabilities and related service and interest cost are calculated using a split-rate interest discounting methodology, whereby expected future cash flows related to these liabilities are discounted using multiple interest rates on a forward curve that correspond to the timing of the expected cash flows.
The expected rates of future compensation level increases are based on salary and wage trends in the chemical and other similar industries, as well as the Company’s specific long-term compensation targets by country. Input is obtained from the Company’s internal Human Resources group and from outside actuaries. These rates include components for wage rate inflation and merit increases.
The expected long-term rates of return on plan assets are determined based on the plans’ current and projected asset mix. To determine the expected overall long-term rate of return on assets, the Company takes into account the rates on long-term debt investments held within the portfolio, as well as expected trends in the equity markets, for plans including equity securities. Peer data and historical returns are reviewed and the Company consults with its actuaries, as well as the Plan’s investment advisors, to confirm that the Company’s assumptions are reasonable.
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The weighted average rates used to determine the benefit obligations were as follows for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, and the Predecessor period January 1, 2019 through July 1, 2019:
Pension Benefits
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
U.S.
Plans
Non-U.S.
Plans
U.S.
Plans
Non-U.S.
Plans
U.S.
Plans
Non-U.S.
Plans
Discount rate 2.2 % 0.8 % 3.1 % 1.2 % 3.3 % 1.3 %
Rate of increase in future compensation levels - 3.6 % - 3.4 % - 3.4 %
Non-Pension Postretirement Benefits
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
U.S.
Plans
Non-U.S.
Plans
U.S.
Plans
Non-U.S.
Plans
U.S.
Plans
Non-U.S.
Plans
Discount rate - % 4.6 % - % 5.2 % - % 6.9 %
Rate of increase in future compensation levels - - - - - -
The weighted average assumed health care cost trend rates are as follows:
Health care cost trend rate assumed for next year - % 6.8 % - % 5.7 % - % 6.2 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) - % 4.5 % - % 4.0 % - % 4.0 %
Year that the rate reaches the ultimate trend rate - 2040 - 2040 - 2040
The weighted average rates used to determine net periodic pension expense (benefit) were as follows for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:
Pension Benefits
U.S. Plans Non-U.S. Plans
Successor Predecessor Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018 December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Discount rate 3.1 % 3.3 % 4.1 % 3.5 % 1.2 % 1.3 % 1.9 % 1.9 %
Rate of increase in future compensation levels - - - - 3.4 % 3.4 % 2.3 % 2.4 %
Expected long-term rate of return on plan assets 6.6 % 6.6 % 6.6 % 6.7 % 3.1 % 2.6 % 3.1 % 3.1 %
Non-Pension Postretirement Benefits
U.S. Plans Non-U.S. Plans
Successor Predecessor Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018 December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Discount rate - % - % 4.1 % 3.2 % 5.2 % 6.9 % 6.3 % 5.3 %
Rate of increase in future compensation levels - - - - - - - -
Expected long-term rate of return on plan assets - - - - - - - -
A one-percentage-point change in the assumed health care cost trend rates would change the projected benefit obligation for international non-pension postretirement benefits by approximately $2 and service cost and interest cost by $1. The impact on U.S. plans is negligible.
Hexion Inc. | 102 | 2020 Form 10-K
Pension Investment Policies and Strategies
The Company’s investment strategy for the assets of its North American defined benefit pension plans is to maximize the long-term return on plan assets using a mix of equities, fixed income and alternative investments with a prudent level of risk. Risk tolerance is established through careful consideration of plan liabilities, plan funded status and expected timing of future cash flow requirements. The investment portfolio contains a diversified blend of equity, fixed-income and alternative investments. For U.S. plans, equity investments are also diversified across U.S. and international stocks, as well as growth, value and small and large capitalization investments, while the Company’s Canadian plan includes a blend of Canadian securities with U.S. and other foreign investments. The alternative investments are allocated in a diversified fund structure with exposure to a variety of hedge fund strategies. Investment risk and performance is measured and monitored on an ongoing basis through periodic investment portfolio reviews, annual liability measurements and periodic asset and liability studies. As plan funded status changes, adjustments to the diversified portfolio may be considered to reduce funded status volatility and better match the duration of plan liabilities.
The Company periodically reviews its target allocation of North American plan assets among the various asset classes. The targeted allocations are based on anticipated asset performance, discussions with investment professionals and on the projected timing of future benefit payments.
The Company observes local regulations and customs governing its European pension plans in determining asset allocations, which generally require a blended weight leaning toward more fixed income securities, including government bonds.
Actual Target 2020
2020 2019
Weighted average allocations of U.S. pension plan assets at December 31:
Equity securities 32 % 35 % 35 %
Debt securities 55 % 53 % 55 %
Cash, short-term investments and other 13 % 12 % 10 %
Total 100 % 100 % 100 %
Weighted average allocations of non-U.S. pension plan assets at December 31:
Equity securities 22 % 22 % 23 %
Debt securities 76 % 75 % 77 %
Cash, short-term investments and other 2 % 3 % - %
Total 100 % 100 % 100 %
Fair Value of Plan Assets
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:
•Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.
•Level 3: Unobservable inputs that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.
Certain investments measured at net asset value (“NAV”), as a practical expedient for fair value, have been excluded from the fair value hierarchy.
Hexion Inc. | 103 | 2020 Form 10-K
The following table presents U.S. pension plan investments measured at fair value on a recurring basis as of December 31, 2020 and 2019:
Fair Value Measurements Using
2020 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2) Unobserv-able
Inputs
(Level 3) Total Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2) Unobserv-able
Inputs
(Level 3) Total
Large cap equity funds (1)
$ - $ 35 $ - $ 35 $ - $ 37 $ - $ 37
Small/mid cap equity funds (1)
- 5 - 5 - 6 - 6
International equity funds (1)
- 25 - 25 - 27 - 27
Fixed income securities (1)
- 107 - 107 - 103 - 103
Cash equivalents (2)
- 2 - 2 - 2 - 2
$ - $ 174 $ - $ 174 $ - $ 175 $ - $ 175
Investments measured at fair value using net asset value as a practical expedient:
Other funds (3)
$ 23 $ 22
Total $ 197 $ 197
The following table presents non-U.S. pension plan investments measured at fair value on a recurring basis as of December 31, 2020 and 2019:
Fair Value Measurements Using
2020 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2) Unobserv-able
Inputs
(Level 3) Total Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2) Unobserv-able
Inputs
(Level 3) Total
Pooled insurance products with fixed income guarantee (1)
$ - $ 15 $ - $ 15 $ - $ 13 $ - $ 13
Cash equivalents (2)
- - - - - 1 - 1
$ - $ 15 $ - $ 15 $ - $ 14 $ - $ 14
Investments measured at fair value using net asset value as a practical expedient:
Other international equity funds (3)
$ 135 $ 108
Other fixed income securities (3)
464 361
Total $ 614 $ 483
(1)Level 2 equity and fixed income securities are primarily in pooled asset and mutual funds and are valued based on underlying net asset value multiplied by the number of shares held. The underlying asset values are based on observable inputs and quoted market prices.
(2)Cash equivalents represent investment in a collective short term investment fund, which is a cash sweep for uninvested cash that earns interest monthly. For these investments, book value is assumed to equal fair value due to the short duration of the investment term.
(3)Represents investments in commingled funds with exposure to a variety of hedge fund strategies, which are not publicly traded and have ongoing redemption restrictions. The Company’s interest in these investments is measured at net asset value per share as a practical expedient for fair value, which is derived from the underlying asset values in these funds, only some of which represent observable inputs and quoted market prices.
Projections of Plan Contributions and Benefit Payments
The Company expects to make contributions totaling $36 to its defined benefit pension plans in 2021.
Hexion Inc. | 104 | 2020 Form 10-K
Estimated future plan benefit payments as of December 31, 2020 are as follows:
Pension Benefits Non-Pension
Postretirement Benefits
Year U.S.
Plans
Non-U.S.
Plans U.S.
Plans
Non-U.S.
Plans
2021 $ 17 $ 16 $ - $ 1
2022 16 16 - -
2023 15 17 - -
2024 15 19 - -
2025 15 17 - -
2026-2030
64 118 - 2
Defined Contribution Plans
The Company sponsors a number of defined contribution plans for its associates, primarily in the U.S., Canada, Europe and in the Asia-Pacific region. Full-time associates are generally eligible to participate immediately and may make pre-tax and after-tax contributions subject to plan and statutory limitations. For certain plans, the Company has the option to make contributions above the match provided in the plan based on financial performance.
As previously discussed, U.S retirement income benefits are provided under the Company's defined contribution plan (the “401(k) Plan”). This plan allows eligible associates to make pre-tax contributions from 1% to 15% of eligible earnings for associates who meet the IRS definition of a highly compensated employee and up to 25% for all other associates up to the federal limits for qualified plans. Associates contributing to the 401(k) are eligible to receive matching contributions from the Company at 100% on contributions of up to 5% of eligible earnings. An additional matching contribution may be made if the Company achieves specified annual financial targets established at the beginning of each plan year. In addition, the Company makes an annual retirement contribution ranging from 3% to 7% of eligible compensation depending on years of benefit service. All associates who are actively employed on the last day of the year are eligible for the true-up match and annual retirement contribution, unless otherwise determined by collective bargaining agreements. Effective January 2, 2018, the 401(k) Plan added the option for eligible participants to make after-tax contributions to a Roth 401(k).
The Company incurred expense for contributions under its defined contribution plans of $14, $6, $7 and $17 during the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively.
Non-Qualified and Other Retirement Benefit Plans
The Company provides key executives in some locations with non-qualified benefit plans that provide participants with an opportunity to elect to defer compensation or to otherwise provide supplemental retirement benefits in cases where executives cannot fully participate in the defined benefit or defined contribution plans because of plan or local statutory limitations. Most of the Company's supplemental benefit plans are unfunded and benefits are paid from the general assets of the Company. The liabilities related to defined benefit supplemental benefits are included in the previously discussed defined benefit pension disclosures.
The Company maintains a non-qualified defined contribution plan (the “SERP”) that provides annual employer credits to eligible U.S. associates of 5% of eligible compensation above the IRS limit for qualified plans. The Company can also make discretionary credits under the SERP; however, no participant contributions are permitted. The account credits are made annually to an unfunded phantom account, in the following calendar year. Certain executives also previously earned benefits under U.S. non-qualified executive supplemental plans that were frozen prior to 2010.
The Company’s liability for these non-qualified benefit plans was $4 and $5 at December 31, 2020 and 2019, and is included in “Other long-term liabilities” in the Consolidated Balance Sheets.
The Company’s German subsidiaries offer a government subsidized early retirement program to eligible associates called Altersteilzeit or ATZ Plans. The German government provides a subsidy in certain cases where the participant is replaced with a qualifying candidate. The Company had liabilities for these arrangements of $3 and $2 at December 31, 2020 and 2019, respectively. The Company incurred expense for these plans of $1, less than $1, less than $1 and $1 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively.
Also included in the Consolidated Balance Sheets at both December 31, 2020 and 2019 are other post-employment benefit obligations relating to long-term disability and for liabilities relating to European jubilee benefit plans of $4.
Hexion Inc. | 105 | 2020 Form 10-K
16. Stock Based Compensation
Cancellation and Expiration of Outstanding Predecessor Equity Awards
As of the Effective Date, in conjunction with the Company’s emergence from Chapter 11, all outstanding unvested unit options and restricted deferred units of the Predecessor Company’s parent company, TopCo, were canceled, effective immediately (See Note 6 for more information). There was no financial statement impact as a result of these cancellations.
Successor Company Stock Based Awards
The following is a summary of the new stock based compensation plans issued after Emergence and their related outstanding shares as of December 31, 2020:
Plan Name Grant Date Shares Outstanding(1)
Plan Expiration Vesting Terms/Status Number of Shares Authorized
Hexion Holdings Corporation 2019 Omnibus Incentive Plan August 2029 7,635,389
Restricted Stock Units (“RSUs”) and Performance Stock Units (“PSUs”):
2019 Grants
RSUs September 2019 1,034,100 Time-vest ratably over 3 years, but must be employed on July 1, 2022 in order to receive shares; Accelerated vesting upon change in control.
PSUs September 2019 2,412,894 Performance based with market conditions: Step vest over 4 years based on a 20 consecutive trading-day volume weighted average price per share from $20 to $30 per share. PSUs that vest by June 30, 2022 will be settled in July 2022 and remaining PSUs that vest by June 30, 2023 will be settled in July 2023.
2020 Grants
RSUs March 2020 692,441 Time-vest ratably over 3 years; Accelerated vesting upon change in control.
PSUs March 2020 811,425 Performance based: 50% vest upon achievement of adjusted return on invested capital targets as of December 31, 2022. 50% vest upon achievement of Hexion Segment EBITDA Margin targets as of December 31, 2022. PSUs that vest will be settled in July 2023.
2020 Non-employee Grants
RSUs January 2020 73,332 Time-vest ratably over 3 years; Accelerated vesting upon change in control. Settled upon vesting.
RSUs August 2020 60,664 100% vest on June 1, 2021; Accelerated vesting upon change in control. RSUs that vest will be settled upon the date the non-employee director leaves board service.
(1)Shares outstanding includes shares awarded to associates related to the Held for Sale Business.
Summary of Plans
On August 8, 2019, the Board of Directors of Hexion Holdings approved the Hexion Holdings Corporation 2019 Omnibus Incentive Plan (the “2019 Incentive Plan”), whereby Hexion Holdings is reserving shares of Class B Common Stock, par value $0.01 per share, representing 10% of Hexion Holding’s fully diluted equity as of the date of approval of the 2019 Incentive Plan, for issuance to employees, directors, and other key service providers in connection with stock options, restricted stock units, performance-based stock units and other equity-based awards (such as performance stock units) to be awarded from time to time as the Board determines. The restricted and performance stock units are deemed to be equivalent to one share of common stock of Hexion Holdings. The awards contain restrictions on transferability and other typical terms and conditions.
Restricted Stock Units - Employee Grants
In September 2019, Hexion Holdings granted RSUs that time vest over three years with an aggregate grant date fair value of approximately $16. The fair value was determined using the estimated aggregate fair value of equity per share on the grant date. Compensation cost is recognized equally over the 3 year service period. For certain retirement eligible associates, the stock-based compensation cost is accelerated according to the plan documents. Upon vesting, RSUs are settled in shares at the end of the three year vesting period. As of December 31, 2020, a total of 344,700 RSUs had vested.
Hexion Inc. | 106 | 2020 Form 10-K
In March 2020, Hexion Holdings granted additional RSUs to certain employees that time vest over three years with an aggregate grant date fair value of approximately $11. The fair value was determined using the estimated aggregate fair value of equity per share on the grant date. Compensation cost is recognized equally over the 3 year service period. For certain retirement eligible associates, the stock-based compensation cost is accelerated according to the plan documents. Upon vesting, RSUs are settled in shares at the end of the three year vesting period. As of December 31, 2020, no RSUs had vested.
Restricted Stock Units - Director Grants
In January 2020, Hexion Holdings granted RSUs to certain non-employee directors that time vest over three years with an aggregate grant date fair value of approximately $2. The fair value was determined using the estimated aggregate fair value of equity per share on the grant date. Compensation cost is recognized equally over the 3 year service period. Upon vesting, RSUs are settled in shares. As of December 31, 2020, a total of 36,666 shares had vested and settled.
In August 2020, Hexion Holdings granted RSUs to certain non-employee directors that time vest over one year with an aggregate grant date fair value of approximately $1. The fair value was determined using the estimated aggregate fair value of equity per share on the grant date. Compensation cost is recognized equally over the 1 year service period. RSUs that vest are settled in shares upon the date the non-employee director leaves board service. As of December 31, 2020, no shares had vested.
Performance Stock Units
In September 2019, Hexion Holdings granted PSUs with market conditions with an aggregate grant date fair value of approximately $29. The fair value was estimated at the grant date using a Monte Carlo valuation method. The Monte Carlo valuation method requires the use of a range of assumptions that includes the risk-free interest rates of 1.49% to 1.87% and expected volatility rates ranged from 39% to 60%. The expected life assumption is not used in the Monte Carlo valuation method, but the output of the model indicated a weighted-average expected life of 3.8 years. The PSUs step vest over four years upon the achievement of the pre-established goals by the end of the fourth year of the term. PSUs that vest by June 30, 2022 will be settled in shares in July 2022 and remaining PSUs that vest by June 30, 2023 will be settled in shares by July 2023. As of December 31, 2020, the market conditions have not been met and no PSUs have vested. Compensation cost will be recognized over 3.8 years and adjusted accordingly as vesting conditions are met. For certain retirement eligible associates, the recognition of stock-based compensation cost is accelerated according to the plan documents.
In March 2020, Hexion Holdings granted PSUs with performance conditions with an aggregate grant date fair value of approximately $13. The fair value was determined using the estimated aggregate fair value of equity per share on the grant date. The PSUs vest upon achievement of the performance metrics. 50% of the PSUs vest upon achievement of an adjusted return on invested capital target as of December 31, 2022. 50% vest upon achievement of Hexion Segment EBITDA Margin target as of December 31, 2022, and will be settled in shares in July 2023. Compensation cost will be recognized when a performance condition is deemed probable and adjusted accordingly as vesting conditions are met. As of December 31, 2020, the performance conditions have not been deemed probable, thus no PSUs have vested and no compensation cost has been recorded.
The following is a summary of Company’s RSU and PSU plan activity for the year ended December 31, 2020:
Hexion Holdings Common RSUs Weighted Average Grant Date Fair Value Hexion Holdings Common PSUs Weighted Average Grant Date Fair Value
Nonvested at December 31, 2019
1,034,100 $ 15.37 2,412,894 $ 11.97
Units granted 882,422 $ 15.80 823,619 $ 15.80
Units forfeited (16,348) $ 15.80 (12,194) $ 15.80
Units vested (381,366) $ 15.41 - $ -
Nonvested at December 31, 2020(1)
1,518,808 $ 15.60 3,224,319 $ 12.93
(1)Nonvested shares include shares awarded to associates related to discontinued operations.
Financial Statement Impact
Although the 2019 Incentive Plan was issued by Hexion Holdings, the underlying share-based compensation cost represents compensation costs paid for by Hexion Holdings on Hexion’s behalf, as a result of the employees’ service to Hexion. The compensation costs for RSUs and PSUs are recorded over the requisite service period on a graded-vesting basis and over the derived service period, respectively.
Share-based compensation costs are recognized, net of actual forfeitures, over the requisite service period on a graded-vesting basis for RSUs. Stock-based compensation cost is recognized, net of forfeitures, over the requisite service period on a graded-vesting basis over the derived service period for PSUs. The Company adjusts compensation expense periodically for forfeitures. Stock based compensation costs are included in “Non-cash stock based compensation expense” on the Consolidated Statements of Cash Flows.
The Company recognized $17 and $8 share-based compensation costs for the year ended December 31, 2020 and the Successor period from July 2, 2019 through December 31, 2019, respectively. The amount of expense for associates related to discontinued operations was less than $1 for both the year ended December 31, 2020 and the Successor period from July 2, 2019 through December 31, 2019. There were no share-based compensation costs for the Predecessor period from January 1, 2019 through July 1, 2019, and year ended December 31, 2018, respectively. The amounts are included in “Selling, general and administrative expense” in the Consolidated Statements of Operations.
Hexion Inc. | 107 | 2020 Form 10-K
The Company’s Parent had 57,568,295 shares of common stock outstanding as of December 31, 2020.
17. Income Taxes
During 2018, the Company recognized income tax expense of $31, primarily as a result of income from certain foreign operations. In the United States, disallowed interest expense resulted in current year taxable income which utilized a net operating loss carryforward. The disallowed interest expense carryforward of $283 generated a deferred tax asset. The decrease in the valuation allowance due to the net operating loss utilization was offset by an increase in the valuation allowance recorded on the interest expense carryforward deferred tax asset. The Company had a Global Intangible Low Tax Income (“GILTI”) inclusion of $21, which was fully offset by our net operating loss. This further reduced our valuation allowance.
During the Predecessor period January 1, 2019 through July 1, 2019, the Predecessor Company recorded income tax expense of $40 for reorganization adjustments, primarily consisting of tax expense of $50 for the gain recognized between fair value and tax basis (the gain in Predecessor Company will be substantially offset by the Predecessor Company’s tax attributes, including net operating losses and previously disallowed interest expense). A tax benefit of $10 was recorded for the removal of a valuation allowance for certain foreign jurisdictions. Pursuant to the Plan, the Successor Company is obligated to indemnify the Predecessor Company for any tax related liabilities. The Predecessor Company recorded income tax expense of $201 in the Predecessor period, primarily related to the increase in deferred tax liabilities resulting from fresh start accounting.
The Predecessor Company’s U.S. net operating loss carryforward of $1,053 and certain state net operating loss carryforwards, along with other tax attributes, have been utilized or forfeited as a result of the taxable gain realized upon Emergence. Certain foreign net operating losses and other carryforwards of the Predecessor Company were forfeited upon Emergence.
Upon the Emergence, the Successor Company applied fresh start accounting (see Note 6 for more information regarding fresh start accounting) and therefore the deferred tax assets and liabilities were adjusted based on the revised U.S. GAAP financial statements. As a result of the step-up in U.S. GAAP basis in the Successor Company’s foreign assets without a corresponding step-up in the tax basis of the foreign assets, the Successor Company’s deferred tax liability increased. An Internal Revenue Code §338(h)(10) election was made to treat the Emergence as an asset sale for U.S. income tax purposes. As a result, the Emergence was treated as a deemed sale of assets of the Predecessor Company while the Successor Company received a step-up in U.S. tax basis to fair value. The Successor Company elected bonus depreciation on the stepped-up U.S. eligible fixed assets. The Successor Company elected to amortize the stepped-up basis of intangibles over a 15-year period and the Successor Company’s depreciation and amortization expense generated a U.S. net operating loss for both the tax years ended December 31, 2020 and 2019. The U.S. net operating loss will be carried forward indefinitely, but will be subject to an 80% limitation on U.S. taxable income starting in 2021.
During the Successor period July 2, 2019 through December 31, 2019, the Company recognized income tax benefit of $10, primarily as a result of losses from certain foreign operations of which the deferred tax asset created is not offset by a valuation allowance. Losses in the United States created a deferred tax asset which was completely offset by an increase to the valuation allowance. The Company recognized a GILTI inclusion of $5, which was fully offset by our net operating loss and further reduced our valuation allowance. As previously discussed above, the Company elected bonus depreciation in 2019.
Income tax expense detail for the Company for year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018 is as follows:
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Current:
Federal $ (14) $ (1) $ 36 $ (4)
State and local - 4 13 1
Foreign 22 1 11 25
Total current 8 4 60 22
Deferred:
Federal 3 9 (2) 1
State and local (1) 1 - -
Foreign 4 (24) 143 8
Total deferred 6 (14) 141 9
Income tax expense (benefit) (1)
$ 14 $ (10) $ 201 $ 31
(1)Excludes income tax expense of $1, $1, $21, and $9 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019, and the year ended December 31, 2018, respectively, related to the Held for Sale Business.
A reconciliation of the Company’s combined differences between income taxes computed at the federal statutory tax rate of 21% and the provisions for income taxes for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:
Hexion Inc. | 108 | 2020 Form 10-K
Successor Predecessor
December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Income tax (benefit) expense computed at federal statutory tax rate $ (31) $ (21) $ 622 $ (35)
State tax (benefit) expense, net of federal benefit (5) (2) 9 1
Foreign tax rate expense differential 1 2 33 13
Foreign source income subject to U.S. taxation - 3 1 2
Non-deductible losses and other expenses - - 5 9
Increase (decrease) in the taxes due to changes in valuation allowance 46 17 (433) 25
Additional (benefit) expense on foreign unrepatriated earnings (3) - - 1
Additional (benefit) expense for uncertain tax positions (4) - 44 15
Tax recognized in other comprehensive income - (1) (4) -
Changes in enacted tax laws and tax rates 6 - - -
Tax benefit for fresh start accounting and reorganization adjustments - - (68) -
Other decrease (increase) of deferred tax assets 4 (8) (8) -
Income tax expense (benefit)(1)
$ 14 $ (10) $ 201 $ 31
(1)Excludes income tax expense of $1, $1, $21, and $9 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019, and the year ended December 31, 2018, respectively, related to the Held for Sale Business.
The domestic and foreign components of the Company’s loss before income taxes for year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Domestic $ (138) $ (46) $ 2,754 $ (216)
Foreign (11) (58) 206 52
Total(1)
$ (149) $ (104) $ 2,960 $ (164)
(1)Excludes (loss) income before income taxes of $(70), $5, $155, and $38 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively, related to the Held for Sale Business.
The tax effects of significant temporary differences, net operating losses, interest expense limitation, and credit carryforwards, which comprise the Company’s deferred tax assets and liabilities at December 31, 2020 and 2019 are as follows:
December 31, 2020 December 31, 2019
Assets:
Non-pension post-employment $ 4 $ 4
Accrued and other expenses 61 97
Property, plant and equipment - 4
Loss, expense, and credit carryforwards 240 163
Intangible assets 11 -
Pension and postretirement benefit liabilities 47 14
Gross deferred tax assets 363 282
Valuation allowance (217) (122)
Net deferred tax asset 146 160
Liabilities:
Property, plant and equipment (227) (228)
Unrepatriated earnings of foreign subsidiaries (7) (10)
Intangible assets (66) (65)
Gross deferred tax liabilities (300) (303)
Net deferred tax liability(1)
$ (154) $ (143)
(1)Excludes net deferred tax liability of $20 and $15 for the years ended December 31, 2020 and 2019, respectively, related to the Held for Sale Business.
Hexion Inc. | 109 | 2020 Form 10-K
The following table summarizes the presentation of the Company’s net deferred tax liability in the Consolidated Balance Sheets at December 31, 2020 and 2019:
December 31, 2020 December 31, 2019
Assets:
Long-term deferred income taxes $ 7 $ 6
Liabilities:
Long-term deferred income taxes (161) (149)
Net deferred tax liability(1)
$ (154) $ (143)
(1)Excludes net deferred tax liability of $20 and $15 for the years ended December 31, 2020 and 2019 respectively, related to the Held for Sale Business.
Hexion Holdings, and its direct subsidiary Hexion Intermediate Holding 1, Inc. and its direct subsidiary Hexion Intermediate Holding 2, Inc. (the “Eligible Subsidiaries”) are not members of the registrant. Hexion Holdings and its Eligible Subsidiaries file a consolidated U.S. Federal income tax return. Therefore, the Company can utilize Hexion Holdings and its Eligible Subsidiaries’ tax attributes or vice versa.
As of December 31, 2020, the Company had a $217 valuation allowance against its net deferred tax assets that management believes, more likely than not, will not be realized. The Company’s deferred tax assets include federal, state and foreign net operating loss carryforwards as well as an interest expense carryforward. The federal net operating loss carryforwards available are $636, which excludes the cumulative income from Hexion Holdings and its Eligible Subsidiaries, as described above. The federal net operating loss will be carried forward indefinitely, but beginning in 2021, will be subject to an 80% limitation on U.S. taxable income. A valuation allowance has been recorded against these loss carryforwards. The Company has provided a valuation allowance against its state deferred tax assets, primarily related to state net operating loss carryforwards of $19. A valuation allowance of $97 has been recorded against a portion of foreign net operating loss carryforwards, primarily in the Netherlands.
The Company continues to not assert indefinite reinvestment of undistributed earnings of its foreign subsidiaries outside of the United States. Accordingly, a related deferred tax liability of $7 is recorded.
The following table summarizes the changes in the valuation allowance for the year ended December 31, 2020, and the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:
Balance at
Beginning
of Period Changes in
Related Gross
Deferred Tax
Assets/Liabilities Charge / (Release) Balance at
End of
Period
Valuation allowance on Deferred tax assets:
Predecessor
Year ended December 31, 2018 498 - 27 525
January 1, 2019 through July 1, 2019 525 - (427) 98
Successor
July 2, 2019 through December 31, 2019 98 - 24 122
Year ended December 31, 2020(1)
122 41 54 217
(1)The changes in related gross deferred tax assets/liabilities is related to the application of discontinued operations accounting to asset sale entities for tax purposes.
For 2020, previous and current losses in the U.S. and in certain foreign operations for recent periods continue to provide sufficient negative evidence requiring a valuation allowance against the net federal, state, and certain foreign deferred tax assets.
Examination of Tax Returns
The Company conducts business globally and, as a result, certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, the Company is subject to examinations by taxing authorities throughout the world, including major jurisdictions such as the United States, Brazil, Canada, China, Germany, Italy, Netherlands and the United Kingdom.
With minor exceptions, the Company’s closed tax years for major jurisdictions are years prior to: 2016 for United States, 2013 for Brazil, 2010 for Canada, 2015 for China, 2016 for Germany, 2016 for Italy, 2010 for Netherlands and 2017 for the United Kingdom.
The Company continuously reviews issues that are raised from ongoing examinations and open tax years to evaluate the adequacy of its liabilities. As the various taxing authorities continue with their audit/examination process, the Company will adjust its reserves accordingly to reflect the current status and settlements.
Hexion Inc. | 110 | 2020 Form 10-K
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019
Balance at beginning of period $ 130 $ 133 $ 94
Additions based on tax positions related to the current year 4 2 41
Additions for tax positions of prior years 14 - 5
Reductions for tax positions of prior years (20) (3) (6)
Settlements (1) (4) -
Foreign currency translation 2 2 (1)
Balance at end of period(1)
$ 129 $ 130 $ 133
(1)Includes unrecognized tax benefits of $6, $5, and $11 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019 and the Predecessor period January 1, 2019 through July 1, 2019 associated with the Held for Sale business.
During the year ended December 31, 2020 and the Successor period July 2, 2019 through December 31, 2019, the Company decreased the amount of its unrecognized tax benefits, including its accrual for interest and penalties, by $10 and $1, respectively, primarily as a result of decreases in the unrecognized tax benefit from negotiations with foreign jurisdictions, lapses of statute of limitations and settlements, offset by increases of unrecognized tax benefits for various intercompany transactions. During the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, the Company recognized approximately $9, $2, $3 and $3, respectively, in interest and penalties. The Company had approximately $56, $56, and $54 accrued for the payment of interest and penalties at December 31, 2020 and 2019, and July 1, 2019, respectively.
$129 of unrecognized tax benefits, if recognized, would affect the effective tax rate; however, a portion of the unrecognized tax benefit would be in the form of a net operating loss carryforward, which would be subject to a full valuation allowance. The Company anticipates recognizing less than $15 of the total amount of unrecognized tax benefits within the next 12 months as a result of lapses of statute of limitations, negotiations with foreign jurisdictions, settlements, and completion of audit examinations.
18. Dispositions
ATG
On January 8, 2018, the Company completed the sale of its Additives Technology Group business (“ATG”) to MÜNZING CHEMIE GmbH. ATG was previously included within the Company’s Forest Products Resins segment and includes manufacturing sites located in Somersby, Australia and Sungai Petani, Malaysia. The ATG business produced a range of specialty chemical materials for the engineered wood, paper impregnation and laminating industries, including catalysts, release agents and wetting agents.
The Company received gross cash consideration for the ATG business in the amount of $49, which was used for general corporate purposes. The Company recorded a gain on this disposition of $44 which is included in “Gain on dispositions” in the Predecessor Company’s Consolidated Statements of Operations for the year ended December 31, 2018.
19. Summarized Financial Information of Unconsolidated Affiliates
Summarized financial information of the Company’s unconsolidated affiliates, which are listed below, as of December 31, 2020 and 2019 and for the years ended December 31, 2020, and 2019 is as follows:
•Momentive UV Coatings (Shanghai) Co., Ltd
•Hexion Australia Pty Ltd
•MicroBlend Columbia S.A.S.
Excluded from the table below is the summarized financial information for the Russia JV since it is part of the Held for Sale Business (See Note 4).
December 31, 2020 December 31, 2019
Current assets $ 38 $ 32
Non-current assets 7 6
Current liabilities 20 10
Non-current liabilities - -
Hexion Inc. | 111 | 2020 Form 10-K
Successor Predecessor
December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Net sales $ 59 $ 33 $ 39 $ 88
Gross profit 16 8 9 22
Pre-tax income 8 3 4 13
Net income 6 2 3 9
20. Segment and Geographic Information
Realignment of Reportable Segments in 2020
As part of the Company’s continuing efforts to drive growth and greater operating efficiencies, in January 2020, the Company changed its reporting segments to align around its two growth platforms: (i) Adhesives and (ii) Coatings and Composites. At December 31, 2020, the Company’s continuing operations has three reportable segments which consist of the following businesses:
•Adhesives: these businesses focus on the global adhesives market. They include the Company’s global wood adhesives business, which now also includes the oilfield technologies group, including: forest products resin assets in North America, Latin America, Australia and New Zealand; and global formaldehyde.
•Coatings and Composites: these businesses focus on the global coatings and composites market. They include the Company’s base and specialty epoxy resins and Versatic™ Acids and Derivatives businesses.
•Corporate and Other: primarily corporate general and administrative expenses that are not allocated to the other segments, such as
shared service and administrative functions and foreign exchange gains and losses.
The Company has recast its Net Sales and Segment EBITDA (as defined below) for the Successor period July 2, 2019 through December 31, 2019 and for the Predecessor periods July 1, 2019 and January 1, 2019 through July 1, 2019 to reflect the new reportable segments.
Reportable Segments
Following are net sales, Segment EBITDA and other financial information from continuing operations by reportable segment. Segment EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items and other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the board of directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is primarily corporate general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions and foreign exchange gains and losses not allocated to continuing segments.
Net Sales(1):
Following is continuing operations revenue by reportable segment. Product sales within each reportable segment share economically similar risks. These risks include general economic and industrial conditions, competitive pricing pressures and the Company’s ability to pass on fluctuations in raw material prices to its customers. A substantial number of the Company’s raw material inputs are petroleum-based and their prices fluctuate with the price of oil. Due to differing regional industrial and economic conditions, the geographic distribution of revenue may impact the amount, timing and uncertainty of revenue and cash flows from contracts with customers.
Successor Predecessor
December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Adhesives $ 1,188 $ 693 $ 761 $ 1,641
Coatings and Composites 1,322 630 720 1,496
Total $ 2,510 $ 1,323 $ 1,481 $ 3,137
(1) Intersegment sales are not significant and, as such, are eliminated within the selling segment.
Hexion Inc. | 112 | 2020 Form 10-K
Segment EBITDA:
Successor Predecessor
December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Adhesives(1)
$ 214 $ 116 $ 135 $ 252
Coatings and Composites(2)
151 60 96 200
Corporate and Other (71) (37) (30) (71)
Total $ 294 $ 139 $ 201 $ 381
(1) Included in Adhesives Segment EBITDA are “Earnings from unconsolidated entities, net of taxes” of less than $1 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019 and the Predecessor Period January 1, 2019 through July 1, 2019 and $1 for the Predecessor year ended December 31, 2018.
(2) Included in Coatings and Composites Segment EBITDA are “Earnings from unconsolidated entities, net of taxes” of $2, $2, $1 and $3 for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, respectively.
Depreciation and Amortization Expense:
Successor Predecessor
December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Adhesives (1)
$ 97 $ 47 $ 21 $ 50
Coatings and Composites 90 44 20 44
Corporate and Other 4 2 2 4
Total $ 191 $ 93 $ 43 $ 98
(1) Includes accelerated depreciation of $2 and $4 for the years ended December 31, 2020 and 2018. There was no accelerated depreciation in either the Successor period July 2, 2019 through December 31, 2019 or in the Predecessor period January 1, 2019 through July 1, 2019.
Total Assets(1):
December 31, 2020 December 31, 2019
Adhesives $ 2,202 $ 2,374
Coatings and Composites 1,404 1,371
Corporate and Other 396 401
Total $ 4,002 $ 4,146
(1)Includes assets held for sale at December 31, 2020 and 2019.
Capital Expenditures(1):
Successor Predecessor
December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Adhesives $ 62 $ 21 $ 18 $ 35
Coatings and Composites 43 22 22 43
Corporate and Other 3 4 1 3
Total $ 108 $ 47 $ 41 $ 81
(1) Includes capitalized interest costs that are incurred during the construction of property and equipment.
Hexion Inc. | 113 | 2020 Form 10-K
Geographic Information
Net Sales(1):
Successor Predecessor
December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
United States $ 1,142 $ 617 $ 693 $ 1,449
Netherlands 523 240 308 652
Canada 278 153 154 362
China 259 121 121 229
Brazil 123 83 91 194
Other international 185 109 114 251
Total $ 2,510 $ 1,323 $ 1,481 $ 3,137
(1) Sales are attributed to the country in which the individual business locations reside.
Following is net sales by reportable segment disaggregated by geographic region(1):
Successor
December 31, 2020 July 2, 2019 through December 31, 2019
Adhesives Coatings and Composites Total Adhesives Coatings and Composites Total
North America $ 910 $ 510 $ 1,420 $ 517 $ 255 $ 772
Europe 20 521 541 12 236 248
Asia Pacific 124 291 415 69 139 208
Latin America 134 - 134 95 - 95
Total $ 1,188 $ 1,322 $ 2,510 $ 693 $ 630 $ 1,323
Predecessor
January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
Adhesives Coatings and Composites Total Adhesives Coatings and Composites Total
North America $ 562 $ 286 $ 848 $ 1,215 $ 596 $ 1,811
Europe 15 305 320 $ 37 $ 644 681
Asia Pacific 81 129 210 $ 170 $ 254 424
Latin America 103 - 103 $ 219 $ 2 221
Total $ 761 $ 720 $ 1,481 $ 1,641 $ 1,496 $ 3,137
(1) Intersegment sales are not significant and, as such, are eliminated within the selling segment.
Long-Lived Assets(1):
December 31, 2020 December 31, 2019
United States $ 1,520 $ 1,605
Netherlands 556 526
Brazil 79 105
Canada 113 116
Other international 234 218
Total $ 2,502 $ 2,570
(1)Long-lived assets consist of property, plant and equipment, net; goodwill; and other intangible assets, net.
Hexion Inc. | 114 | 2020 Form 10-K
Reconciliation of Net Loss to Segment EBITDA:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Reconciliation:
Net (loss) income attributable to Hexion Inc. $ (230) $ (89) $ 2,894 $ (162)
Add: Net income (loss) attributable to noncontrolling interest - 1 1 (1)
Less: Net (loss) income from discontinued operations (69) 4 135 28
Net (loss) income from continued operations (161) (92) 2,760 (191)
Income tax expense (benefit) 14 (10) 201 31
Interest expense, net 100 55 89 365
Depreciation and amortization (1)
191 93 43 98
EBITDA 144 46 3,093 303
Adjustments to arrive at Segment EBITDA:
Asset impairments and write-downs $ 16 $ - $ - $ 32
Business realignment costs (2)
69 22 14 27
Realized and unrealized foreign currency losses (gains) - 4 (7) 28
Gain on dispositions - - - (44)
Unrealized losses (gains) on pension and OPEB plan liabilities 4 5 - (13)
Transaction costs (3)
6 11 26 13
Reorganization items, net (4)
- - (2,943) -
Non-cash impact of inventory step-up(5)
- 27 (27) -
Accelerated deferred revenue (6)
- - 18 -
Other non-cash items (7)
43 10 9 14
Other (8)
12 14 18 21
Total adjustments 150 93 (2,892) 78
Segment EBITDA $ 294 $ 139 $ 201 $ 381
Segment EBITDA:
Adhesives 214 116 135 252
Coatings and Composites 151 60 96 200
Corporate and Other (71) (37) (30) (71)
Total $ 294 $ 139 $ 201 $ 381
(1)For the year ended December 31, 2020 and 2018 accelerated depreciation of $2 and $4 has been included in “Depreciation and amortization.” There was no accelerated deprecation in either the Successor year ended December 31, 2019 or in the Predecessor period January 1, 2019 through July 1, 2019.
(2)Business realignment costs for the Successor and Predecessor periods below included:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Severance costs $ 16 $ 9 $ 8 $ 9
In-process facility rationalizations 11 5 3 11
Contractual costs from exited business 8 - - -
Business services implementation 22 - - -
Legacy environmental reserves 9 7 1 5
Other 3 1 2 2
(a) The Company had $8 of severance liabilities accrued within “Other current liabilities” on the Consolidated Balance Sheets at both December 31, 2020 and 2019. The Company expects the amounts associated with these severance liabilities to be paid over the next 12 months.
(3)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 and $23, respectively, of certain professional fees and other expenses related to the Company’s Chapter 11 proceedings.
(4)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.
Hexion Inc. | 115 | 2020 Form 10-K
(5)Represents $27 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.
(6)For the Predecessor period from January 1, 2019 through July 1, 2019, $18 of deferred revenue was accelerated on July 1 as part of Fresh Start accounting.
(7)Other non-cash items for the Successor and Predecessor periods presented below included:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Fixed asset write-offs $ 13 $ 6 $ 3 $ 6
Stock-based compensation costs 17 8 - -
Long-term retention programs 9 (2) 5 8
One-time capitalized variance impact of inventory fresh start step-up - (4) - -
Other 4 2 1 -
(8)Other for Successor and Predecessor periods presented below included:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through
December 31, 2019 January 1, 2019 through
July 1, 2019 Year Ended December 31, 2018
Legacy and other non-recurring items $ 8 $ 7 $ 3 $ 7
IT outage (recoveries) costs, net (4) - 9 -
Financing fees and other 8 7 6 14
21. Changes in Accumulated Other Comprehensive Loss
Following is a summary of changes in “Accumulated other comprehensive loss” for December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period of January 1, 2019 through July 1, 2019 and the year ended December 31, 2018:
Defined Benefit Pension and Postretirement Plans Foreign Currency Translation Adjustments Cash Flow Hedge Total
Predecessor
Balance at December 31, 2018
$ (1) $ (17) $ - $ (18)
Change in value - (8) - (8)
Elimination of Predecessor Company accumulated other comprehensive loss 1 25 - 26
Balance at July 1, 2019
$ - $ - $ - $ -
Successor
Balance at July 2, 2019 $ - $ - $ - $ -
Change in value - (3) 2 (1)
Balance at December 31, 2019
$ - $ (3) $ 2 $ (1)
Change in value - (8) (18) (26)
Balance at December 31, 2020
$ - $ (11) $ (16) $ (27)
Hexion Inc. | 116 | 2020 Form 10-K
22. Selected Unaudited Quarterly Financial Data
Condensed Consolidated Statements of Operations
Successor
Three Months Ended December 31, 2020 Three Months Ended September 30, 2020
(as revised) (1)
Three Months Ended June 30, 2020 Three Months Ended March 31, 2020
Net sales $ 655 $ 634 $ 534 $ 687
Operating (loss) income (10) 8 (28) (34)
Net (loss) income from continuing operations, net of taxes (37) (26) (36) (62)
Net income (loss) from discontinued operations, net of taxes 2 (68) (6) 3
Net loss $ (35) $ (94) $ (42) $ (59)
(1) “Net income (loss) from discontinued operations” and “Net loss” for the three months ended September 30, 2020 includes a revision of approximately $8 of income to correct an overstatement of expense in previously issued interim financial statements. See below for additional information.
Successor
Predecessor
Three Months Ended December 31, 2019
July 2, 2019 through September 30, 2019
July 1, 2019(1)
Three Months Ended June 30, 2019(2)
Three Months Ended March 31, 2019
Net sales $ 630 $ 693 $ - $ 750 $ 731
Operating (loss) income (30) (18) - 40 27
Net (loss) income from continuing operations, net of taxes (48) (44) 2,935 (118) (57)
Net income from discontinued operations, net of taxes 3 1 119 10 6
Net (loss) income (45) (43) 3,054 (108) (51)
Net income attributable to noncontrolling interest (1) - - - (1)
Net (loss) income attributable to Hexion Inc. $ (46) $ (43) $ 3,054 $ (108) $ (52)
(1) During the Emergence on July 1, 2019, the Predecessor recognized $3,126 of reorganization adjustments, which relate to gains on the settlement of liabilities under the Plan, offset by the incremental costs incurred directly as a result of the Bankruptcy Petitions and the net impact of fresh start accounting adjustments, are classified as “Reorganization items, net” in the Consolidated Statements of Operations (see Note 6 and Note 7 for more information).
(2) During the three months ended June 30, 2019, the Predecessor recognized $156 of incremental costs directly as a result of Bankruptcy Petitions. These costs are classified as “Reorganization items, net” in the Consolidated Statements of Operations (see Note 6 and Note 7 for more information).
In the fourth quarter 2020, we identified certain errors within our condensed consolidated financial statements for the three and nine months ended September 30, 2020:
-Approximately $13 associated with an insurance premium financing arrangement was incorrectly disclosed as a non-cash financing activity but should have been classified as an operating cash outflow from continuing operations and financing cash inflow;
-“Net cash used in operating activities from continuing operations” was overstated by approximately $13 and “Net cash (used in) provided by operating activities from discontinued operations” was understated by approximately $13 due to activity within “Other assets, current and non-current” being incorrectly classified; and
-The impairment charge recognized with respect to our Held for Sale Business was overstated by approximately $8 which also resulted in an understatement of the Assets Held for Sale as of September 30, 2020.
Based upon quantitative and qualitative assessments, we have determined that these adjustments were not material to the previously issued interim financial statements. The impacts to the previously issued interim financial statements will be revised in our Form 10-Q filing for the quarterly period ended September 30, 2021 and are shown in the tables below.
Hexion Inc. | 117 | 2020 Form 10-K
Condensed Consolidated Statement of Cash Flows (Nine Months Ended September 30, 2020) (unaudited)
Line Item As Previously Reported Adjustments As Revised
Net (loss) income $ (203) $ 8 $ (195)
(Loss) income from discontinued operations, net of taxes (79) 8 (71)
Other assets, current and non-current (1) (26) (27)
Net cash (used in) provided by operating activities from continuing operations (11) (26) (37)
Net cash (used in) provided by operating activities from discontinued operations (1) 13 12
Net cash (used in) provided by operating activities $ (12) $ (13) $ (25)
Net short-term debt repayments $ (25) $ 13 $ (12)
Net cash provided by (used in) financing activities $ 7 $ 13 $ 20
Condensed Consolidated Statement of Operations (Three Months Ended September 30, 2020) (unaudited)
Line Item As Previously Reported Adjustment (1)
As Revised
(Loss) income from discontinued operations, net of taxes $ (76) $ 8 $ (68)
Net (loss) income (102) 8 (94)
Net (loss) income attributable to Hexion Inc. (102) 8 (94)
Condensed Consolidated Statement of Operations (Nine Months Ended September 30, 2020) (unaudited)
Line Item As Previously Reported Adjustment (1)
As Revised
(Loss) income from discontinued operations, net of taxes $ (79) $ 8 $ (71)
Net (loss) income (203) 8 (195)
Net (loss) income attributable to Hexion Inc. (203) 8 (195)
(1) The $8 adjustment summarized above impacts the “Asset impairments” caption within the financial results table in the Discontinued Operations footnote. The adjustment also impacts “Comprehensive loss” and “Accumulated deficit.”
Hexion Inc. | 118 | 2020 Form 10-K
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Hexion Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Hexion Inc. and its subsidiaries (Successor) (the “Company”) as of December 31, 2020 and 2019, and the related consolidated statements of operations, of comprehensive (loss) income, of equity (deficit) and of cash flows for the year ended December 31, 2020 and for the period from July 2, 2019 through December 31, 2019, including the related notes and schedule of valuation and qualifying accounts for the year ended December 31, 2020 and for the period from July 2, 2019 through December 31, 2019 listed in the index appearing under Item 8 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the year ended December 31, 2020 and for the period from July 2, 2019 through December 31, 2019 in conformity with accounting principles generally accepted in the United States of America.
Basis of Accounting
As discussed in Note 5 to the consolidated financial statements, the United States Bankruptcy Court for the district of Delaware confirmed the Company's Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the "plan") on June 25, 2019. Confirmation of the plan resulted in the discharge of all claims against the Company that arose before April 1, 2019 and terminates all rights and interests of equity security holders as provided for in the plan. The plan was substantially consummated on July 1, 2019 and the Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting as of July 1, 2019.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessments - Forest Products and Versatics Reporting Units
As described in Note 2 to the consolidated financial statements, the Company’s consolidated goodwill balance from continuing operations was $164 million as of December 31, 2020, including $127 million related to the Forest Products (“FPD”) reporting unit and $36 million related to the Versatics reporting unit. Management tests goodwill annually for impairment of value or more frequently when potential impairment triggering events are present. Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit to its carrying value. Management uses a weighted market and income approach to estimate the fair value of its reporting units. Management’s market approach is based on the EBITDA (earnings before interest, income taxes, depreciation and amortization) multiple technique. Management’s income approach is based on a discounted cash flow model. The key assumptions and estimates utilized in the market and income approaches primarily include market multiples, discount rates, and future levels of revenue growth and operating margins.
Hexion Inc. | 119 | 2020 Form 10-K
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessments of the FPD and Versatics reporting units is a critical audit matter are (i) the significant judgment by management when determining the fair value estimates of the reporting units; (ii) the high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating the significant assumptions used in management’s fair value estimates related to market multiples, discount rates, and future levels of revenue growth and operating margins; and (iii) the audit effort involved in the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included, among others, (i) testing management’s process for determining the fair value estimates of the FPD and Versatics reporting units; (ii) evaluating the appropriateness of the weighted market and income approaches; (iii) testing the completeness and accuracy of the underlying data used in the market and income approaches; and (iv) evaluating the reasonableness of the significant assumptions used by management related to market multiples, discount rates, and future levels of revenue growth and operating margins. Evaluating management’s assumptions related to the future levels of revenue growth and operating margins involved evaluating whether the assumptions were reasonable considering (i) current and past performance of the reporting units; (ii) the consistency with external market and industry data; and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the weighted market and income approaches and (ii) the reasonableness of significant assumptions related to the market multiples and the discount rates.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
March 10, 2021
We have served as the Company's auditor since 2005.
Hexion Inc. | 120 | 2020 Form 10-K
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholder of Hexion Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of operations, of comprehensive (loss) income, of equity (deficit) and of cash flows of Hexion Inc. and its subsidiaries (Predecessor) (the “Company”) for the period from January 1, 2019 through July 1, 2019 and for the year ended December 31, 2018, including the related notes and schedule of valuation and qualifying accounts for the period from January 1, 2019 through July 1, 2019 and for the year ended December 31, 2018 listed in the index appearing under Item 8 (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the results of the Company’s operations and its cash flows for the period from January 1, 2019 through July 1, 2019 and for the year ended December 31, 2018 in conformity with accounting principles generally accepted in the United States of America.
Basis of Accounting
As discussed in Note 5 to the consolidated financial statements, the Company, Hexion Holdings LLC, Hexion LLC and certain of the Company’s subsidiaries filed petitions on April 1, 2019 with the United States Bankruptcy Court for the district of Delaware for reorganization under the provisions of Chapter 11 of the Bankruptcy Code. The Company’s Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 was substantially consummated on July 1, 2019 and the Company emerged from bankruptcy. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting.
Changes in Accounting Principles
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits of these consolidated financial statements in accordance with the standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Columbus, Ohio
March 3, 2020, except for the effects of discontinued operations discussed in Note 4 and the change in composition of reportable segments discussed in Note 20 to the consolidated financial statements, as to which the date is March 10, 2021
We have served as the Company's auditor since 2005.
Hexion Inc. | 121 | 2020 Form 10-K
Schedule II - Valuation and Qualifying Accounts
Description Balance at
Beginning
of Period Additions Deductions(2)
Balance at
End of
Period
Charged
to cost and
expenses(1)
Charged
to other
accounts
Allowance for Doubtful Accounts:
Successor
Year Ended December 31, 2020
$ 3 $ 1 $ - $ (1) $ 3
Period from July 2, 2019 through December 31, 2019 - 5 - (2) 3
Predecessor
Period from January 1, 2019 through July 1, 2019 $ 16 $ - $ - $ (16) $ -
Year Ended December 31, 2018
19 - - (3) 16
(1)Includes the impact of foreign currency translation.
(2)Deductions for the Predecessor period January 1, 2019 through July 1, 2019 include the elimination of the predecessor allowance for doubtful accounts in conjunction with the application of fresh start accounting as described in Note 6 in Item 8 of Part II of this Annual Report on Form 10-K.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on Form 10-K, we, under the supervision and with the participation of our Disclosure Committee and our management, including our President and Chief Executive Officer and our Executive Vice President and Chief Financial Officer, carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as such term is defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, our President and Chief Executive Officer, and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2020.
Management’s Annual Report on Internal Control Over Financial Reporting
We are responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
We have assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework (2013). Based on our assessment, we have concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based on those criteria.
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2020, we continued to transition certain of our information technology, procurement administration, accounting and finance functions to our new third party business services partner. We expect to be fully transitioned in early 2021. No other changes occurred in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
ITEM 9B - OTHER INFORMATION
None.
Hexion Inc. | 122 | 2020 Form 10-K
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors, Executive Officers, Promoters and Control Persons
The supervision of our management and the general course of the Company’s affairs and business operations is entrusted to the Board of Directors of our indirect parent, Hexion Holdings.
Set forth below are the names, ages and current positions of our executive officers and the members of the Hexion Holdings Board of Directors as of March 1, 2021.
Name Age Position
Craig A. Rogerson 64 Director, Chairman, President and Chief Executive Officer
Patrick J. Bartels 45 Director
Jeffrey D. Benjamin 59 Director
James N. Chapman 58 Director
Joaquin Delgado 61 Director
Carol S. Eicher 62 Director
Michael J. Shannon 61 Director
John K. Wulff 72 Director
Stephen D. Newlin 68 Director
George F. Knight 64 Executive Vice President and Chief Financial Officer
Douglas A. Johns 63 Executive Vice President and General Counsel
John P. Auletto 55 Executive Vice President - Human Resources
Nathan E. Fisher 55 Executive Vice President - Procurement
Matthew A. Sokol 48 Executive Vice President - Chief Administrative Officer
Paul G. Barletta 62 Executive Vice President - Operations
Ann Frederix 56 Senior Vice President & General Manager, Global Epoxies
Mark Alness 66 Senior Vice President, Global Resins
Craig A. Rogerson was elected Chairman, President and Chief Executive Officer and a director of the Company effective July 9, 2017 and of Hexion Holdings Corporation in July 2019. He served as Chairman, President and Chief Executive Officer of Chemtura Corporation from December 2008 to April 2017. He was President, Chief Executive Officer and Director of Hercules Incorporated from December 2003 to November 2008. Mr. Rogerson joined Hercules in 1979 and served in a number of management positions, including President of the FiberVisions and Pinova Divisions, Vice President of Global Procurement and Chief Operating Officer. He was President and Chief Executive Officer of Wacker Silicones Corporation from 1997-2000. In May 2000, he rejoined Hercules and became President of its BetzDearborn division in August 2000. Mr. Rogerson is an independent Chair of the board of PPL Corporation and serves on the boards of the American Chemistry Council, the Society of Chemical Industry, and the Pancreatic Cancer Action Network. He also serves on the Alumni board of the Michigan State University College of Engineering and on the Advisory board of the MSU Chemical Engineering & Materials Science College. For Hexion Holdings Corporation, he serves on the Listing Committee.
Patrick J. Bartels is the Managing Member of Redan Advisors LLC, a firm that provides fiduciary services, including board of director representation and strategic planning advisory services for domestic and international public and private business entities. Prior to founding Redan Advisors LLC, Mr. Bartels was a senior investment professional with 20 years of experience. His professional experience includes investing in complex financial restructurings and process-intensive situations in North America, Asia and Europe in a broad universe of industries and he has served as a director on numerous public and private boards of directors. Mr. Bartels currently serves on the board of directors of Arch Resources, Inc. and Monitronics International, Inc. From 2002 to December 2018, Mr. Bartels served as a Managing Principal at Monarch Alternative Capital LP, a private investment firm that focused primarily on event-driven credit opportunities. Prior to Monarch, he served as Research Analyst for high yield investments at INVESCO, where he analyzed primary and secondary debt offerings of companies in various industries. Mr. Bartels began his career at Pricewaterhouse Coopers LLP, where he was a Certified Public Accountant. He holds the Chartered Financial Analyst designation. For Hexion Holdings Corporation, he serves on the Audit, Listing and Nominating & Corporate Governance Committees.
Jeffrey D. Benjamin has been Senior Advisor to Cyrus Capital Partners, L.P. from 2008 to the present. He is currently Chairman of A-Mark Precious Metals, Inc. since 2014, and he has been on the American Airlines Group Inc. board since 2013. He has also been on the board of Rackspace Technology Inc. since 2016. Past Directorships and Committees include Chemtura Corp., Caesar’s Entertainment Corp., Exco Resources, Inc. (Chairman), and Spectrum Group International. Private Directorships consist of ImOn Communications LLC (Chairman), Involta LLC and Shutterfly, Inc. He has executive leadership experience in the investment industry, including UBS Securities LLC and Salomon Brothers Inc. For Hexion Holdings Corporation, he is Lead Director, Chair of the Compensation Committee and serves on the Audit and Listing Committees.
Hexion Inc. | 123 | 2020 Form 10-K
James N. Chapman is a non-executive Advisory Director of SkyWorks Capital, LLC and serves as a member of the Board of Directors of Arch Resources, Inc. (NYSE: ARCH), California Resources Corporation (NYSE: CRC) and Denbury, Inc. (NYSE: DEN) as well as Eco-Bat Technologies, LLC and Neenah Enterprises, Inc. Previously, he has served on numerous other public and private boards, including AerCap NV, American Media, Inc., Bennu Oil & Gas, LLC, Broadview Networks Inc., Chrysler LLC, CSC ServiceWorks, Inc., Hayes- Lemmerz, Inc., Jack Cooper, Inc., National/Alamo Rental Car, Inc., SSA Global, Inc., Teleglobe, Inc., Tembec, Inc. and Tower International, Inc. Mr. Chapman has also previously worked for Regiment Capital Advisors, LP, The Renco Group, Inc. and was a founding principal of Fieldstone Private Capital Group. Prior to joining Fieldstone, Mr. Chapman worked for Bankers Trust Company. He has been a capital markets and strategic planning consultant with over 35 years of investment banking experience in a wide range of industries including aviation, mining, energy, automotive and general manufacturing. For Hexion Holdings Corporation, he is Chair of the Listing Committee, and serves on the Audit Committee and Compensation Committee.
Joaquín Delgado worked at 3M Company from 1987 until his retirement in July 2019. He most recently served as Executive Vice President since July 2009, having operating responsibility for three Business Groups consecutively: Electro-Communications Business Group, Health Care Business Group and Consumer Business Group. He has been on the Board of Directors of Stepan Company from 2011 to present, serving on all Committees. He also serves on the Ballet Austin Board of Directors and also on the Executive Committee. In addition, Dr. Delgado serves as a member of Board of Trustees of Goldman Sachs Trust and Goldman Sachs Variable Insurance Trust. Dr. Delgado has a PhD in polymer science and engineering from Lehigh University. For Hexion Holdings Corporation, he serves on the Environmental Health & Safety Committee and on the Nominating & Corporate Governance Committee.
Carol S. Eicher is a Director, Chair of the Governance Committee and member of the Compensation Committee of Tennant Co. and a Director, Chair of the Governance Committee and member of the Audit Committee of Advanced Emissions Solutions, Inc. She is also a Director and member of the Governance Committee of Arconic Corp. Previously, she was a Director of A. Schulman Co. and President, CEO and Director of Innocor, Inc. She also held senior management positions with Dow Chemical Co., Rohm and Haas Co., Ashland, Inc. and E.I. DuPont de Nemours and Co. She has been in the chemical industry since 1979 and has extensive experience with operating leadership positions in the industry. For Hexion Holdings Corporation, she is Chair of the Nominating & Corporate Governance Committee and serves on the Environmental Health & Safety Committee.
Michael J. Shannon is a board member of Quaker Houghton (KWR), serving on the Audit Committee since Aug 2019 and the Sustainability Committee since 2020. Mr. Shannon is the former Chief Executive Officer and a board member of Houghton International Inc. and served in these roles since his appointment in December 2015. Immediately prior to this appointment, Mr. Shannon served as Chief Operating Officer responsible for all global commercial and operational activities. Previously, Mr. Shannon spent 24 years at Ashland Inc. as a Corporate Officer and President of Global Supply Chain and Senior VP of the Performance Materials Group. He has also served on the board of Reichhold, Inc. Mr. Shannon has a BS in Chemical Engineering from the University of Pennsylvania and an MBA from Temple University. For Hexion Holdings Corporation, he is Chair of the Environmental Health & Safety Committee and serves on the Nominating & Corporate Governance Committee.
John K. Wulff serves on the Board of Directors of Celanese Corporation (Chairman, Audit Committee, and as of February 2021, moved from membership on the Nominating and Corporate Governance Committee to the Environmental, Health, Safety Public policy and Quality Committee), and of Atlas Air Worldwide Holdings, Inc. (Member, Audit and Compensation Committees). Mr. Wulff is the former Chairman of the Board of Hercules Inc. and, in the past five years, has served on the boards and committees of Moody's Corp. and of Chemtura Corp. He has also served as a member of the Financial Accounting Standards Board (FASB), CFO of Union Carbide Corp, a partner of KPMG LLP, and officer of other governance and financial organizations. He has substantial chemical industry, strategy and financial expertise. For Hexion Holdings Corporation, he is Chair of the Audit Committee and serves on the Compensation Committee.
Stephen D. Newlin is non-executive Chairman of Oshkosh Corp. and he serves as a director on the Univar Solutions (UNVR) board. He served as Chairman, President and Chief Executive Officer of Univar from 2016-2018 after being elected to the board in 2014. Mr. Newlin previously served as Executive Chairman of the Board of PolyOne Corp. (POL) from 2014-2016, and Chairman, President and CEO of PolyOne from 2006-2014, following 27 years at Nalco and Ecolab (now merged). At Nalco he became President, COO and Vice-Chair, and at Ecolab he was President of Ecolab's Industrial Sector. In addition, he has held previous board positions at Chemours Corporation (CC), The National Association of Manufacturers and others. For Hexion Holdings Corporation, he serves on the Compensation and the Environmental Health & Safety Committees.
George F. Knight was elected Executive Vice President and Chief Financial Officer of the Company effective January 1, 2016. From 2016 to July 2019 he was also a director of Hexion Holdings. He served as Senior Vice President - Finance and Treasurer of the Company from June 1, 2005 to December 31, 2015, having been Vice President, Finance and Treasurer since July 2002. Mr. Knight also served as Senior Vice President-Finance and Treasurer for MPM and Hexion Holdings from October 1, 2010 and November 1, 2010, respectively, until December 31, 2015. Mr. Knight joined the Company in 1997 and served until 1999 as Director and then Vice President of Mergers and Acquisitions - Finance for Borden, Inc. From 1999-2001 he served as Vice President of Finance for Borden Foods Corporation. He began his career at Deloitte & Touche after earning a Master’s Degree in Accounting at Syracuse University.
Hexion Inc. | 124 | 2020 Form 10-K
Douglas A. Johns joined the Company on May 9, 2015 but had served as Executive Vice President and General Counsel under the Shared Services Agreement with MPM since October 1, 2010. He also serves as Executive Vice President, General Counsel and Secretary of Hexion Holdings. Mr. Johns was employed by Momentive Performance Materials Inc., serving as its General Counsel and Secretary from its formation on December 4, 2006 until October 24, 2014. Prior to that time, Mr. Johns served as General Counsel for GE Advanced Materials, a division of the General Electric Company from 2004 to December 2006. Mr. Johns began his career as a trial lawyer at the U.S. Department of Justice and was in private practice before joining GE in 1991, where he served as Senior Counsel for global regulatory and environmental matters and Senior Business Counsel at GE Plastics’ European headquarters in Bergen Op Zoom, The Netherlands from 2001 to 2004. He graduated with honors from Oberlin College, and holds an MBA from University of Massachusetts, Amherst and a JD from Northeastern University School of Law.
John P. Auletto was elected Executive Vice President - Human Resources effective May 15, 2016. Mr. Auletto joined the Company in September 1999 as Director of Human Resources for the Performance Resins Group. Since then he has held various positions with increasing responsibilities in human resources, including most recently, Vice President- Human Resources for the Epoxy, Phenolic and Coating Resins Division from April 2013 to May 15, 2016. Prior to joining the Company, Mr. Auletto served in human resources roles with Associates National Bank, W.L. Gore & Associates, and The Bank of New York.
Nathan E. Fisher was elected Executive Vice President - Procurement of the Company on June 1, 2005. He served as Executive Vice President - Procurement of Momentive Performance Materials Inc., having been elected to that position on October 1, 2010 and ending on 12/31/2019. Mr. Fisher joined the Company in March 2003 as Director of Strategic Sourcing and was promoted to Vice President - Global Sourcing in September 2004. Previously, Mr. Fisher worked in Procurement Management and Supply Chain at Eastman Chemical and as in industrial engineering at Texas Instruments. He earned a bachelor’s degree in industrial engineering from Tennessee Technological University and a master’s degree in business administration from East Tennessee State University.
Matthew A. Sokol has been Chief Administrative Officer of the Company since February 21, 2019. He joined the Company in November 2017 as Executive Vice President, Business Development and Strategy. Mr. Sokol came from Lanxess Solutions, Inc. (formerly Chemtura Corporation), where he served as Interim Vice President of HR and M&A (NAFTA) for Lanxess. Mr. Sokol joined Chemtura in October 2005 and held a number of senior leadership roles including leading M&A, which ultimately culminated in the sale of the company to Lanxess in April 2017. Previous roles at Chemtura included: Head of Corporate Development & Investor Relations; General Manager, Flame Retardants; and Director, Strategic Corporate Development. While at Chemtura, Mr. Sokol also served as Associate General Counsel, IEP Segment, and Assistant General Counsel. Prior to Chemtura, Mr. Sokol served as senior litigation associate at Tyler, Cooper & Alcon, LLP from September 1999 to October 2005.
Paul G. Barletta was elected Executive Vice President of Operations of the Company as of February 2019. Prior to that, he was Senior Vice President, Environmental Health and Safety and Global Epoxy Manufacturing in 2018. From 2005 to 2018 he held various management roles including Vice President of Global Epoxy Manufacturing. He has been at Hexion since its formation in 2005. His previous experience also includes Site Manager at Resolution Performance Products, Inc. from 2000 to 2005 and its predecessor company, Shell Chemical. He joined Shell in 1980 and has held a variety of roles in manufacturing including Engineering, Production, Maintenance, EHS, Manufacturing Excellence, Quality, and Special Projects. He served on the Louisiana Chemical Association Board of Directors from 2006 to 2019. He holds a BS in Chemical Engineering from Wayne State University.
Ann Frederix has 30 years of experience in the chemical industry. She has been with Hexion from its formation in 2005, and has been Senior Vice President and General Manager, Global Epoxy & Versatics since June 2019. She was Vice President Epoxy Specialties from 2016 to 2019 and was Business Director and Global Marketing Manager from 2009 to 2014. Her previous experience also includes Technology Director Europe at Resolution Performance Products and Manager at Hexion’s predecessor company Shell Chemicals. In her current role, she is responsible for developing and executing strategy for the Business. Dr. Frederix earned a PhD in organic chemistry from Catholic University of Leuven in 1990.
Mark Alness has been Senior Vice President - Global Resins of the Company since July 1, 2019. Throughout his career at Hexion, he has held numerous positions in all segments of the Forest Products business including North America Commercial Director, Global Business Director and Senior Vice President Americas. He joined the Company in June 1978 as a technical service representative in Forest Products Resins. Mr. Alness was hired directly from the University of Minnesota after receiving his Bachelor of Science degree in Forest Product Engineering.
Nominating & Corporate Governance Committee
Hexion’s indirect parent, Hexion Holdings, utilizes a Nominating & Corporate Governance Committee (“NomGov Committee”), which is chaired by Ms. Eicher. The Charter for the NomGov Committee is available to shareholders on the Company’s website, located at http://investors.hexion.com/governance-highlights. The NomGov Committee consists of Messrs. Eichel, Shannon, Delgado and Bartels. For purposes of complying with the disclosure requirements of the SEC, we have adopted the definition of independence used by the New York Stock Exchange, and under that definition each of the foregoing members of the NomGov Committee is considered independent. The NomGov Committee’s process for identifying and evaluating nominees for director involves assessing candidates’ knowledge relevant to the businesses and industries in which the Company operates, as well as their ability to contribute unique and diverse thinking for the benefit of the Board.
Hexion Inc. | 125 | 2020 Form 10-K
Audit Committee Financial Expert
Since neither Hexion or its indirect parent, Hexion Holdings, are listed issuers, there are no requirements that we have an independent Audit Committee. However, for purposes of complying with the disclosure requirements of the SEC, we have adopted the definition of independence used by the New York Stock Exchange, and under that definition our Audit Committee is considered independent. Hexion Holdings’ Audit Committee consists of Messrs. Bartels, Benjamin, Chapman, and Wulff, each of whom qualifies as an audit committee financial expert, as such term is defined in Item 407(d)(5) of Regulation S-K.
Code of Conduct
We have a Code of Conduct that applies to all associates, including our Chief Executive Officer and senior financial officers. These standards are designed to deter wrongdoing and to promote the honest and ethical conduct of all employees. Our Code of Conduct is posted on our website: www.hexion.com under “Investor Relations - Corporate Governance.” Any substantive amendment to, or waiver from, any provision of the Code of Conduct with respect to any senior executive or financial officer shall be posted on this website.
Hexion Inc. | 126 | 2020 Form 10-K

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ITEM 11. EXECUTIVE COMPENSATION
ITEM 11 - EXECUTIVE COMPENSATION
COMPENSATION DISCUSSION AND ANALYSIS
In this Compensation Discussion and Analysis, we describe our process for determining the compensation and benefits provided to our “Named Executive Officers” (“NEOs”) and any material compensation and benefits decisions we have made with respect to our NEOs for 2020. Our 2020 NEOs are
Name Title & Position
Craig A. Rogerson President & Chief Executive Officer
George F. Knight Executive Vice President & Chief Financial Officer
Douglas A. Johns Executive Vice President & General Counsel
Ann Frederix Senior Vice President and General Manager, Coatings & Composites
Mark I. Alness Senior Vice President and General Manager, Global Adhesives
Executive Summary
Fiscal 2020 Company Performance
Despite negative COVID-19 economic headwinds in the first half of 2020, Hexion showed consecutive quarter over quarter growth in the second half of 2020 due to recovering economic demand in many key end markets as we recovered from the global pandemic. We also had our highest fourth quarter Segment EBITDA1 from continuing operations in the last seven years. Despite overall softer earnings and the ongoing pandemic in 2020, we were able to generate strong cash flow from operations2 of $116 million and positive free cash flow3 of $8 million in 2020. We exited the year in a strong financial position with significant liquidity of $561 million to support our ongoing business initiatives. In addition to our strong liquidity performance in 2020, we also had strong environmental health & safety (“EH&S”) safety performance for the year.
1 Segment EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items, other income and expenses and discontinued operations. 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. For further information, see Note 20 in Part I of this Annual Report on Form 10-K and below for reconciliation of net (loss) income to Segment EBITDA.
2 Cash Flow From Operations is defined as the Cash Flow provided by Operating activities for its continuing operations from the Company’s 2020
10-K Consolidated Statement of Cashflow for the year ended December 31, 2020.
3 Free cash flow is a non-GAAP financial measure and is a liquidity measure used by the Company. Free cash flow is defined by the Company as net cash provided by (used in) operating activities less capital expenditures on property, plant and equipment.
4 Third Quarter 2019 Segment EBITDA results excludes $18 of previously recorded deferred contract revenue that was accelerated as a result of
the application of fresh start accounting in 2019.
Hexion Inc. | 127 | 2020 Form 10-K
Human Capital Management
At December 31, 2020, our continuing operations had approximately 2,600 employees. Approximately 35% of our employees are members of a labor union or are represented by workers’ councils that have collective bargaining agreements, including most of our European employees. We believe that we have good relations with our union and non-union employees. We believe our diverse global employee talent is a key driver of our future success and competitive advantage. Hexion offers industry competitive salary and benefits, performance incentive plans and enriching career opportunities that enable employee engagement.
At Hexion, We Do the Right Thing. We act ethically and with integrity.
Acting ethically and with integrity is a core value at Hexion. This is a commitment to our company, our customers, our vendors and ourselves. Every associate, regardless of his or her rank or position is responsible for the ethical health of our organization.
Our commitment to acting ethically is non-negotiable.
•We treat others with respect - regardless of gender, race, age, orientation or background.
•We conduct business with integrity - comply with all anti-trust, anti-bribery, workplace harassment, and conflict-of-interest requirements.
•We engage with each other and remind one another of our commitment to act with integrity.
•We speak up if we witness misconduct or have a compliance concern.
Diversity, Equity and Inclusion
We are focused on accelerating our organization’s commitment to diversity, equity and inclusion worldwide, including developing and implementing a strategy to attract, retain and develop diverse talent and promote an inclusive environment where associates at all levels can perform their best. This is a top priority for us in 2021 and long term. In addition, our Chief Executive Officer (“CEO”) has joined with other company’s CEO’s by signing the “CEO Action for Diversity & Inclusion pledge”. We also recently hired a Director of Diversity, Equity and Inclusion to help implement these goals.
At Hexion, Safety is Our Highest Priority. Our work is never more important than performing it safely.
While 2020 was a challenging year for all of us. Hexion’s associates not only endured but stayed focused on serving our customers, operating our manufacturing sites safely and supporting the communities in which they work and live. In fact, 2020 was the strongest safety performance on record for Hexion across the majority of our metrics. In 2020, we operated in the American Chemistry Council’s safety Occupational Injury and Illness Rate (“OIIR”) top quartile. This is a result of our multi-year initiative to enhanced training, alignment between our manufacturing and Environmental, Health and Safety teams, and our associates’ commitment to each other to remain vigilant as part of our “Get Zero. Get Home” safety initiative. At Hexion, we are committed to making sure that each associate goes home just as they arrived to work.
During this pandemic, we have implemented additional guidelines to further protect the health and safety of our employees as we continue to operate with our suppliers and customers. We have committed to maintaining a paramount focus on the safety of our employees while minimizing potential disruptions caused by COVID-19. For example, we are following all legislatively-mandated travel directives in the various countries where we operate, and we have also put additional travel restrictions in place for our associates designed to reduce the risk from COVID-19. Additionally, we are utilizing extended work from home options to protect our office associates, while adjusting our meeting protocols and processes at our manufacturing sites.
Enhancing worker safety/well-being sustainability goals
In addition to our future sustainability goals, by 2022, Hexion will offer a voluntary well-being program that addresses associate physical, mental, and financial well-being with the goal of 50% associate participation in the program by 2025. Hexion also re-affirmed its commitment to continue to drive toward zero recordable injuries.
Hexion Inc. | 128 | 2020 Form 10-K
Oversight of Executive Compensation
The Board of Directors of the Company’s parent holding company, Hexion Holdings Corporation, is responsible for governance of the Company, including the responsibility for determining the compensation and benefits of our executive officers. All executive compensation decisions made during 2020 for our NEOs were made by the Compensation Committee of the Hexion Holdings Corporation Board of Directors (the “Committee”).
The Committee sets the principles and strategies that guide the design of our executive compensation program. The Committee annually evaluates the performance and compensation levels of the NEOs. This annual compensation review process includes an evaluation of key objectives and measurable contributions to ensure that incentives are not only aligned with the Company’s strategic goals, but also enable us to attract and retain a highly qualified and effective management team. Based on this evaluation, the Committee approves each executive officer’s compensation level, including base salary, annual incentive opportunities and long-term incentive opportunities.
In order to obtain a general understanding of current compensation practices when setting total compensation levels for our NEOs, the Committee considers broad-based competitive market data on total compensation packages provided to executive officers with similar responsibilities at comparable companies. Such companies include those within the chemical industry, as well as those with similar revenues and operational complexity outside the chemical industry. As warranted, the Committee may use data obtained from third-party executive compensation salary surveys such as those published by Willis Towers Watson and AonHewitt when determining appropriate total compensation levels for our NEOs. The Committee retained its own executive compensation consultant, Lyons Benenson & Company, Inc., to review and advise the Committee on the Company’s executive compensation program and practices. In 2020, the specific peer companies used by Lyons Benenson & Company, Inc. were the following:
2020 Peer Companies
AdvanSix Inc. Albemarle Corporation Ashland Global Holdings, Inc.
Avient Corporation Celanese Corporation Eastman Chemical Company
H.B. Fuller Company Huntsman Corporation Kraton Corporation
Kronos Worldwide, Inc. NewMarket Corporation Olin Corporation
RPM International Inc. Stepan Company The Chemours Company
Hexion Inc. | 129 | 2020 Form 10-K
Executive Summary
Executive Compensation Objectives and Strategy
Our executive compensation program is designed to set compensation and benefits at a level that is appropriate, internally equitable and externally competitive. Specifically, the Committee is guided by the following principles:
Principle Description
Pay for Performance We emphasize pay for performance, as measured by achievement of company operational and financial objectives, and the realization of personal goals. We believe that a significant portion of each executive officer’s total compensation should be variable and contingent upon the achievement of specific and measurable financial and operational performance goals.
Align Incentives with Shareholders Our executive compensation program is designed to focus our NEOs on our key strategic, financial and operational goals that will translate into long-term value-creation for our shareholders.
Balance Critical Short-Term Objectives and Long-Term Strategy We believe that the compensation packages we provide to our NEOs should include a mix of short-term, cash-based incentive awards that encourage the achievement of annual goals, and long-term cash and equity elements that reward long-term value-creation for the business.
Attract, Retain and Motivate Top Talent We design our executive compensation program to be externally competitive in order to attract, retain and motivate the most talented executive officers who will drive company objectives.
Pay for Individual Achievement We believe that each executive officer’s total compensation should correlate to the scope of his or her responsibilities and relative contributions to the Company’s performance.
CEO Total Direct Compensation
The CEO’s target total direct compensation for 2020 is consistent with our pay for performance philosophy and focuses a significant portion on variable compensation that is closely aligned with Company performance. In the chart below, the CEO’s targeted pay mix is compared to the pay mix reflected in actual delivered compensation for 2020. The major difference when comparing target to actual is driven by the annual incentive payout, which was significantly below target based on 2020 performance. Like many other companies in the chemical industry, our revenues were significantly lower in the second quarter due to the worldwide impact of the coronavirus. This reduction in revenues led to EBITDA performance that missed the target we had set for the second quarter. While our EBITDA performance in the third and fourth quarters of 2020 was higher than the prior year, it was not enough to fully offset the impact of the second quarter, and led to a 0% payout on the EBITDA portion under our annual incentive plan.
Hexion Inc. | 130 | 2020 Form 10-K
2020 Executive Compensation Updates
•Mr. Rogerson, the Company’s CEO, was on a paid medical leave that began March 25, 2020. Mr. Rogerson returned to full-time work on September 14, 2020, although he was working on a part-time basis beginning June 22, 2020. Until Mr. Rogerson returned to full-time work, the Chief Financial Officer, Mr. Knight, served as the Company’s interim Chief Executive Officer.
•The Company continued its focus on (i) motivating our NEOs to deliver improved performance and (ii) retaining key talent during difficult business cycles through the use of the goals set in our annual and long term incentive plans.
Hexion Inc. | 131 | 2020 Form 10-K
•The Committee reviewed the base salaries of our NEOs in the first quarter of the year. After considering the accomplishments of our NEOs, internal equity dynamics and external market factors, the Committee determined to increase the base salaries of four of our NEOs. We delivered these annual merit base salary increases effective July 2020, consistent with our recent past practice. Details of the increases can be found in the “Components of Our Executive Compensation Program- Base Salary” section below.
•The Company is not currently required to hold a shareholder advisory “say-on-pay” vote.
Evaluating Company and Individual Performance
In determining compensation, the Committee considered both prior year accomplishments as well as the accomplishments of our NEOs in 2020:
Named Executive Officer 2020 Accomplishments
Mr. Rogerson
Chairman, President and
Chief Executive Officer
•Despite negative COVID-19 economic headwinds in the first half of 2020, led the Company to consecutive quarter over quarter growth in the second half of the year.
•Provided key leadership to strategic portfolio optimization efforts during the year.
•Led the Company to excellent cash performance for the year despite missing the annual EBITDA goal due to the impact of the global pandemic.
Mr. Knight
Executive Vice President and
Chief Financial Officer
•Served as interim CEO and successfully drove initiatives forward.
•Provided key leadership to the sale of our Phenolic Specialty Resin, Hexamine and European-based Forest Products Resins businesses.
•Provided critical support to significant initiatives including the Company’s global Business Services rollout.
Mr. Johns
Executive Vice President and
General Counsel
•Provide significant legal support to the Company’s sale of our Phenolic Specialty Resin, Hexamine and European-based Forest Products Resins businesses.
•Led the Company’s continued compliance training program.
•Provides significant counsel and advice on key strategic business initiatives.
Ms. Frederix
Senior Vice President and
General Manager, Coatings & Composites
•Provided key leadership to the Coatings and Composites segment’s recovery from the impact of the global pandemic.
•Delivered solid working capital management.
•Strong focus on margin improvement.
Mr. Alness
Senior Vice President and
General Manager, Global Adhesives
•Established a new product development team and process to deliver on key market opportunities.
•Successfully took actions to wind down non-performing business.
•Effectively managed operations at a key Latin America site.
Components of Our Executive Compensation Program
The principal components of our executive compensation program are shown in the table below. The following section describes each of these components in further detail.
Type Components
Annual Cash Compensation Base Salary
Annual Cash Incentive Awards
Discretionary Awards
Long-Term Incentives Equity Awards
Long-Term Cash Awards
Benefits Health and Welfare Benefits
Retirement Benefits
Other International Assignment Compensation
Change-in-Control and Severance Benefits
Hexion Inc. | 132 | 2020 Form 10-K
1. Annual Cash Compensation
Base Salaries
The base salaries of our NEOs are designed to be commensurate with the position’s overall responsibility, complexity and difficulty, and scope and impact within the organization, as well as the executive’s performance in the role and ability to assume increasing levels of responsibility within Hexion. The annual base salaries of our NEOs are also intended to be internally equitable and externally competitive with the market.
The Committee reviews our NEOs' base salary levels (i) annually, in conjunction with annual performance reviews, or (ii) in connection with promotions or significant changes in job responsibilities. When evaluating base salary increases, the Committee considers various factors, such as job performance, total target compensation, internal equity, impact on value-creation and the external competitive marketplace.
The base salary change for each NEO is shown in the table below. No base salary increase was granted to Mr. Rogerson based on market considerations. The effective date of the salary increases for Messrs. Knight, Johns and Alness was June 29, 2020, and Ms. Frederix’s salary increase was effective July 1, 2020, both consistent with our past practice in delivering annual merit increases.
Name 2019 Base Salary 2020 Base Salary 2020 Increase (Decrease)
Mr. Rogerson
Chairman, President and
Chief Executive Officer
$1,250,000 $1,250,000 - %
Mr. Knight
Executive Vice President and
Chief Financial Officer
$524,579 $540,316 3.00 %
Mr. Johns
Executive Vice President and
General Counsel
$530,660 $543,927 2.50 %
Ms. Frederix (1)
Senior Vice President and
General Manager, Coatings & Composites
$401,049 $413,080 3.00 %
Mr. Alness
Senior Vice President and
General Manager, Global Adhesives
$460,000 $473,800 3.00 %
(1)Ms. Frederix’s local currency salary was converted from Euros to US Dollars based on a 2020 average exchange rate of 1.1389 Euros per US Dollar.
Annual Incentive Awards
Our annual incentive compensation plan (“ICP”) is a short-term performance-based plan designed to reward participants for delivering increased value to the organization relative to specific financial and other critical business objectives that have been approved by the Committee at the beginning of each performance year . Annual incentive compensation awards are targeted at a level that, when combined with base salaries and other components of our total rewards program, is intended to yield total annual cash compensation that is competitive in the external marketplace, while awards for performance that exceeds the established targets are intended to result in total annual cash compensation above the market median.
The performance targets under the ICP are identical for our top executives and other ICP eligible, salaried associates. We strive to set annual incentive award measures and goals that are achievable only through strong performance, believing that this motivates our executives and other participants to deliver ongoing value-creation, while allowing the Company to attract and retain highly talented senior executives. Annual ICP measures and goals are determined in connection with the development of an overall budget for Hexion Holdings Corporation and its subsidiaries. Performance goals may be based on a number of factors, such as our prior-year performance, current market trends, anticipated synergies, integration efforts around acquired assets or businesses, potential pricing actions, raw material projections, the realization of planned productivity initiatives, expansion plans, new product development, environmental, health and safety, and other financial and/or strategic factors that could potentially impact operations.
The 2020 Annual Incentive Compensation Plan
In early 2020, the Committee approved the 2020 ICP for the Company and its subsidiaries, which we refer to as the “2020 ICP.” Under the 2020 ICP, our NEOs and other eligible participants had the opportunity to earn annual cash incentive compensation based upon the achievement of certain financial and environmental health & safety (“EH&S”) goals.
Hexion Inc. | 133 | 2020 Form 10-K
The Hexion performance goals were established based on the following measures:
Measure Description 2020 ICP Target
Segment EBITDA Equals earnings before interest, taxes, depreciation and amortization, adjusted to exclude discontinued operations, certain non-cash and other unusual income and expense items.
See Items 7 & 8 of Part II of this Annual Report on Form 10-K for a reconciliation of Hexion Net Income to Segment EBITDA.
Hexion Segment EBITDA (1)
($415.0 million)
Coatings & Composites Segment EBITDA ($164.4 million)
Global Resins Segment EBITDA
($211.1 million)
Cash Flow from Operations Encompasses Segment EBITDA, net trading capital improvement and/or usage, capital spending and interest paid along with other operating cash flow items such as income taxes paid and pension contributions. Cash flow from operations excludes restructuring, unusual financing transactions, Business Services implementation costs and any proceeds/costs relative to acquisitions and divestitures.
Hexion Global Cash Flow
(Net cash generation of $100 million)
SIFs Severe or high-potential incidents. Three (3) incidents
OIIR Occupational illness and injury rate. 0.53
Which would represent top quartile performance among medium-sized companies in the American Chemistry Council.
ERI Total environmental incidents 15 incidents
A reduction of five (5) incidents or 25% improvement from the prior year.
(1)Reflects EBITDA reported for the overall company (globally), including Corporate costs that are not allocated to the segments.
Each of the 2020 performance goals was measured independently such that a payout for the achievement of one element was not dependent upon the achievement of any other performance measure. This was intended to keep associates focused on driving continuous improvement in EH&S and cash flow, in addition to EBITDA.
Awards under the 2020 ICP were calculated as follows: each participant was designated a target award under the 2020 ICP based on a percentage of his or her base salary, which varies by participant based on the scope of the participant’s responsibilities and externally competitive benchmarks. The target bonus percentages for the NEOs are reflected in the chart below.
Note: For the EBITDA and Cash Flow goals, no payout is earned at the minimum level of achievement. NEOs begin to earn a payout only when achievement exceeds the minimum. See table below for payout percentages for EH&S goals.
Hexion Inc. | 134 | 2020 Form 10-K
In 2020, for the EBITDA and Cash Flow goals, the Committee established a minimum level of performance at or below which there is no payout for that component. Above the minimum level of performance, each NEO earns a payout calculated on a linear path up to and including the target level of performance (100% payout). Above the target level of performance, each NEO earns a payout calculated on a linear path up to and including the maximum level of performance (200% payout). The Committee established fixed payout percentages for our NEOs for the EH&S goals. The Committee established minimum (30% payout), target (100% payout) and maximum (200% payout) levels of performance for OIIR and ERI. Only target (100% payout) and maximum (200% payout) levels of performance were established for SIFs.
Minimum Target Maximum
Hexion Segment EBITDA (1)
$375.0 $415.0 $450.0
Coatings & Composites Segment EBITDA (1)
$148.6 $164.4 $178.3
Global Resins Segment EBITDA (1)
$190.7 $211.1 $228.9
Hexion Global Cash Flow (1)
$60 $100 $140
Payout percentages applicable to achievement of EBITDA and Cash Flow goals - 100% 200%
EH&S Goal - SIFs (2)
NA 3 1
EH&S Goal - OIIR 0.65 0.53 0.35
EH&S Goal - ERI 18 15 12
Payout percentages applicable to achievement of EH&S goals
30% 100% 200%
(1)Amounts reflected are in millions.
(2)Reflects number of incidents.
The following table summarizes the target awards, performance measures, weightings, achievements and payouts for the 2020 ICP awards granted to our NEOs. The 2020 ICP award amounts are reflected in the “Non-Equity Incentive Plan Compensation” column of the Summary Compensation Table. Each NEO’s actual bonus under the 2020 ICP is calculated based on the information provided in the table below. In each case, the “Target Award” amount for each NEO is multiplied by the weighting percentage and performance achieved percentage for each individual component to determine the payout for that component. The total bonus payout is the sum of the individual component payouts.
Hexion Inc. | 135 | 2020 Form 10-K
Name Incentive Target (% of Base Salary) Target Award ($)(1)
Performance Criteria / Weighting % Performance Achieved (%) 2020 ICP Payout ($)
Mr. Rogerson 125% 1,562,500 Hexion Global EBITDA - Corp / 65% 0% -
Hexion SIF / 5% 200% 126,099
Hexion OIIR / 2.5% 144% 45,536
Hexion ERI / 2.5% 200% 63,050
Hexion Cash Flow / 25% 58% 181,268
Mr. Knight 70% 378,221 Hexion Global EBITDA / 65% 0% -
Hexion SIF / 5% 200% 37,822
Hexion OIIR / 2.5% 144% 13,658
Hexion ERI / 2.5% 200% 18,911
Hexion Cash Flow / 25% 58% 54,369
Mr. Johns 70% 380,749 Hexion Global EBITDA - Corp / 65% 0% -
Hexion SIF / 5% 200% 38,075
Hexion OIIR / 2.5% 144% 13,749
Hexion ERI / 2.5% 200% 19,037
Hexion Cash Flow / 25% 58% 54,733
Ms. Frederix
60% 247,848 Hexion Global EBITDA - BU / 32.5% 0% -
Hexion Coatings & Composites EBITDA - BU / 32.5% 10% 8,136
Hexion SIF / 5% 200% 24,785
Hexion OIIR / 2.5% 144% 8,950
Hexion ERI / 2.5% 200% 12,392
Hexion Cash Flow / 25% 58% 35,628
Mr. Alness 60% 284,280 Hexion Global EBITDA - BU / 32.5% 0% -
Hexion Global Resins EBITDA - BU / 32.5% 0% -
Hexion SIF / 5% 200% 28,428
Hexion OIIR / 2.5% 144% 10,266
Hexion ERI / 2.5% 200% 14,214
Hexion Cash Flow / 25% 58% 40,865
(1)Ms. Frederix’s ICP target award and payout was converted from Euros to US Dollars based on a 2020 average exchange rate of 1.1389 Euros per US Dollar.
Discretionary Awards
The CEO periodically uses discretionary awards to reward exemplary efforts. Often, such efforts are required by atypical business conditions or are related to special projects impacting long-term business results. Discretionary awards are also used for retention purposes or in connection with a new hiring or promotion. Any discretionary award to an executive officer must be approved by the Committee. In 2020, Mr. Rogerson recommended, and the Committee approved, a discretionary award for Mr. Knight to reward him for the significant additional contributions he made during the period Mr. Knight served as both CFO and interim CEO of the Company while Mr. Rogerson was out on a medical leave. In addition, the Committee approved a discretionary award for Mr. Rogerson which resulted in a total payout relative to target consistent with the other NEOs in corporate roles. Please see Footnote 1 to our Summary Compensation Table below for details of both awards.
2. Long-Term Incentive Awards
Equity Awards
The Committee believes that equity awards play an important role in creating incentives to maximize Company performance, motivating and rewarding long-term value-creation, and further aligning the interests of our executive officers with those of our shareholders. Our NEOs, as well as other members of the leadership team and other eligible associates, participate in the equity plan sponsored by Hexion Holdings Corporation. Awards under these plans are factored into the executive compensation program established by the Committee.
Our long-term strategy includes the use of periodic grants as well as ongoing annual grants of equity. We believe that periodic grants provide an incentive toward a projected long-term equity value and keep participants focused on the achievement of that long-term objective. Annual equity grants are a tool to both retain key associates and drive toward the achievement of longer-term business objectives. Our equity awards contain performance- and service-vesting requirements. Awards that are conditioned on service-vesting requirements
Hexion Inc. | 136 | 2020 Form 10-K
function as a retention incentive, while awards that are conditioned on performance- and service-vesting requirements are linked to the attainment of specific longer-term financial goals.
In August 2019, the Board adopted the Hexion Holdings Corporation 2019 Omnibus Incentive Plan (the “2019 Plan”). Under the 2019 Plan, annual grants were made in March 2020 to the NEOs, which included the following types of equity awards: (i) time-based restricted stock units (“RSUs”) and (ii) performance-based stock units (“PSUs”). These equity awards were granted to our NEOs and other selected management team executives who are critical to delivering on the current and future performance goals of Hexion Holdings Corporation. These awards were granted to management in order to retain these executives and align their interests to those of our shareholders.
The stock units granted are non-voting units of measurement which are deemed for bookkeeping purposes to be equivalent to one share of common stock of Hexion Holdings Corporation. Of the stock units granted to the NEOs in March 2020, forty percent (40%) are RSUs and the remaining sixty percent (60%) are PSUs. The RSUs vest in equal installments on the first three anniversaries of the grant date.
The PSUs are divided into two equal tranches. The first tranche (50% of the PSUs granted) is earned based on achievement of adjusted return on invested capital (“Adjusted ROIC”) for the trailing 12 month period ending December 31, 2022. The second tranche (50% of the PSUs granted) is earned based on achievement of EBITDA margin (“EBITDA Margin”) for the trailing 12-month period ending December 31, 2022. Any PSUs earned based on the performance criteria become vested when settled in July 2023. The performance targets and percentage of PSUs eligible to be earned are reflected in the tables below.
Adjusted ROIC Percentage of Adjusted ROIC PSUs earned EBITDA Margin Percentage of EBITDA Margin PSUs Earned
13.0% 50.0% 13.0% 50.0%
14.0% 100.0% 15.0% 100.0%
15.0% 150.0% 17.0% 150.0%
If the executive resigns without good reason prior to the settlement date:
•Vested RSUs are retained and any unvested RSUs are cancelled as of the resignation date.
▪Earned and unearned PSUs are cancelled as of the resignation date.
If the executive is terminated by the Company without cause, or the executive resigns for good reason prior to the settlement date:
•Vested RSUs are retained. The tranche of the RSUs that would vest on the immediately succeeding vesting date following the termination date of the executive accelerate and become immediately vested upon the executive’s termination date. Unvested RSUs as of the termination date are cancelled on the termination date.
•A pro-rata number of the PSUs remain eligible to be earned based on the number of days the executive is employed by the Company during the January 1, 2020 through December 31, 2022 period. The remaining PSUs are cancelled on the termination date.
If the executive dies or becomes disabled prior to the settlement date:
•The RSUs vest in full and all vested RSUs are settled as soon as administratively feasible, but in no event later than 30 days following such date of termination.
•Earned PSUs immediately vest and are settled as soon as administratively feasible, but in no event later than 30 days following the executive’s termination date. Unearned PSUs are cancelled upon the executive’s termination date.
Upon the executive’s retirement following attainment of age 60 with at least five years of service with the Company, and upon the executive providing the Company with four (4) months advance notice of the executive’s retirement date:
•Any unvested RSUs continue to vest in full.
•A pro-rata number of the PSUs remain eligible to be earned based on the number of days the executive is employed by the Company during the January 1, 2020 through December 31, 2022 period. The remaining PSUs are cancelled on the executive’s retirement date.
Unless otherwise noted above, vested RSUs and earned PSUs are subject to settlement in July 2023.
Hexion Inc. | 137 | 2020 Form 10-K
If a change-in-control transaction takes place during the RSU vesting period, all unvested RSUs will automatically vest and be settled in cash as soon as administratively feasible, but in no event later than 14 days following such change in control. If a change in control takes place prior to December 31, 2022, a pro-rata number of PSUs shall be deemed earned based on the number of days that elapsed from January 1, 2020 through the date of the change in control. Such earned PSUs vest immediately upon such change in control and will be settled in cash as soon as administratively feasible, but in no event later than 14 days following such change in control.
Unless otherwise noted above, (i) vested RSUs are subject to settlement and delivery of the underlying shares of common stock in July 2023; and (ii) earned PSUs are subject to settlement and delivery of the underlying shares of common stock in July 2023 unless, prior to the settlement date, the executive resigns his or her employment. Termination of employment for cause will result in the executive forfeiting earned, vested or unvested awards upon the termination date.
The details of the grants made to our NEOs are shown in the “Grants of Plan-Based Awards” table below.
Cash Awards
The Committee may, from time to time, approve long-term cash awards or plans for our key associates, including our NEOs. These awards are designed to pay over extended performance periods subject to the achievement of specified, measurable performance goals, and are further conditioned upon continued employment. As such, these awards are useful for providing a defined value for achievement of our financial targets, as well as leadership stability. In addition, long-term cash awards help complement equity awards that are not yet liquid.
In November 2016, in an effort to retain key talent in a challenging business environment, long-term cash awards were granted under the Momentive Performance Materials Holdings LLC Long-Term Cash Incentive Plan (the “LTIP”) to all of our NEOs other than the CEO. The LTIP awards vest based upon service and/or performance metrics, depending upon the grantee.
In July 2017, following the retirement announcement of Mr. Craig Morrison, our former CEO, a modification was made to the 2016 awards to ensure stability and retention of key associates; including the NEOs, except for Mr. Rogerson. A portion of these awards that were payable based on achievement of performance metrics were converted into time-based awards payable in 2020 or 2021 as applicable. The LTIP was assumed by Hexion Holdings Corporation upon emergence from the balance sheet restructuring process on July 1, 2019. The amounts paid in July 2020 to Messrs. Knight, Johns, and Alness were $791,666, $862,021, and $352,296, respectively. Ms. Frederix will receive payment of the remaining tranche of her 2016 award in July 2021.
The above amounts are reported in the “Bonus” column of the Summary Compensation Table below.
3. Benefits and Perquisites
Benefits
The Company provides a comprehensive suite of benefits to eligible associates, including our NEOs. Our benefit programs are designed to provide market-competitive benefits for associates and their covered dependents. Each of our NEOs (other than Ms. Frederix) is covered under a health and welfare program that provides medical, prescription drug, dental, vision, life insurance and disability insurance benefits. Ms. Frederix is covered under the applicable health and welfare benefits program offered to associates in Belgium.
Each of our NEOs, other than Ms.Frederix, also participates in our savings plan, a defined contribution plan (the “401(k) Plan”), which allows eligible U.S. associates to make pre-tax contributions from 1% to 15% of eligible earnings up to the U.S. tax limits for qualified plans. Those associates are also eligible to receive matching contributions from the Company equal to 100% on contributions of up to 5% of eligible earnings. In addition, the Company makes an annual retirement contribution, ranging from 3% to 7% of eligible earnings depending on years of service, to eligible associates actively employed on the last day of the year. An additional company contribution may be made if we achieve specified annual financial goals established at the beginning of each plan year. Ms. Frederix participates in a defined benefit pension plan offered to our Belgium associates, as further described in the Narrative to the Pension Benefits Table below.
Each of our NEOs, other than Messrs. Johns and Rogerson and Ms. Frederix, participated in a qualified cash balance pension plan on substantially the same terms as other plan participants (the “Hexion U.S. Pension Plan”). The Hexion U.S. Pension Plan was frozen in 2009, as discussed further in the Narrative to the Pension Benefits table below. In addition, because individuals are subject to U.S. tax limitations on contributions to qualified retirement plans, the Company provided a non-qualified retirement plan intended to provide plan participants, including our NEOs, with an incremental benefit on eligible earnings above the U.S. tax limits for the qualified plan (the “Hexion Supplemental Plan”). The benefits in the Hexion Supplemental Plan associated with the Hexion U.S. Pension Plan were also frozen in 2009. Our NEOs participated in the Hexion Supplemental Plan on the same basis as our other highly compensated salaried associates.
Additionally, because individuals are subject to U.S. tax limitations on contributions to a qualified retirement plan, and following the freezing of the Hexion Supplemental Plan, the Company established a non-qualified Supplemental Executive Retirement Plan (“SERP”) in 2011, which provides a benefit on eligible earnings that exceed the U.S. tax limit applicable to our 401(k) Plan. In 2020, our NEOs, other than Ms. Frederix, were eligible to receive a 5% company contribution on eligible earnings in excess of $285,000, which is the same benefit received by our other highly compensated salaried associates.
There were no significant changes to the Company’s benefit plans in 2020 that would impact our NEOs. There are descriptions of these plans in the Narrative to the Pension Benefits Table and Narrative to the Nonqualified Deferred Compensation Table below.
Hexion Inc. | 138 | 2020 Form 10-K
The Company may provide certain additional benefits to an executive officer if he or she is on a temporary international or domestic assignment. These benefits are externally competitive and a means to compensate the executive officer for financial expenses that would not exist if the executive remained in his or her home. For example, the Company may provide family travel and housing allowances, other one-time allowances, tax equalization payments, and reimbursements or payments for relocation from the executive officer’s home. In addition, pursuant to the Company’s relocation policy, certain expenses are grossed up to protect the executive from the tax consequences associated with those certain relocation expenses. We believe that, as a global company, it is necessary to offer this benefit to encourage key associates and executives to temporarily relocate for strategic business reasons. None of our NEOs received additional benefits related temporary assignment or relocation in 2020.
Perquisites
A company-leased car is provided to Ms. Frederix and Mr. Alness in connection with their commercial responsibilities. Ms. Frederix pays a statutorily-determined tax based on the fiscal price of the car and a CO2 emission rate, consistent with market practice. The Company imputes income to Mr. Alness each year, and withholds appropriate taxes, based on the value of the car and the percentage of time Mr. Alness uses the company car for his personal benefit, also consistent with market practice.
Employment Agreements and Restrictive Covenants
We entered into an employment agreement with Mr. Rogerson effective July 1, 2019. Otherwise, we don’t have employment agreements with our NEOs other than in countries where it is common practice to employ an executive by contract.
Change-in-Control and Severance Benefits
Our NEOs are generally entitled to change-in-control and severance protections. We believe that appropriate change-in-control and severance protections accomplish two objectives. First, they create an environment where key executives are able to take actions in the best interest of the Company without incurring undue personal risk. Second, they foster management stability during periods of potential uncertainty. We are also cognizant that excessive pay in the form of change-in-control and severance protection would not be in the best interest of the Company because such pay may encourage undue risk-taking. In an attempt to balance the delicate equation, the Committee has determined to provide these benefits very selectively. The arrangements for our NEOs other than Mr. Rogerson were implemented in prior years. The arrangement for Mr. Rogerson was implemented in connection with the Emergence and was an important tool to ensure his continued service during this critical time for the Company. The change-in-control and severance benefits payable to our NEOs are discussed in the Narrative to the Summary Compensation Table and in the discussion on Potential Payments Upon Termination of Employment below.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION(1)
The Committee has reviewed and discussed with management the disclosures contained in the above Compensation Discussion and Analysis. Based upon this review and discussion, the Committee recommended to our Board of Directors that the Compensation Discussion and Analysis section be included in our Annual Report on Form 10-K.
Compensation Committee of the Board of Managers
Jeffrey D. Benjamin (Chairman)
James N. Chapman
Stephen D. Newlin
John K. Wulff
(1)SEC filings sometimes “incorporate information by reference.” This means the Company is referring the reader to information that has previously been filed with the SEC, and that this information should be considered as part of the filing. Unless the Company specifically states otherwise, this report shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act or the Securities Exchange Act.
Hexion Inc. | 139 | 2020 Form 10-K
SUMMARY COMPENSATION TABLE
The following table provides information about the compensation of our Chief Executive Officer, Chief Financial Officer, and our three next most highly compensated executive officers whom we collectively refer to as our NEOs.
Name and
Principal Position(a) Year
(b) Salary
($)
(c) Bonus
($)
(d) (1)
Stock
Awards
($)
(e) Options
Awards
($)
(f) Non-Equity
Incentive Plan
Compensation ($)
(g) (2)
Change in Pension Value
and Nonqualified Deferred
Compensation Earnings ($)(h) (3)
All Other Compensation
($)
(i) (4)
Total
($)
(j)
Craig A. Rogerson President and Chief Executive Officer 2020 1,250,000 99,445 5,925,000 - 415,953 2,235 115,041 7,807,674
2019 1,125,000 - 23,814,996 - 1,068,178 330 202,013 26,210,517
2018 1,000,000 - - - 916,000 - 374,556 2,290,556
George F. Knight Executive Vice President and Chief Financial Officer 2020 532,447 1,041,666 1,022,228 - 124,760 16,476 69,229 2,806,806
2019 515,464 250,113 1,602,096 - 306,139 49,028 67,772 2,790,612
2018 496,612 475,000 - - 324,672 - 53,412 1,349,696
Douglas A. Johns
Executive Vice
President and
General Counsel 2020 537,293 862,021 894,343 - 125,594 1,414 66,598 2,487,263
2019 523,936 208,428 1,255,704 - 309,688 430 64,306 2,362,492
2018 517,213 517,213 - - 331,637 - 50,548 1,416,611
Ann Frederix
Senior Vice President and General Manager Global Epoxies 2020 407,065 - 520,436 - 89,891 1,049,294 13,667 2,080,353
2019 375,986 290,626 974,250 - 105,232 793,347 - 2,539,441
Mark I. Alness
Senior Vice President
Global Resins 2020 466,900 352,296 605,661 - 93,773 13,770 61,315 1,593,715
(1)The amounts shown in column (d) for 2020 reflect time-based amounts paid under the LTIP and for Messrs. Rogerson and Knight, also includes a discretionary bonuses of $99,445 and $250,000, respectively, as described in the Compensation Discussion & Analysis above.
(2)The amounts shown in column (g) for 2020 reflect the amounts earned under the 2020 ICP, based on performance achieved for 2020. The material terms of the 2020 ICP are described in the Compensation Discussion & Analysis above. Payments under the 2020 ICP were made in March 2021.
(3)The amounts shown in column (h) reflect the net actuarial increase in the present value of benefits under the Hexion U.S. Pension Plan and the Hexion Supplemental Plan for Messrs Knight and Alness. The increase in net present value for 2020 includes: for Mr. Knight, a $11,211 increase; and for Mr. Alness, a $9,142 increase in net present value. Mr. Rogerson, Ms. Frederix, and Mr. Johns are not participants in these plans. In addition, the amounts reported include excess interest credits in the Hexion non-qualified deferred compensation plans for Messrs. Rogerson, Knight, Johns and Alness. The amount reported for Ms. Frederix is the net present value increase in 2020 to her accrued benefit in the Hexion Belgium Pension Plan. See the Pension Benefits Table below, including the Narrative to Pension Benefits Table, for additional information regarding our pension calculations, including the assumptions used for these calculations.
(4)The amounts shown in the All Other Compensation column for 2020 include: for Mr. Rogerson: $115,041 of company contributions made or accrued to the defined contribution plans,, for Mr. Knight: $69,229 of company contributions made or accrued to the defined contribution plans; for Mr. Johns: $66,598 of company contributions made or accrued to the defined contribution plans; for Mr. Alness: $61,315 of company contributions made or accrued to the defined contribution plans, as well as the cost associated with personal use of his company car; and for Ms.Frederix $13,667, reflecting the cost associated with personal use of her company car.
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GRANTS OF PLAN-BASED AWARDS
The following table presents information about grants of plan-based awards during the year ended December 31, 2020, including the annual incentive compensation plan (2020 ICP) and annual equity awards granted under the 2019 MIP.
Name (a) Estimated Future Payouts Under
Non-Equity Incentive Plan Awards Estimated Future Payouts Under Equity Incentive Plan Awards(1)
All Other
Stock
Awards:
Number of
Shares of
Stock or
Units
(#)
(h) (2)
All Other
Option
Awards:
Number of
Securities
Underlying
Options
(#)
(i) Exercise or
Base
Price of
Option
Awards
($/share)
(j) Grant Date
Fair Value
of Stock
and Option
Awards
($)(k)(3)
Threshold
($)
(b) Target
($)
(c) Maximum
($)
(d) Threshold
(#)
(e) Target
(#)
(f) Maximum
(#)
(g)
Craig A. Rogerson
2020 ICP 3,906 1,562,500 3,125,000 - - - - - - -
2020 Equity Grant
RSUs - - - - - - 150,000 - - 2,370,000
PSUs - - - 112,500 225,000 337,500 - - - 3,555,000
George F. Knight
2020 ICP 946 378,221 756,442 - - - - - - -
2020 Equity Grant
RSUs - - - - - - 25,879 - - 408,888
PSUs - - - 19,410 38,819 58,229 - - - 613,340
Douglas A. Johns
2020 ICP 620 380,749 761,497 - - - - - - -
2020 Equity Grant
RSUs - - - - - - 22,642 - - 357,744
PSUs - - - 16,981 33,962 50,943 - - - 536,600
Ann Frederix
2020 ICP 952 247,848 435,229 - - - - - - -
2020 Equity Grant
RSUs - - - - - - 13,176 - - 208,181
PSUs - - - 9,837 19,673 29,510 - - - 312,255
Mark I. Alness
2020 ICP 711 284,280 568,560 - - - - - - -
2020 Equity Grant
RSUs - - - - - - 15,333 - - 242,261
PSUs - - - 11,500 23,000 34,500 - - - 363,400
(1) The number reported reflects the number of performance-based stock units that could be earned based on achievement of the performance criteria at minimum, target and maximum. The aggregate Target Award was converted into a performance-based award (60%) based on a Hexion Holdings Corporation stock price of $15.00 per share.
(2) The number reported reflects the number of time-based restricted stock units granted. The aggregate Target Award value was converted into a time-based award (40%) based on a Hexion Holdings Corporation stock price of $15.00 per share.
(3) The values shown are based on a fair value of $15.80 per share for the time-based restricted stock units and the performance based stock units at Target.
Hexion Inc. | 141 | 2020 Form 10-K
Narrative to Summary Compensation Table and Grants of Plan-Based Awards Table
Employment Agreements
The Company has employment agreements or employment letters with each of our NEOs, which provide for their terms of compensation, benefits, severance, and certain restrictive covenants. Details regarding the severance and restrictive covenant provisions are provided below under “Potential Payments upon a Termination or Change in Control.”
Mr. Rogerson’s Employment Agreement dated July 1, 2019, includes (i) a base salary at the rate of one million two hundred fifty thousand dollars ($1,250,000) per annum, (ii) an annual cash bonus with a target amount equal to 125% of his base salary, based on Mr. Rogerson’s and/or the Company’s attainment of certain criteria as determined by the Board, and (iii) a commitment that Mr. Rogerson will participate in the Company’s equity incentive program upon terms and conditions established by the Board.
Mr. Knight’s Terms of Employment dated October 22, 2015 provides that he is entitled to (i) receive an annual base salary of $475,000 for his first year (“Base Salary”), (ii) be eligible to receive annual cash incentive compensation payments (the “Annual Bonus”) with a target Annual Bonus opportunity of 70% of his Base Salary; and (iii) be eligible to receive severance equal to 18 months of Base Salary in the event of a termination by the Company without cause. Mr. Knight will not receive additional compensation for serving as a director of the Company.
Ms. Frederix’s Employment Agreement, as amended July 1, 2019, provides for (i) a base salary at the rate of three hundred fifty-two thousand one hundred and twenty-seven euros (EUR 352,127) per annum, (ii) an annual cash bonus with a target amount equal to 60% of her base salary, based on the achievement of certain targets determined annually by the Board, and (iii) a commitment that Ms. Frederix will participate in the Company’s equity incentive program upon terms and conditions established by the Board.In addition, Ms. Frederix receives a company car benefit under the company car policy for Europe.
Mr. Johns’ Employment Agreement dated May 6, 2015 includes (i) a base salary of $497,319.68 per year (“Base Salary”); (ii) annual cash incentive compensation payments (“Annual Bonus”) with an annual target of 70% of his Base Salary; and (iii) eligibility to receive severance equal to 18 months of Base Salary in the event of a termination by the Company without cause. In addition, Mr. Johns received service credit for his prior years of service with MPM and GE for purposes of calculating his retirement benefits.
Mr. Alness’s Terms of Employment dated July 1, 2019 provide for (i) a base salary at the rate of four hundred sixty thousand dollars ($460,000) per year, (ii) an annual cash bonus with a target amount equal to 60% of base salary, based on the achievement of certain targets determined annually by the Board, and (iii) health and welfare and retirement benefits on the same terms and conditions as other eligible associates. In addition, Mr. Alness receives a company car under the company car arrangements offered to eligible U.S. associates.
Grants of Plan-Based Awards
Each of our NEOs received an annual equity grant on March 9, 2020. The grant was delivered in a mix of time-based restricted stock units (40% of total award value) and performance-based stock units (60% of total award value). The time-based restricted stock units vest in equal installments on each of the first three anniversaries of the grant date and will be settled as soon as administratively feasible in July 2023. Fifty percent (50%) of the performance-based stock units are earned based on achievement of EBITDA margin for the trailing twelve month period ending December 31, 2022. A minimum of 50% will be earned if EBITDA margin of 13% is achieved, and a maximum of 150% will be earned if EBITDA margin of 17% is achieved. The remaining 50% of the performance-based stock units are earned based on achievement of adjusted return on invested capital (“Adjusted ROIC”) for the trailing twelve month period ending December 31, 2022. A minimum of 50% will be earned if Adjusted ROIC of 13% is achieved, and a maximum of 150% of the target shares will be earned if Adjusted ROIC of 15% is achieved. Any shares earned will vest and be settled as soon as administratively feasible in July 2023.
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OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table presents information about outstanding stock awards held by our NEOs as of December 31, 2020. The securities underlying the awards are common shares of Hexion Holdings, and the awards were granted under the Hexion Holdings Corporation 2019 Omnibus Incentive Plan. See the footnotes and Narrative to Outstanding Equity Awards Table below, as well as the description of Equity Awards above, for a discussion of this plan and the vesting conditions applicable to the awards.
Stock Awards(1)
Name (a) Number of Shares or Units of Stock That Have Not Vested
(#)
(b) (2)
Market Value of Shares or Units or Stock That Have Not Vested
($)
(c) (3)
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
(#)
(d) (4)
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested
($)(e) (3)
Craig A. Rogerson
Restricted Stock Units 700,000 8,575,000 - -
Performance Stock Units - - 1,508,333 18,477,079
George F. Knight
Restricted Stock Units 62,879 770,268 - -
Performance Stock Units - - 125,152 1,533,112
Douglas A. Johns
Restricted Stock Units 51,642 632,615 - -
Performance Stock Units - - 101,629 1,244,955
Ann Frederix
Restricted Stock Units 35,676 437,031 - -
Performance Stock Units - - 72,263 885,222
Mark I. Alness
Restricted Stock Units 40,333 494,079 - -
Performance Stock Units - - 81,333 996,329
(1)Reflects grants made on September 9, 2019 and March 9, 2020
(2)The award granted September 9, 2019 vests in three equal annual installments on the first three anniversaries of July 1, 2019 however, is subject to forfeiture based on resignation prior to the settlement date. Settlement of vested awards that have not been forfeited will occur and will be settled within 10 days following July 1, 2022. The award granted March 9, 2020 vests in three equal annual installments on the first three anniversaries of the grant date and will be settled as soon as administratively feasible in July 2023.
(3)The market values shown in Columns (h) and (j) are based on the closing price of a share of Hexion Holdings Corporation common stock on the over-the-counter market as of December 31, 2020.
(4)Twenty-five percent (25%) of the award granted September 9, 2019 vests when, at any time during the Vesting Period, a $20 .00 volume-weighted average price (VWAP) is attained. Thereafter, an additional 7.5% of the award will vest with each $1.00 increase in the VWAP during the Vesting Period, until 100% of the award is vested if a $30.00 VWAP is attained during the Vesting Period. Any portion of the award that vests prior to July 1, 2022 areis subject to settlement and delivery of the underlying shares of common stock in July 2022, and any portion of the award that vests on or after July 1, 2022, but before July 1, 2023, is subject to settlement and delivery of the underlying shares of common stock in July 2023. Fifty percent (50%) of the award granted March 9, 2020 is earned based on achievement of EBITDA margin for the trailing twelve month period ending December 31, 2022. A minimum of 50% of the target shares will be earned if EBITDA margin of 13% is achieved and a maximum of 150% of the target shares will be earned if EBITDA margin of 17% is achieved. The remaining 50% of the award granted on March 9, 2020 is earned based on achievement of adjusted return on invested capital (“Adjusted ROIC”) for the trailing twelve month period ending December 31, 2022. A minimum of 50% of the target shares will be earned if Adjusted ROIC of 13% is achieved and a maximum of 150% of the target shares will be earned if Adjusted ROIC of 15% is achieved. Any shares earned will vest and be settled as soon as administratively feasible in July 2023.
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Narrative to Outstanding Equity Awards Table
2019 MIP
In August 2019, the Board of Directors of Hexion Holdings Corporation approved a new long-term equity incentive plan for employees and directors of the Company (the “2019 MIP”). Grants under the 2019 MIP are denominated in common shares of Hexion Holdings Corporation. Under the 2019 MIP, participants may receive grants of options to purchase shares, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards upon terms and conditions determined by the Board.
Grants of time-based and performance-based stock units were made in September 2019 and March 2020 to a select group of certain Company leaders, including our Named Executive Officers. The amount of each award was based on the executive’s scope of responsibility, market data, contribution to value creation and other relevant factors determined by the Board in its discretion. Grants of time-based restricted stock units and performance-based stock units were made. The time-based awards require continued service and function as a retention incentive, while the performance-based awards vest upon achievement of certain stock prices over a four-year period financial metrics, which we believe provides both a retention incentive and encourages the attainment of specific long-term financial objectives. The material terms of the grants made to our Named Executive Officers under the 2019 MIP in 2020 are further described in the Narrative to the Grants of Plan-Based Awards table.
OPTION EXERCISES AND STOCK VESTED
The Option Exercises and Stock Vested table is omitted since there were no such transactions for our NEOs during the year ended December 31, 2020.
PENSION BENEFITS
The following table presents information regarding the benefits payable to each of our NEOs at, following, or in connection with their retirement under the qualified and non-qualified defined benefit pension plans of the Company as of December 31, 2020. The table does not provide information regarding the Company’s qualified or non-qualified defined contribution plans. The amounts shown in the table for each participant represent the present value of the annuitized benefit and do not represent the actual cash value of a participant’s account.
Name
(a) Plan Name
(b) Number of
Years Credited
Service
(#)
(c) (1)
Present
Value of
Accumulated
Benefit
($)
(d) Payments
During Last
Fiscal Year
($)
(e)
Craig A. Rogerson(2)
Hexion U.S. Pension Plan - - -
Hexion Supplemental Plan - - -
George F. Knight Hexion U.S. Pension Plan 12.23 213,099 -
Hexion Supplemental Plan 11.74 102,774 -
Douglas A. Johns(2)
Hexion U.S. Pension Plan - - -
Hexion Supplemental Plan - - -
Ann Frederix (2)
Hexion Belgium Pension Plan 29.92 4,917,556 -
Mark Alness Hexion U.S. Pension Plan 31 258,706 -
Hexion Supplemental Plan 30.51 54,539
(1)The number of years of credited service set forth in column (c) reflects the number of years between the NEO’s hire date and the earlier of (i) the plan freeze date, and (ii) December 31, 2020. The number of years of credited service is used to determine benefit accrual under the applicable plan.
(2)Messrs. Rogerson and Johns, and Ms. Frederix, do not participate in the Hexion U.S. Pension Plan or the Hexion Supplemental Plan.
Narrative to Pension Benefits Table
Hexion U.S. Pension Plan, Hexion Supplemental Plan and Hexion Belgium Pension Plan
The benefits associated with the Hexion U.S. Pension Plan and Hexion Supplemental Plan were frozen June 30, 2009, and January 1, 2009, respectively. Although participants will continue to receive interest credits under the plans, no additional benefit credits will be provided. Prior to the freeze, the Hexion U.S. Pension Plan provided benefit credits equal to 3% of earnings up to the social security wage base for the year, plus 6% of eligible earnings in excess of the social security wage base for the year, subject to the IRS-prescribed limit applicable to tax-qualified plans.
The Hexion Supplemental Plan provided non-qualified pension benefits in excess of allowable limits for the qualified pension plans. The benefit formula mirrored the qualified Hexion U.S. Pension Plan but applied only to eligible compensation above the federal limits for qualified plans. The accrued benefits are unfunded and are paid from our general assets upon the participant’s termination of employment with the Company.
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The Hexion Supplemental Plan provided non-qualified pension benefits in excess of allowable limits for the qualified pension plans. The benefit formula mirrored the qualified Hexion U.S. Pension Plan but applied only to eligible compensation above the federal limits for qualified plans. The accrued benefits are unfunded and are paid from our general assets upon the participant’s termination of employment with the Company.
Under both the Hexion U.S. Pension Plan and Hexion Supplemental Plan, eligible earnings included annual incentive awards that were paid currently, but excluded any long-term incentive awards. Historically, the accrued benefits earned interest credits based on one-year Treasury bill rates until the participant begins to receive benefit payments. Effective January 1, 2012, the plans were amended to provide a minimum interest crediting rate of 300 basis points. Participants vest after the completion of three years of service.
Messrs. Knight and Alness are currently eligible for early retirement under the Hexion U.S. Pension Plan, having met the eligibility criteria of having reached age 55 with 10 years of service with the Company.
Ms. Frederix, our NEO in Belgium, participates in a contributory defined benefit pension plan covering certain employees in Belgium. The benefit is determined based on salary as well as service history with the company. The employee contributes between 1.5% to 5% of eligible earnings based on a specified formula and the company is responsible for the remainder of the cost.
For a discussion of the assumptions applied in calculating the benefits reported in the table above, please see Note 16 to our Consolidated Financial Statements included in Part II of Item 8 in this Annual Report on Form 10-K.
NONQUALIFIED DEFERRED COMPENSATION
The following table presents information with respect to each defined contribution or other plan that provides for the deferral of compensation on a basis that is not tax-qualified.
Name (a) Executive
Contributions
in Last FY
($)
(b) Registrant
Contributions
in Last FY
($)
(c) (1)
Aggregate
Earnings (Loss) in Last
FY
($)
(d) Aggregate Withdrawals/
Distributions
($)
(e) Aggregate
Balance at
Last FYE
($)
(f)
Craig A. Rogerson
Hexion Supplemental Plan - - - - -
Hexion SERP - 88,050 4,191 - 190,660
George F. Knight
Hexion Supplemental Plan - - 6,394 - 216,616
Hexion SERP - 28,007 3,478 - 133,327
Douglas A. Johns
Hexion Supplemental Plan - - - - -
Hexion SERP - 28,779 2,652 - 105,744
Ann Frederix
Hexion Supplemental Plan - - - - -
Hexion SERP - - - - -
Mark I. Alness
Hexion Supplemental Plan - - 5,293 - 179,332
Hexion SERP - 14,974 3,384 - 122,927
(1) The amount shown in column (c) for the Hexion SERP is included in the All Other Compensation column of the Summary Compensation Table for 2020. These amounts were earned in 2019 and credited to the accounts by Hexion in 2020.
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Narrative to the Nonqualified Deferred Compensation Table
Hexion Supplemental Plan
Effective January 1, 2009, the benefits associated with this plan were frozen. This plan provided supplemental retirement benefits in the form of voluntary associate deferral opportunities and employer match on compensation earned above the IRS limit on qualified plans. The Hexion Supplemental Plan benefits are unfunded and paid from our general assets upon the associate’s termination of employment. Effective January 1, 2016, interest credits are made to the participants’ accounts at an interest rate determined by the Company, which has been defined as the greater of (i) the rate in the fixed income fund of the 401(k) Plan and (ii) 3%.
Hexion SERP
The Company adopted the Hexion SERP in 2011 to provide certain of our executives and other highly compensated associates, including our NEOs, an annual contribution of 5% of eligible earnings above the maximum limitations set by the IRS for contributions to a qualified defined contribution plan. Under the Hexion SERP, an unfunded non-qualified plan, eligible earnings are limited to base salary and amounts earned under the Company’s annual incentive compensation plan. Account credits are made to the plan during the third quarter of each year. Interest credits are provided in participants’ SERP accounts at an interest rate determined by the Company. Effective January 1, 2016, the interest rate determined by the Company is the greater of (i) the rate in the fixed income fund of the 401(k) Plan and (ii) 3%. This deferred compensation is paid six months following termination of employment.
POTENTIAL PAYMENTS UPON TERMINATION OR CHANGE-IN-CONTROL
The Company has employment agreements or letters with Rogerson, Knight, and Johns. The section below describes the payments that may be made to our Named Executive Officers upon separation, pursuant to these individual agreements, applicable corporate practices, or in connection with a change in control. For payments made upon a retirement, other than in connection with a separation or change in control, also see the discussion in the Pension Benefits and Nonqualified Deferred Compensation tables and related narratives above.
Severance/Termination Payments
The employment agreement with Mr. Rogerson provides that if Mr. Rogerson’s employment is terminated by the Company without cause or he resigns for good reason (as defined in his employment agreement), the Company will provide him with an amount equal to two times the sum of (x) his annual base salary and (y) his target annual bonus, paid in equal installments for 24 months, and continued COBRA coverage for 18 months at the expense of the Company (or until Mr. Rogerson becomes ineligible for such coverage), subject to his execution of a release of claims against the Company and his continued compliance with post-termination covenants. And provided further, if such termination of employment occurs following a change of control (as defined in the agreement), then the severance payment shall be equal to three times the sum of his annual base salary plus target bonus, such amounts to be paid in substantially equal installments for a period ending in 36 months. In addition, any accrued but unpaid compensation through the termination date (such as accrued but unpaid base salary, earned but unpaid bonus, and accrued and unused vacation) will be paid in a lump-sum payment at the time of termination. The employment agreement also contains an agreement to not disclose non-public information and a 12 month post-termination non-competition and non-solicitation agreement.
In addition, the employment agreement with Mr. Rogerson provides that if Mr. Rogerson’s employment is terminated by the Company upon or following a change-in-control (as defined in his employment agreement), the Company will provide him with an amount equal to three times the sum of (x) his annual base salary and (y) his target annual bonus, paid in equal installments for 36 months, and continued COBRA coverage for 18 months at the expense of the Company (or until Mr. Rogerson becomes ineligible for such coverage), subject to his execution of a release of claims against the Company and his continued compliance with post-termination covenants.
Under Mr. Knight’s terms of employment, he would receive 18 months of continued base salary if his employment is terminated through no fault of his own. In addition to agreeing to not disclose non-public information, pursuant to the Management Investor Rights Agreement under the 2011 Equity Plan, Mr. Knight has agreed not to compete with the Company during the period he receives severance payments from the Company and not to solicit Company associates for one year following the date he ceases receiving severance payments from the Company.
Under Mr. Johns’ terms of employment, he would receive 18 months of continued base salary if his employment is terminated by the Company without cause. In addition to agreeing to not disclose non-public information, pursuant to the Management Investor Rights Agreement under the 2011 Equity Plan, Mr. Johns has agreed not to compete with the Company during the period he receives severance payments from the Company and not to solicit Company associates for one year following the date he ceases receiving severance payments from the Company.
Ms. Frederix is entitled to severance based on local legislation in the event of involuntary termination without cause.
Mr. Alness is entitled to severance based on the standard guidelines for an E1 level executive from the March 2014 MPM Severance Plan, which was adopted by Hexion Holdings Corporation following emergence from Chapter 11. The standard guideline for an E1 level executive are two (2) weeks of severance per year of service with a minimum of thirty-six (36) weeks and a maximum of fifty-two (52) weeks. Based on his years of service with the company, Mr. Alness would receive fifty-two (52) weeks.
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Termination Payments
The following table describes payments our NEOs would have received had the individual’s employment been terminated by the Company without cause, or in the case of Rogerson, by the executive for good reason or a change-in-control, as of December 31, 2020.
Name Cash Severance ($)(1)
Estimated Value of Benefits
($)(2)
2019 LTI (3)
Restricted
Stock
Units(4)
Performance
Stock
Units (Refer to footnote) Pension and Nonqualified Plan Payouts(5)
Craig A. Rogerson
Termination Without Cause 5,625,000 35,195 1,667,420 2,858,333 (6) 190,660
Resignation with Good Reason 5,625,000 35,195 - 2,858,333 (6) 190,660
Termination Due to Change-in-Control 8,437,500 35,195 1,667,420 8,575,000 (7) 190,660
Change in Control - - - 8,575,000 (7) -
George F. Knight
Termination Without Cause 810,474 24,186 250,113 256,755 (6) 665,816
Resignation with Good Reason - - - - (8) 665,816
Termination Due to Change-in-Control - - 250,113 770,268 (7) 665,816
Change in Control - - - 770,268 (7) -
Douglas A. Johns
Termination Without Cause 815,890 47,479 208,428 210,870 (6) 105,744
Resignation with Good Reason - - - - (8) 105,744
Termination Due to Change-in-Control - - 208,428 632,615 (7) 105,744
Change in Control - - - 632,615 (7) -
Ann Frederix
Termination Without Cause - - 118,702 145,677 (6) -
Resignation with Good Reason - - - - (8) -
Termination Due to Change-in-Control - - 118,702 437,031 (7) -
Change in Control - - - 437,031 (7) -
Mark I. Alness
Termination Without Cause 473,800 19,840 166,742 164,693 (6) 615,504
Resignation with Good Reason - - - - (8) 615,504
Termination Due to Change-in-Control - - 166,742 494,079 (7) 615,504
Change in Control - - - 494,079 (7) -
(1)This column reflects cash severance payments due under the NEO’s employment agreement, or under the applicable severance guidelines of the Company, as described above, based on salary as of December 31, 2020. The cash severance due to Ms. Frederix would be based on applicable local legislation and company guidelines.
(2)This column reflects the estimated value of health care benefits and outplacement services. Under the Company’s severance guidelines, each NEO, other than Ms.Frederix, would be entitled to 12 months of executive outplacement services in the event of a termination through no fault of their own. The values are based upon the Company’s estimated cost of providing such benefits as of December 31,2020.
(3)The amount shown in this column is the amount that would be due pursuant to the 2019 LTI plan provisions.
(4)Amounts shown reflect the value of outstanding restricted stock units that would be due pursuant to plan and award agreement provisions, calculated based on the year-end stock price of Hexion Holdings Corporation.
(5)The amounts shown reflect the value of vested benefits as of December 31, 2020 for each of the other NEOs.
(6)The performance stock units granted on September 9, 2019 (the “2019 PSUs”) vest based on stock price and, upon termination without cause and, in Mr. Rogerson’s case, resignation with good reason, on December 31, 2020, the 2019 PSUs would continue to have the opportunity to vest, based on stock price, for the one-year period following termination of employment. Any 2019 PSUs that subsequently vest during the one-year period following termination of employment would be settled in shares of Hexion Holdings Corporation common stock in July 2022. The performance stock units granted on March 9, 2020 (the “2020 PSUs”) are earned based on achievement of specified Company performance criteria measured for the trailing twelve month period ending December 31, 2022. Upon termination without cause and, in Mr. Rogerson’s case, resignation with good
Hexion Inc. | 147 | 2020 Form 10-K
reason, on December 31, 2020, one-third of the 2020 PSUs would remain outstanding and eligible to be earned based on achievement of the performance criteria. Any 2020 PSU’s subsequently earned would vest and be settled in shares of Hexion Holdings Corporation common stock in July 2023.
(7)With respect to the 2019 PSUs, upon a change in control, the 20 consecutive trading-day volume weighted average price per share of Hexion Holdings Corporation common stock (“VWAP”) shall be deemed to equal the per share price of Hexion Holdings Corporation common stock implied (or actually paid) in the change in control transaction as of such change in control, and the performance period shall expire immediately following such change in control. Any PSUs that vest based on the VWAP, as well as any previously vested PSUs, shall be settled within 10 days following such change in control in an amount of cash equal to the fair market value of such PSUs on the date of the change in control. With respect to the 2020 PSUs, if a change in control occurs prior to the end of the performance period, the performance period shall expire immediately following such change in control, and a number of PSUs equal to the product of (x) the number of PSUs granted multiplied by (y) a fraction, the numerator of which is the number of days that elapsed from January 1, 2020 through the date of the change in control and the denominator of which is the number of days from January 1, 2022 through December 31, 2022, shall be deemed earned and shall vest immediately upon such change in control. Any PSUs that are deemed earned shall vest and be settled as soon as administratively feasible, but in no event later than 14 days following such change in control, in an amount of cash equal to the fair market value of such vested PSUs on the date of the change in control.
(8)Messrs. Knight, Johns, Alness, and Ms. Frederix, do not have a resignation with good reason provision in employment arrangements that would entitle them to any additional benefits beyond any benefits that have already vested as of December 31, 2020.
In addition to these benefits, our NEOs would also generally be entitled to receive the benefits set forth above in the Pension Benefits Table and Nonqualified Deferred Compensation Table following a termination of employment for any reason.
Other Change-in-Control Payments
NEOs will be entitled to accelerated vesting of their outstanding unvested equity awards under the 2019 MIP, as reflected above, in connection with certain corporate transactions or change-in-control transactions. In addition, under the 2016 LTIP Awards, the service components of the awards would be deemed satisfied upon a change-in-control transaction but the performance conditions would not be deemed satisfied upon a change-in-control transaction.
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PAY RATIO DISCLOSURE
As required by Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and Item 402(u) of Regulation S-K, following is information about the relationship of the annual total compensation of our employees and the total compensation of Mr. Craig Rogerson, our CEO. The pay ratio included in this information is a reasonable estimate calculated in a manner consistent with Item 402(u) of Regulation S-K.
For the most recently completed fiscal year ended December 31, 2020:
•The median of the annual total compensation of all our employees (other than our CEO) was $78,495; and
•The annual total compensation of our CEO was $7,807,674.
Pay Ratio
Annual Total Compensation of Mr. Rogerson, our CEO Median of the Annual Total Compensation of All Employees Pay Ratio
$7,807,674
$78,495
Methodology
Consistent with Item 402(u) of Regulation S-K, we have determined the median paid employee’s to-date average foreign exchange rates were used to translate the local currency to U.S dollars for the median paid employee for 2020. The pay ratio was 357 to 1 in 2019, primarily due to the one-time stock award granted to Mr. Rogerson in 2019. In 2020, the pay ratio decreased to 99 to 1, as Mr. Rogerson’s 2020 annual grant was less than his one-time stock award in 2019.
The table below lists the components of total compensation for Mr. Rogerson:
Compensation Component Annualized Amount
Salary $ 1,250,000
Bonus 99,445
Stock Awards 5,925,000
Non-Equity Incentive Plan 415,953
Change in Pension Value and Non-qualified Deferred Compensation Earnings 2,235
All Other Compensation:
Employer 401(k) match (qualified plan)
14,250
Employer annual retirement contribution (qualified plan)
8,550
Employer supplemental executive retirement plan contribution, including interest credits (non-qualified plan)
92,241
Commuting and housing allowance, including tax gross-up -
Total annualized compensation $ 7,807,674
DIRECTOR COMPENSATION
The following table presents information regarding the compensation earned or paid during 2020 to our directors who are not also NEOs and who served on the Board of Directors of Hexion Holdings during the year.
Name Fees Earned or Paid in Cash
($) Stock Awards Total
($)
Carol S. Eicher(1)
117,500 326,523 444,023
Patrick Bartels(1)
125,000 326,523 451,523
Joaquin Delgado(1)
110,000 326,523 436,523
Jeffrey D. Benjamin(1)
170,000 410,800 580,800
James N. Chapman(1)
140,000 326,523 466,523
Stephen D. Newlin(1)
110,000 326,523 436,523
Michael J. Shannon(1)
125,000 326,523 451,523
John K. Wulff(1)
130,000 326,523 456,523
Narrative to the Director Compensation Table
The members of the new independent board of directors were selected based on their qualifications and prior experience in the chemical industry and prior service on similar boards. The Company engaged a consultant to assist with determining our new directors’ compensation arrangements based on a review and analysis of the director compensation arrangements of the Company’s peer group of companies. Based on that analysis and the consultant’s recommendation, as well as the level of activity expected of the Company’s directors
Hexion Inc. | 149 | 2020 Form 10-K
over the next few years, the Company adopted the following compensation arrangement for directors which will be evaluated on an annual basis:
Compensation Type Amount ($)
Regular Board Service Annual Cash Retainer 100,000
Regular Board Service Annual Equity Grant 110,000
Lead Director Annual Cash Retainer 130,000
Lead Director Annual Equity Grant 140,000
Audit Committee Chair Retainer 25,000
Compensation Committee Chair Retainer 20,000
Nominating & Governance Committee Chair Retainer 12,500
Environmental, Health & Safety Committee Chair Retainer 20,000
Listing Committee Chair Retainer 25,000
Audit Committee Member Retainer 10,000
Listing Committee Member Retainer 10,000
Compensation Committee Member Retainer 5,000
Nominating & Governance Committee Member Retainer 5,000
Environmental, Health & Safety Committee Member Retainer 5,000
During 2020, Directors received grants of time-based restricted stock units (RSUs) on January 31, 2020 and August 14, 2020. The RSUs granted on January 31, 2020 reflect the initial equity grant made to directors following the Company’s emergence from Chapter 11 on July 1, 2019. These RSUs vest in three equal annual installments on July 1, 2020, July 1, 2021 and July 1, 2022. The RSUs granted on August 14, 2020 reflect the 2020 annual equity grant and vest in three equal annual installments on June 1, 2021, June 1, 2022 and June 1, 2023. Settlement of the RSUs granted on August 14, 2020 is deferred until the Director leaves Board service. The table below shows the current number of unvested RSUs held by each of our directors.
Name Unvested
RSUs
Carol S. Eicher 16,222
Patrick Bartels 16,222
Joaquin Delgado 16,222
Jeffrey D. Benjamin 20,445
James N. Chapman 16,222
Stephen D. Newlin 16,222
Michael J. Shannon 16,222
John K. Wulff 16,222
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Benjamin, Chapman, Newlin, and Wulff, whose names appear on the Compensation Committee Report above, are not employed by Hexion Holdings. None of these directors is or has been an executive officer of the Company. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, the executive officers of which served as a director or member of our Compensation Committee during the fiscal year ended December 31, 2020.
Hexion Inc. | 150 | 2020 Form 10-K

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
Hexion Holdings is our ultimate parent company and indirectly owns 100% of our capital stock. The following table sets forth information available to the Company regarding the beneficial ownership of Hexion Holdings, as of December 31, 2020, unless otherwise noted below, and showing the combined number of Class B common Stock and warrants, granting rights to purchase Class B Common Stock, and the percentage owned by:
•each person known to beneficially own more than 5% of the Class B common Stock of Hexion Holdings;
•each of Hexion’s 2020 Named Executive Officers;
•each current member of the Board of Directors of Hexion Holdings; and
•all of the executive officers and current members of the Board of Directors of Hexion Holdings as a group.
As of December 31, 2020, Hexion Holdings had 58,529,727 Class B Common Stock issued and 57,568,295 outstanding as well as 10,177,908 outstanding warrants. The amounts and percentages of common units and warrants beneficially owned are reported on the basis of regulations of the SEC governing the determination of beneficial ownership of securities. Under the rules of the SEC, a person is deemed to be a “beneficial owner” of a security if that person has or shares “voting power,” which includes the power to vote or to direct the voting of such security, or “investment power,” which includes the power to dispose of or to direct the disposition of such security. A person is also deemed to be a beneficial owner of any securities of which that person has a right to acquire beneficial ownership within 60 days. Under these rules, more than one person may be deemed a beneficial owner of the same securities and a person may be deemed a beneficial owner of securities as to which he has no economic interest. Except as otherwise indicated in the footnotes below, each of the beneficial owners has, to our knowledge, sole voting and investment power with respect to the indicated Class B Common Stock and warrants, and has not pledged any such units as security.
Beneficial Ownership
of Equity Securities
Name of Beneficial Owner Amount of Beneficial Ownership Percent of Outstanding Equity
Funds affiliated with Goldentree Asset Management, LP(1)
13,423,984 21.5%
Funds and managed accounts affiliated with Cyrus Capital Partners, L.P.(2)
9,205,306 14.9%
Funds affiliated with Monarch Alternative Capital LP(3)
6,603,589 11.2%
Funds affiliated with Blackstone(4)
5,568,963 9.7%
Funds affiliated with Brigade Capital Management, L.P.(5)
4,628,811 8.0%
Funds affiliated with Davidson Kempner Capital Management, L.P.(6)
3,911,170 6.8%
Funds affiliated with Capital Research & Management Company (U.S.)(7)
3,185,752 5.5%
Funds affiliated with Oak Hill Advisors, L.P.(8)
3,127,867 5.4%
Funds affiliated with Loomis Sayles & Company, L.P.(9)
3,055,040 5.3%
Patrick J. Bartels(10)
- *
Jeffrey D. Benjamin(10)
- *
James N. Chapman(10)
- *
Joaquin Delgado(10)
- *
Carol S. Eicher(10)
- *
Michael J. Shannon(10)
- *
John K. Wulff(10)
- *
Stephen D. Newlin(10)
- *
Craig A. Rogerson (11)
- *
George F. Knight (11)
- *
John P. Auletto (11)
- *
Nathan E. Fisher (11)
- *
Douglas A. Johns (11)
- *
Matthew A. Sokol (11)
- *
Paul G. Barletta (11)
- *
Ann Frederix (11)
- *
Mark Alness(11)
- *
All Directors and Executive Officers as a group - *
* less than 1%
(1)As of February 16, 2021. Includes 4,762,314 shares issuable upon exercise of a warrants issued on July 1, 2019. The shares and warrants are owned by funds managed by GoldenTree Asset Management, LP, whose address is 300 Park Ave, New York, NY 10022.
Hexion Inc. | 151 | 2020 Form 10-K
(2)As of February 16, 2021. Includes 4,151,668 shares issuable upon exercise of a warrants issued on July 1, 2019. The address of Cyrus Capital Partners, LP is 65 East 55 Street, 34th Floor, New York, NY 10022
(3)As of February 16, 2021. Includes 1,263,926 shares issuable upon exercise of a warrants issued on July 1, 2019. Monarch Alternative Capital LP (“MAC”) serves as advisor or agent to certain funds and entities that hold the securities referenced. By virtue of the agreements governing such relationships, MAC may be deemed to beneficially own such securities. MDRA GP LP (“MDRA GP”) is the general partner of MAC and Monarch GP LLC (“Monarch GP”) is the general partner of MDRA GP. By virtue of such relationships, MAC, MDRA GP and Monarch GP may be deemed to share voting and dispositive power over the securities. The address for these entities is 535 Madison Avenue, 26th Floor, New York, New York 10022.
(4)As of February 16, 2021. Represents (i) 375,006 shares held directly by GSO Churchill Partners LP, (ii) 1,708,340 shares held directly by GSO Credit Alpha II Trading (Cayman) LP, and (iii) 3,485,617 shares held directly by GSO CSF III Holdco (Cayman) LP (and, collectively with GSO Churchill Partners LP and GSO Credit Alpha II Trading (Cayman) LP, the “BXC Funds”). GSO Churchill LLC is the general partner of GSO Churchill Partners LP. GSO Credit Alpha Associates II LP is the general partner of GSO Credit Alpha II Trading (Cayman) LP. The general partners of GSO Credit Alpha Associates II LP are GSO Credit Alpha Associates II (Delaware) LLC and GSO Credit Alpha Associates II (Cayman) Ltd. GSO Capital Solutions Associates III LP is the general partner of GSO CSF III Holdco (Cayman) LP. The general partners of GSO Capital Solutions Associates III LP are GSO Capital Solutions Associates III (Delaware) LLC and GSO Capital Solutions Associates III (Cayman) Ltd. GSO Holdings I L.L.C. is the managing member of each of GSO Churchill LLC, GSO Credit Alpha Associates II (Delaware) LLC and GSO Capital Solutions Associates III (Delaware) LLC, and a shareholder of each of GSO Credit Alpha Associates II (Cayman) Ltd. and GSO Capital Solutions Associates III (Cayman) Ltd. Blackstone Holdings II L.P. is the managing member of GSO Holdings I L.L.C. with respect to securities beneficially owned by the BXC Funds. Blackstone Holdings I/II GP L.L.C. is the general partner of Blackstone Holdings II L.P. The Blackstone Group Inc. is the sole member of Blackstone Holdings I/II GP L.L.C. Blackstone Group Management L.L.C. is the sole holder of the Class C common stock of The Blackstone Group Inc. Blackstone Group Management L.L.C. is wholly-owned by Blackstone’s senior managing directors and controlled by its founder, Stephen A. Schwarzman. Each of the foregoing entities and Mr. Schwarzman disclaims beneficial ownership of the securities held directly by the BXC Funds (other than the BXC Funds to the extent of their direct holdings). The principal business address of each is 345 Park Avenue, New York, NY 10154.
(5)As of February 17, 2021. Brigade is Brigade Capital Management, LP (on behalf of its various funds and accounts). The address is 399 Park Avenue, 16th Floor, New York, NY 10022.
(6)The address of Davidson Kempner Capital Management, L.P. is 520 Madison Avenue, 30th Floor, New York, NY 10022. The share amount listed has been obtained from a third-party source and has not been confirmed by Davidson Kempner Capital Management, L.P.
(7)As of January 22, 2021. The address of Capital Research & Management Company is 333 S. Hope St., 55th Floor, Los Angeles, CA 90071. The share amount listed has been obtained from a third-party source and has not been confirmed by Capital Research & Management Company.
(8)As of January 22, 2021. The address of Oak Hill Advisors, L.P. is 114 Avenue of the Americas, 27th Floor, New York, NY 10036. The share amount listed has been obtained from a third-party source and has not been confirmed by Oak Hill Advisors, L.P.
(9)The address of Loomis, Sayles & Company, L.P. is One Financial Ctr., Boston, MA 02111.
(10)The address for Messrs. Bartels, Benjamin, Chapman, Delgado, Shannon, Wulff, Newlin and Ms. Eicher is c/o Hexion Inc., 180 E. Broad St., Columbus, Ohio 43215
(11)The address for Messrs. Rogerson, Knight, Auletto, Fisher, Johns, Sokol, Barletta, Alness and Ms. Frederix is c/o Hexion Inc., 180 E. Broad St., Columbus, Ohio 43215.
As of December 31, 2020, Hexion Inc. has no compensation plans that authorize issuing our common stock to employees or non-employees. In addition, there have been no sales or repurchases of our equity securities during the past fiscal year. However, our Parent Company, Hexion Holdings, has issued and may issue from time to time equity awards to our employees and directors that are denominated in or based upon the Class B Common Stock of Hexion Holdings. As the awards were granted in exchange for service to us these awards are included in our consolidated financial statements. For a discussion of these equity plans see Note 16 in Item 8 of Part II and Item 11 of Part III of this Annual Report on Form 10-K. Additionally, our Parent Company, Hexion Holdings, has repurchased 961,432 Class B Common Stock and 47,537 warrants during the year ended December 31, 2020.
Hexion Inc. | 152 | 2020 Form 10-K

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Review, Approval or Ratification of Transactions with Related Persons
We have a written Statement of Policy and Procedures Regarding Related Person Transactions that has been adopted by our Board of Directors.
The policy requires the Company to establish and maintain procedures for identifying potential or existing transactions between the Company and related persons. The policy generally adopts the definitions of “related person” and “transaction” set forth in Regulation S-K Item 404 under the Securities Act of 1933 and the Securities Exchange Act of 1934.
The types of transactions that are covered by our policy include financial and other transactions, arrangements or relationships in which the Company or any of its subsidiaries is a participant and in which a related person has a direct or indirect material interest, where the amount involved exceeds $75,000.
Related persons include directors and director nominees, executive officers, shareholders beneficially owning more than 5% of the Company’s voting stock, and immediate family members of any of the previously described persons. A related person could also be an entity in which a director, executive officer or 5% shareholder is an employee, general partner or 5% shareholder.
Transactions identified by management that are between the Company and a related person that involve amounts exceeding $75,000 will be reviewed by the Board of Directors, the Audit Committee, or another appropriate committee of the Board of Directors. In certain situations, the Board or a committee may delegate authority to an individual Board member to review related person transactions.
Under the policy, the Board of Directors or a committee of the Board of Directors is directed to approve only those related person transactions that are determined by them in good faith to be in, or not inconsistent with, the best interest of the Company and its shareholders. In making this determination, all available, relevant facts and circumstances will be considered, including the benefits to the Company; the impact of the transaction on the related person’s independence; the availability of other sources of comparable products or services; the terms of the transaction; and the terms available to unrelated third parties or to employees in general.
Our policy recognizes that there are situations where related person transactions may be in, or may not be inconsistent with, the best interests of the Company and its shareholders, especially while we are a “controlled company.”
There were no material related person transactions where our policies and procedures did not require review, approval or ratification or where such policies and procedures were not followed.
Related Transactions
Transactions with Apollo
As of the Company’s emergence from bankruptcy on July 1, 2019, Apollo is no longer a related party to the Company. The disclosures below are through July 1, 2019 and only reflect the time period when Apollo was a related party. Sales to various Apollo affiliates were $1 million and $2 million for the Predecessor period January 1, 2019 through July 1, 2019 and for the year ended December 31, 2018. There were no purchases during the Predecessor period January 1, 2019 through July 1, 2019 and for the year ended December 31, 2018.
Management Consulting Agreement
The Company was party to a Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) pursuant to which the Company received certain structuring and advisory services from Apollo and its affiliates. Apollo was entitled to an annual fee equal to the greater of $3 million or 2% of the Company’s Adjusted EBITDA. In conjunction with the Company’s Chapter 11 proceedings and the Support Agreement filed on April 1, 2019, Apollo agreed to waive its annual management fee for 2019. In connection with the Company’s emergence from Chapter 11, the Management Consulting Agreement was terminated pursuant to the Confirmation Order, as of the Effective Date.
Transactions with MPM
As of May 15, 2019, MPM was no longer under the common control of Apollo and, accordingly, is no longer a related party to the Company. During the year ended December 31, 2018, the Company sold less than $1 million of products to MPM. There were no products sold to MPM during the Predecessor period January 1, 2019 through July 1, 2019. During the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, the Company earned less than $1 million from MPM as compensation for acting as distributor of products and had purchases of $10 million and $32 million, respectively.
Hexion Inc. | 153 | 2020 Form 10-K
Shared Services Agreement
The Company previously held a shared services agreement with MPM (the “Shared Services Agreement”). Under this agreement, the Company provided to MPM, and MPM provided to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. On March 14, 2019, MPM terminated the Shared Services Agreement, which triggered a transition period for the parties to work together to facilitate an orderly transition of services. The transition of services was completed on September 1, 2020. During the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018, the Company incurred approximately $15 million and $28 million, respectively, of net costs for shared services and MPM incurred approximately $14 million and $21 million of net costs for shared services. Included in the net costs incurred during the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018 were net billings from Hexion to MPM of $11 million and $14 million, respectively.
Other Transactions and Arrangements
In March 2020, the Company entered into a $10 million short term affiliate loan with its Parent at a 0% interest rate to fund Parent share repurchases. In June 2020, the Company made a $10 million non-cash distribution to its Parent treated as a return of capital to settle this affiliate loan. The Company made an additional $3 million return of capital distribution to its Parent to fund additional Parent share repurchases in December 2020. This return of capital reduced “Paid-in capital” in the Consolidated Balance Sheet at December 31, 2020.
The Company sells products and provides services to, and purchases products from, its other joint ventures which are accounted for under the equity method of accounting. Refer to the below table for a summary of the sales and purchases with the Company and its joint ventures which are recorded under the equity method of accounting:
Successor Predecessor
Year Ended December 31, 2020 July 2, 2019 through December 31, 2019 January 1, 2019 through July 1, 2019 Year Ended December 31, 2018
(in millions)
Sales to joint ventures(1)(2)
$ 2 $ 2 $ 2 $ 9
Purchases from joint ventures(2)
1 2 2 6
(1)Sales to joint ventures includes sales to the Russia JV of $1 million, $1 million, $1 million, and $7 million for the year ended December 31, 2020, the Successor period July 2, 2019 through December 31, 2019, the Predecessor period January 1, 2019 through July 1, 2019 and the year ended December 31, 2018 and is included in the Held for Sale Business.
(2)There were no sales to joint ventures or purchases from joint ventures for the Predecessor period July 1, 2019.
(in millions) December 31, 2020 December 31, 2019
Accounts receivable from joint ventures(1)
$ <1 $ 1
Accounts payable to joint ventures - <1
(1) Accounts receivable from joint ventures is mostly comprised of receivables from the Russia JV included in the Held for Sale Business. Accounts receivable from the Company’s other joint ventures was less than $1 million for both December 31, 2020 and 2019.
In addition to the accounts receivable from joint ventures disclosed above, the Company had a loan receivable of $4 million and $7 million as of December 31, 2020 and 2019, respectively, from the Russia JV. This loan receivable has been included in “Long-term assets held for sale” within the Consolidated Balance Sheets.
Director Independence
We and Hexion Holdings have no securities listed for trading on a national securities exchange or in an automated inter-dealer quotation system of a national securities association which has requirements that a majority of our Board of Directors be independent. However, for purposes of complying with the disclosure requirements of the Securities and Exchange Commission, we and Hexion Holdings have adopted the definition of independence used by the New York Stock Exchange. Under the New York Stock Exchange’s definition of independence, Messrs. Bartels, Benjamin, Chapman, Delgado, Shannon, Wulff, Newlin and Ms. Eicher are independent.
Hexion Inc. | 154 | 2020 Form 10-K

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
PricewaterhouseCoopers LLP (“PwC”) is the Company’s principal accounting firm. The following table sets forth the fees billed by PwC to the Company in 2020 and 2019 (in millions):
PwC
2020 2019
Audit fees (1)
$ 4.2 $ 7.0
Audit-related fees (2)
0.2 0.2
Tax fees (3)
0.6 1.5
Other fees (4)
1.4 0.1
Total $ 6.4 $ 8.8
(1)Audit Fees: This category includes fees and expenses billed by PwC for the audits of the Company’s financial statements and for the reviews of the financial statements included in the Company’s Quarterly Reports on Form 10-Q. This category includes audit fees and expenses for engagements performed at U.S. and international locations.
(2)Audit-Related Fees: This category includes fees and expenses billed by PwC for assurance and related services that are reasonably related to the performance of the audit or review of the Company’s financial statements. This category includes fees for the reviews of SEC registration statements and other SEC reporting services as well as audit fees for other stand-alone financial statements of certain entities of the registrant.
(3)Tax Fees: This category includes fees and expenses billed by PwC for domestic and international tax compliance, planning services, tax advice and assistance with bankruptcy.
(4)Other Fees: This category includes other fees billed for non-recurring work, related to transactions, due diligence or other one-time services.
Pre-Approval Policy and Procedures
Under a policy adopted by the Audit Committee, all audit and non-audit services provided by our principal accounting firms must be pre-approved by the Audit Committee or a member designated by the Audit Committee. All services pre-approved by the designated member are reported to the full Audit Committee at its next regularly scheduled meeting. The pre-approval of audit and non-audit services may be made at any time up to a year before the commencement of the specified service. Under the policy, the Company is prohibited from using its principal accounting firms for certain non-audit services, the list of which is based upon the list of prohibited activities in the SEC’s rules and regulations. Pursuant to the pre-approval provisions set forth above, the Audit Committee approved all services related to the Audit Fees described in (1) above.
Hexion Inc. | 155 | 2020 Form 10-K
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(1)Consolidated Financial Statements - The financial statements and related notes of Hexion Inc., and the reports of independent registered public accounting firms are included at Item 8 of this report.
(2)Financial Statement Schedules - Schedule II - Valuation and Qualifying Accounts and Reserves. All other schedules are omitted because they are not applicable or not required, or because that required information is shown in either the Consolidated Financial Statements or in the notes thereto.
(3)Exhibits Required by SEC Regulation S-K - The following Exhibits are filed herewith or incorporated herein by reference:
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
2.1† Transaction Agreement dated as of April 22, 2005 among RPP Holdings, Resolution Specialty Materials Holdings LLC, BHI Acquisition Corp., BHI Merger Sub One, BHI Merger Sub Two Inc. and Borden Chemical Inc.
S-1/A 333-124287 2.1 7/15/2005
2.2† SOC Resins Master Sale Agreement dated July 10, 2000 among Shell Oil Company, Resin Acquisition, LLC and Shell Epoxy Resins Inc. S-4 333-57170 2.1 3/16/2001
2.3† SPNV Resins Sale Agreement dated as of September 11, 2000 between Shell Petroleum N.V. and Shell Epoxy Resins Inc. S-4 333-57170 2.2 3/16/2001
2.4 Assignment and Assumption Agreement dated November 13, 2000 between Shell Epoxy Resins Inc. and Shell Epoxy Resins LLC S-4 333-57170 2.3 3/16/2001
2.5 Assignment and Assumption Agreement dated November 14, 2000 between Resin Acquisition, LLC and RPP Holdings LLC S-4 333-57170 2.4 3/16/2001
3.1 Restated Certificate of Incorporation of Hexion Inc. dated as of January 15, 2015
10-K 001-00071 3.1 3/10/2015
3.2 Amended and Restated Bylaws of Hexion Inc.
10-K 001-00071 3.2 3/10/2015
4.1 Form of Indenture between Borden, Inc. and The Bank of New York, as Trustee, dated as of December 15, 1987, as supplemented by the First Supplemental Indenture dated as of December 15, 1987, the Second Supplemental Indenture dated as of February 1, 1993 and the Third Supplemental Indenture dated as of June 26, 1996, related to the $200,000,000 9.20% Debentures due 2021 and $750,000,000 7.875% Debentures due 2023 S-3 33-45770 4(a)
thru 4(d)
4.2 Indenture, dated as of January 29, 2010, by and among Hexion Finance Escrow LLC, Hexion Escrow Corporation and Wilmington Trust FSB, as trustee, related to the $1,000,000,000 8.875% Senior Secured Notes due 2018
8-K 001-00071 4.1 2/4/2010
4.3 Supplemental Indenture, dated as of January 29, 2010, by and among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust FSB, as trustee, related to the 8.875% Senior Secured Notes due 2018
8-K 001-00071 4.2 2/4/2010
4.4 Supplemental Indenture, dated as of June 4, 2010, by and among NL COOP Holdings LLC, Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the guarantors party thereto and Wilmington Trust Company, as trustee, related to the 8.875 Senior Secured Notes due 2018
8-K 001-00071 4.1 6/9/2010
4.5 Second Supplemental Indenture, dated as of January 14, 2013, among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, Momentive Specialty Chemicals Inc., the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee, related to the additional $200,000,000 8.875% Senior Secured Notes due 2018
8-K 001-00071 4.1 1/18/2013
4.6 Third Supplemental Indenture, dated as of December 2, 2014, by and among Momentive Specialty Chemicals Inc., Hexion Nova Scotia Finance ULC, the guarantors party thereto and Wilmington Trust, National Association, as trustee, related to the 8.875% Senior Secured Notes due 2018
8-K 001-00071 4.2 12/5/2014
4.7 Indenture, dated as of November 5, 2010, among Hexion U.S. Finance Corp., Hexion Nova Scotia Finance, ULC, the Company, the guarantors named therein and Wilmington Trust Company, as trustee, related to the $574,016,000 9.0% Second-Priority Senior Secured Notes due 2020
8-K 001-00071 4.1 11/12/2010
4.8 First Supplemental Indenture, dated as of December 2, 2014, by and among Momentive Specialty Chemicals Inc., Hexion Nova Scotia Finance ULC, the guarantors party thereto and Wilmington Trust Company, as trustee, related to the 9.00% Second-Priority Senior Secured Notes due 2020
8-K 001-00071 4.3 12/2/2014
4.9 Second Supplemental Indenture, dated as of June 19, 2018 among Hexion Deer Park LLC, Hexion Inc, Hexion Nova Scotia Finance, ULC and Wilmington Trust Company, as trustee.
10-Q 001-00071 4.5 11/13/2018
4.10 Indenture, dated as of March 14, 2012, among Hexion U.S. Finance Corp., Momentive Specialty Chemicals Inc., the guarantors named therein and Wilmington Trust, National Association, as trustee, related to the $450,000,000 First-Priority Senior Secured Notes due 2020
8-K 001-00071 4.1 3/20/2012
Hexion Inc. | 156 | 2020 Form 10-K
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
4.11 First Supplemental Indenture, dated as of January 31, 2013, among Hexion U.S. Finance Corp., Momentive Specialty Chemicals Inc., the subsidiary guarantors party thereto and Wilmington Trust, National Association, as trustee, related to the additional $1,100,000,000 First-Priority Senior Secured Notes due 2020
8-K 001-00071 4.1 2/6/2013
4.12 Second Supplemental Indenture, dated as of March 28, 2013, by and among Hexion U.S. Finance Corp., the guarantors party thereto and Wilmington Trust, National Association, as trustee, related to the 6.625% First-Priority Senior Secured Notes due 2020
8-K 001-00071 4.1 4/3/2013
4.13 Third Supplemental Indenture, dated as of December 2, 2014, by and among Momentive Specialty Chemicals Inc., the guarantors party thereto and Wilmington Trust, National Association, as trustee, related to the 6.625% First-Priority Senior Secured Notes due 2020
8-K 001-00071 4.1 12/2/2014
4.14 Fourth Supplemental Indenture, dated as of June 19, 2018, among Hexion Deer Park LLC, Hexion Inc. and Wilmington Trust, National Association, as trustee.
10-Q 001-00071 4.1 11/13/2018
4.15 Indenture, dated as of April 15, 2015, by and among Hexion Inc., the Guarantors named therein and Wilmington Trust, National Association, as trustee, related to the $315,000,000 10.00% First-Priority Senior Secured Notes due 2020
8-K 001-00071 4.1 4/15/2015
4.16 First Supplemental Indenture, dated as of June 19, 2018, among Hexion Inc., Hexion Deer Park LLC and Wilmington Trust, National Association, as trustee.
10-Q 001-00071 4.2 11/13/2018
4.17 Indenture, dated as of February 8, 2017, between Hexion 2 U.S. Finance Corp. and Wilmington Trust, National Association, as trustee, related to the $485,000,000 10.375% First-Priority Senior Secured Notes due 2022.
8-K 001-00071 4.1 2/10/2017
4.18 Supplemental Indenture, dated as of February 8, 2017, among Hexion Inc., the guarantors party thereto and Wilmington Trust, National Association, as trustee, related to the $485,000,000 10.375% First-Priority Senior Secured Notes due 2022.
8-K 001-00071 4.2 2/10/2017
4.19 Second Supplemental Indenture, dated as of May 12, 2017, by and among Hexion Inc., the guarantors party thereto and Wilmington Trust, National Association, as trustee, related to the $75,000,000 additional 10.375% First-Priority Senior Secured Notes due 2022.
8-K 001-00071 4.1 5/12/2017
4.20 Third Supplemental Indenture, dated as of June 19, 2018, among Hexion Inc., Hexion Deer Park LLC and Wilmington Trust, National Association, as trustee.
10-Q 001-00071 4.3 11/13/2018
4.21 Indenture, dated as of February 8, 2017, among Hexion Inc., the guarantors named therein and Wilmington Trust, National Association, as trustee, related to the $225,000,000 13.75% Senior Secured Notes due 2022.
8-K 001-00071 4.3 2/10/2017
4.22 First Supplemental Indenture, dated as of June 19, 2018, among Hexion Inc., Hexion Deer Park LLC and Wilmington Trust, National Association, as trustee.
10-Q 001-00071 4.4 11/13/2018
4.23 Indenture, dated as of July 1, 2019, by and among Hexion Inc., the subsidiary guarantors party thereto from time to time named therein and Wilmington Trust, National Association as Trustee, related to the $
8-K 001-00071 4.1 7/2/2019
4.24 Agreement of Resignation, Appointment and Acceptance, dated as of March 29, 2019, among Hexion Inc., Wilmington Trust, National Association and Wilmington Savings Fund Society, FSB, related to the 13.75% Senior Secured Notes due 2022.
8-K 001-00071 4.1 4/1/2019
4.25 Agreement of Resignation, Appointment and Acceptance, dated as of April 9, 2019, among Hexion Inc., Wilmington Trust, National Association and U.S. Bank National Association, related to the 6.625% First-Priority Senior Secured Notes due 2020, the 10.00% First-Priority Senior Secured Notes due 2020 and the 10.375% First-Priority Senior Secured Notes due 2022.
10-K 001-00071 4.24 4/11/2019
10.1‡ BHI Acquisition Corp. 2004 Deferred Compensation Plan
10-Q 001-00071 10(iv) 11/15/2004
10.2‡ BHI Acquisition Corp. 2004 Stock Incentive Plan
10-Q 001-00071 10(v) 11/15/2004
10.3‡ Resolution Performance Products Inc. 2000 Stock Option Plan S-4 333-57170 10.26 3/16/2001
10.4‡ Resolution Performance Products Inc. 2000 Non - Employee Directors Stock Option Plan S-4 333-57170 10.27 3/16/2001
10.5‡ Amended and Restated Resolution Performance Products, Inc. Restricted Unit Plan, as amended and restated May 31, 2005
S-1/A 333-124287 10.34 9/19/2005
10.6‡ Form of Non-Qualified Stock Option Agreement between BHI Acquisition Corp. and certain optionees
S-4 333-122826 10.12 2/14/2005
10.7‡ Resolution Specialty Materials Inc. 2004 Stock Option Plan
S-1/A 333-124287 10.52 7/15/2005
10.8‡ Form of Nonqualified Stock Option Agreement for Resolution Specialty Materials Inc. 2004 Stock Option Plan
S-1/A 333-124287 10.53 7/15/2005
10.9‡ Form of Nonqualified Stock Option Agreement for Resolution Performance Products Inc. 2000 Stock Option Plan
S-1/A 333-124287 10.54 7/15/2005
Hexion Inc. | 157 | 2020 Form 10-K
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
10.10‡ Form of Nonqualified Stock Option Agreement for Resolution Performance Products Inc. 2000 Non-Employee Director Stock Option Plan
S-1/A 333-124287 10.55 7/15/2005
10.11‡ Hexion LLC 2007 Long-Term Incentive Plan dated April 30, 2007
10-Q 001-00071 10.1 8/14/2007
10.12 Amended and Restated Investor Rights Agreement dated as of May 31, 2005 between Hexion LLC, Hexion Specialty Chemicals, Inc. and the holders that are party thereto
S-1/A 333-124287 10.63 7/15/2005
10.13 Registration Rights Agreement dated as of May 31, 2005 between Hexion Specialty Chemicals, Inc. and Hexion LLC
S-1/A 333-124287 10.64 7/15/2005
10.14‡ Amended and Restated Executives’ Supplemental Pension Plan for Hexion Specialty Chemicals, Inc., dated as of September 7, 2005
8-K 001-00071 10 9/12/2005
10.15‡ Amended and Restated Employment Agreement dated as of August 12, 2004 between Hexion Specialty Chemicals, Inc. and Joseph P. Bevilaqua
10-Q 001-00071 10(ii) 11/15/2004
10.16‡ Summary of Terms of Employment between Hexion Specialty Chemicals, Inc. and Joseph P. Bevilaqua dated August 10, 2008
10-K 001-00071 10.23 3/9/2010
10.17‡ Momentive Specialty Chemicals Inc. Supplemental Executive Retirement Plan, dated as of December 31, 2011
8-K 001-00071 99.1 1/6/2012
10.18 Master Asset Conveyance and Facility Support Agreement, dated as of December 20, 2002, between Borden Chemical and Borden Chemicals and Plastics Operating Limited Partnership 10-K 001-00071 (10)(xxvi) 3/28/2003
10.19 Environmental Servitude Agreement, dated as of December 20, 2002, between Borden Chemical and Borden Chemicals and Plastics Operating Limited Partnership 10-K 001-00071 (10)(xxvii) 3/28/2003
10.20 Intellectual Property Transfer and License Agreement and Contribution Agreement dated as of November 14, 2000 between Shell Oil Company and Shell Epoxy Resins LLC S-4 333-57170 10.13 3/16/2001
10.21 Intellectual Property Transfer and License Agreement and Contribution Agreement dated as of November 14, 2000 between Shell Internationale Research Maatschappij B.V. and Shell Epoxy Resins Research B.V S-4 333-57170 10140 3/16/2001
10.22 First Amended and Restated Deer Park Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Shell Chemical Company, for itself and as agent for Shell Oil Company, and Shell Epoxy Resins LLC S-4 333-57170 10190 3/16/2001
10.23 First Amended and Restated Pernis Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Raffinaderij B.V. S-4 333-57170 10210 3/16/2001
10.24 First Amended and Restated Pernis Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Chemie B.V. S-4 333-57170 10220 3/16/2001
10.25† Second Amended and Restated Norco Site Services, Utilities, Materials and Facilities Agreement dated November 1, 2004 between Shell Chemical L.P. and Resolution Performance Products LLC.
10-K 001-00071 10450 3/22/2007
10.26 Deer Park Ground Lease and Grant of Easements dated as of November 1, 2000 between Shell Oil Company and Shell Epoxy Resins LLC S-4 333-57170 10230 3/16/2001
10.27 Norco Ground Lease and Grant of Servitudes dated as of November 1, 2000 between Shell Oil Company and Shell Epoxy Resins LLC S-4 333-57170 10240 3/16/2001
10.28 Amended and Restated Agreement of Sub-Lease (Pernis) dated as of November 1, 2000 between Resolution Europe B.V. (f/k/a Resolution Nederland B.V., f/k/a Shell Epoxy Resins Nederland B.V.) and Shell Nederland Raffinaderij B.V. S-4 333-57170 10250 3/16/2001
10.29 Amended and Restated Management Consulting Agreement dated as of May 31, 2005 between Borden Chemical, Inc. and Apollo Management V, L.P.
S-1/A 333-124287 10660 7/15/2005
10.30 Collateral Agreement dated as of November 3, 2006 among Hexion Specialty Chemicals, Inc. and subsidiary parties thereto, and Wilmington Trust Company, as Collateral Agent
10-K 001-00071 10570 3/11/2009
10.31 Credit Agreement with exhibits and schedules dated as of March 3, 2009 among Hexion Specialty Chemicals, Inc., Borden Luxembourg S.a.r.l., Euro V (BC) S.a.r.l., Euro VI (BC) S.a.r.l. and AAA Co-Invest VI (EHS-BC) S.a.r.l.
10-Q 001-00071 10400 8/13/2009
10.32 SUPPLEMENT dated as of June 4, 2010, to the Collateral Agreement dated as of November 3, 2006, among HEXION SPECIALTY CHEMICALS, INC., a New Jersey corporation, each Subsidiary Party party thereto and WILMINGTON TRUST COMPANY, as Collateral Agent (in such capacity, the “Collateral Agent”) for the Secured Parties (as defined therein)
8-K 001-00071 10500 6/9/2010
10.33 Joinder and Supplement to Collateral Agreement dated November 5, 2010 among the Company and subsidiary parties thereto, and Wilmington Trust Company, as trustee and collateral agent
8-K 001-00071 10200 11/12/2010
Hexion Inc. | 158 | 2020 Form 10-K
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
10.34‡ Form of Restricted Deferred Unit Award Agreement of Momentive Performance Materials Holdings LLC
S-4 333-172943 10.70 3/18/2011
10.35‡ Form of Unit Option Agreement of Momentive Performance Materials Holdings LLC
S-4 333-172943 10.71 3/18/2011
10.36‡ Form of Director Unit Option Agreement of Momentive Performance Materials Holdings LLC
S-4 333-172943 10.72 3/18/2011
10.37‡ Management Investor Rights Agreement, dated as of February 23, 2011 by and among Momentive Performance Materials Holdings LLC and the Holders
S-4 333-172943 10.73 3/18/2011
10.38 Master Confidentiality and Joint Development Agreement entered into on March 17, 2011 by and between Momentive Performance Materials Inc. and Momentive Specialty Chemicals Inc.
8-K 001-00071 10.2 3/17/2011
10.39 Fourth Joinder and Supplement to Intercreditor Agreement, dated as of March 14, 2013, by and among Wilmington Trust, National Association, as trustee, JPMorgan Chase Bank N.A., as intercreditor agent, Wilmington Trust Company, as trustee and collateral agent and as second-priority agent, Momentive Specialty Chemicals Holdings LLC, Momentive Specialty Chemicals Inc. and each subsidiary of Momentive Specialty Chemicals Inc. party thereto.
8-K 001-00071 10.5 3/20/2012
10.40‡ First Amended Resolution Specialty Materials Inc 2004 Stock Option Plan
10-Q 001-00071 10.1 11/13/2012
10.41‡ First Amended Hexion LLC 2007 Long-Term Incentive Plan
10-Q 001-00071 10.2 11/13/2012
10.42 Fifth Joinder and Supplement to Intercreditor Agreement, dated January 14, 2013, by and among Wilmington Trust, National Association, as trustee, JPMorgan Chase Bank N.A., as intercreditor agent, Wilmington Trust, National Association, as trustee and collateral agent and as second-priority agent, Momentive Specialty Chemicals Holdings LLC, Momentive Specialty Chemicals Inc. and each subsidiary of Momentive Specialty Chemicals Inc. party thereto.
8-K 001-00071 10.2 1/18/2013
10.43 Amended and Restated Intercreditor Agreement, dated as of January 31, 2013, among JPMorgan Chase Bank, N.A., as intercreditor agent, Wilmington Trust Company, as trustee and as collateral agent, Wilmington Trust, National Association (as successor by merger to Wilmington Trust FSB), as senior-priority agent for the holders of the notes issued under the 1.5 Lien Indenture (as defined therein), Wilmington Trust, National Association, as senior-priority agent for the holders of the notes issued under the First Lien Indenture (as defined therein), Momentive Specialty Chemicals Holdings LLC, Momentive Specialty Chemicals Inc. and subsidiaries of Momentive Specialty Chemicals Inc. party thereto.
8-K 001-00071 10.1 2/6/2013
10.44 Additional Secured Party Consent, dated January 31, 2013, among Wilmington Trust Bank, National Association, as trustee and as authorized representative, JPMorgan Chase Bank, N.A., as applicable first lien representative and collateral agent, Momentive Specialty Chemicals Holdings LLC, Momentive Specialty Chemicals Inc. and subsidiaries of Momentive Specialty Chemicals Inc. party thereto.
8-K 001-00071 10.2 2/6/2013
10.45 Amendment No. 1 to the Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan
8-K 001-00071 10.1 3/6/2013
10.46 Form of Restricted Deferred Unit Agreement of Momentive Performance Materials Holdings LLC
8-K 001-00071 10.2 3/6/2013
10.47 Form of Unit Option Agreement of Momentive Performance Materials Holdings LLC
8-K 001-00071 10.3 3/6/2013
10.48‡ Momentive Performance Materials Holdings LLC 2012 Long-Term Cash Incentive Plan
10-K 001-00071 10.92 4/1/2013
10.49‡ Amended and Restated Momentive Performance Materials Holdings LLC 2011 Equity Incentive Plan
10-K 001-00071 10.93 4/1/2013
10.50 ABL Intercreditor Agreement, dated as of March 28, 2013, by and among JPMorgan Chase Bank, N.A., as the ABL facility collateral agent, Wilmington Trust, National Association, as applicable first-lien agent and first-lien collateral agent, Momentive Specialty Chemicals Inc. and subsidiaries of Momentive Specialty Chemicals Inc. party thereto.
8-K 001-00071 10.2 4/3/2013
10.51 Collateral Agreement, dated as of March 28, 2013, by and among Momentive Specialty Chemicals Inc., subsidiaries of Momentive Specialty Chemicals Inc. party thereto and JPMorgan Chase Bank, N.A. as collateral agent.
8-K 001-00071 10.3 4/3/2013
10.52 Collateral Agreement, dated as of March 28, 2013, by and among Momentive Specialty Chemicals Inc., subsidiaries of Momentive Specialty Chemicals Inc. party thereto and Wilmington Trust, National Association, as collateral agent.
8-K 001-00071 10.4 4/3/2013
Hexion Inc. | 159 | 2020 Form 10-K
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
10.53 Joinder and Supplement to Second Lien Intercreditor Agreement, dated as of March 28, 2013, among JPMorgan Chase Bank, N.A., as ABL credit agreement agent, former intercreditor agent and new intercreditor agent, Wilmington Trust Company, as second-lien trustee, Wilmington Trust, National Association, as 1.5 lien trustee, Wilmington Trust, National Association, as first lien trustee, Momentive Specialty Chemicals Holdings LLC, Momentive Specialty Chemicals Inc. and subsidiaries of Momentive Specialty Chemicals Inc. party thereto.
8-K 001-00071 10.6 4/3/2013
10.54‡ Momentive Performance Materials Holdings LLC 2014 Incentive Compensation Plan
10-K 001-00071 10.87 3/31/2014
10.55‡ Second Amended and Restated Shared Services Agreement, dated as of October 24, 2014, by and among Momentive Specialty Chemicals Inc., Momentive Performance Materials Inc., and the subsidiaries of the Momentive Performance Materials Inc., party thereto
8-K 001-00071 10.1 10/30/2014
10.56‡ Momentive Performance Materials Holdings LLC Long-Term Cash Incentive Plan
10-Q 001-00071 10.1 11/10/2014
10.57‡ Form of 2014 Cash-based Long-Term Incentive Award Agreement
10-Q 001-00071 10.2 11/10/2014
10.58‡ Summary of Terms of Employment between Momentive Performance Materials Inc. and Douglas Johns dated October 3, 2010
10-K 001-00071 10.82 3/10/2015
10.59 First Lien Intercreditor Agreement, dated as of April 15, 2015, among Wilmington Trust, National Association, as collateral agent, Wilmington
8-K 001-00071 10.1 4/15/2015
10.60 Additional Secured Party Consent, dated April 15, 2015, among Wilmington Trust, National Association, as authorized representative for the new secured parties, Wilmington Trust, National Association, as collateral agent, and Hexion Inc.
8-K 001-00071 10.2 4/15/2015
10.61 Fourth Joinder and Supplement to Intercreditor Agreement, dated as of April 15, 2015, by and among JPMorgan Chase Bank, N.A., as intercreditor agent, JPMorgan Chase Bank, N.A., as senior-priority agent for the ABL secured parties, Wilmington Trust, National Association, as senior-priority agent for the existing first lien notes, Wilmington Trust, National Association, as trustee and senior-priority agent for the new first lien notes, Wilmington Trust, National Association, as trustee and second-priority agent for the existing 1.5 lien notes, Hexion LLC, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.3 4/15/2015
10.62 Second Joinder and Supplement to Intercreditor Agreement, dated as of April 15, 2015, by and among JPMorgan Chase Bank, N.A., as intercreditor agent, JPMorgan Chase Bank, N.A., as senior-priority agent for the ABL secured parties, Wilmington Trust, National Association, as trustee and senior-priority agent for the existing first lien notes, Wilmington Trust, National Association, as senior-priority agent for the new first lien notes, Wilmington Trust, National Association, as senior-priority agent for the 1.5 lien notes, Wilmington Trust Company, as trustee and second-priority agent for the existing second lien notes, Hexion LLC, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.4 4/15/2015
10.63 Joinder Agreement to ABL Intercreditor Agreement, dated as of April 15, 2015, by and among JPMorgan Chase Bank, N.A., as ABL facility collateral agent, Wilmington Trust, National Association, as new representative, applicable first-lien agent and first-lien collateral agent, and Hexion Inc.
8-K 001-00071 10.5 4/15/2015
10.64‡ Hexion Holdings LLC 2015 Incentive Compensation Plan
10-Q 001-00071 10.1 5/13/2015
10.65‡ Summary of Terms of Employment between Hexion Inc. and Douglas A. Johns dated May 6, 2015
10-Q 001-00071 10.1 8/12/2015
10.66 Amendment Agreement, dated as of July 27, 2015, among Hexion LLC, Hexion Inc., as U.S. borrower, Hexion Canada Inc., as Canadian borrower, Hexion B.V., as Dutch borrower, Hexion UK Limited and Borden Chemical UK Limited, as U.K. borrowers, Hexion GmbH, as German borrower, the other subsidiaries of Hexion LLC party thereto, as loan parties, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent.
10-Q 001-00071 10.2 8/12/2015
10.67‡ Summary of Terms of Employment between Hexion Inc. and George F. Knight dated October 22, 2015
10-K 001-00071 10.79 3/14/2016
10.68 2015 Audited Financial Statements of Unconsolidated Affiliate of Hexion Inc.
10-K 001-00071 10.80 3/14/2016
10.69‡ Hexion Holdings LLC 2016 Incentive Compensation Plan
8-K 001-00071 10.2 5/6/2016
10.70‡ Form of 2016 Cash-Based Long-Term Incentive Award Agreement
10-Q 001-00071 10.1 11/14/2016
10.71 Amendment Agreement, dated as of December 21, 2016, among Hexion LLC, certain subsidiaries of Hexion LLC party thereto, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent.
8-K 001-00071 10.1 12/23/2016
10.72‡ 2016 Cash-Based Long-Term Incentive Award Agreement for Nathan E. Fisher dated January 3, 2017
10-K 001-00071 10.76 3/8/2017
10.73 2016 Audited Financial Statements of Unconsolidated Affiliate of Hexion Inc.
10-K 001-00071 10.77 3/8/2017
Hexion Inc. | 160 | 2020 Form 10-K
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
10.74 Additional Secured Party Consent, dated as of February 8, 2017, among Wilmington Trust, National Association, as authorized representative for the new secured parties, Wilmington Trust, National Association, as collateral agent, Wilmington Trust, National Association, as authorized representative of the new secured parties, Wilmington Trust, National Association, as authorized representative for the notes obligations, Wilmington Trust, National Association, as authorized representative for the initial other first priority obligations, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.1 2/10/2017
10.75 Third Joinder and Supplement to Intercreditor Agreement, dated as of February 8, 2017, by and among JPMorgan Chase Bank, N.A., as intercreditor agent, JPMorgan Chase Bank, N.A., as senior-priority agent for the ABL secured parties, Wilmington Trust, National Association, as trustee and senior-priority agent for the existing first lien notes, Wilmington Trust, National Association, as senior-priority agent for the new first lien notes, Wilmington Trust, National Association, as senior-priority agent for the new 1.5 lien notes, Wilmington Trust Company, as trustee and second-priority agent for the existing second lien notes, Hexion LLC, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.2 2/10/2017
10.76 Second Joinder Agreement to ABL Intercreditor Agreement, dated as of February 8, 2017, among JPMorgan Chase Bank, N.A., as ABL facility collateral agent, Wilmington Trust, National Association, as new representative, applicable first-lien agent and first-lien collateral agent, and Hexion Inc.
8-K 001-00071 10.3 2/10/2017
10.77 Collateral Agreement, dated as of February 8, 2017, among Wilmington Trust, National Association, as collateral agent, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.4 2/10/2017
10.78 Amended and Restated Intercreditor Agreement, dated as of February 8, 2017, among JPMorgan Chase Bank, N.A., as intercreditor agent, JPMorgan Chase Bank, N.A., as senior-priority agent for the ABL secured parties, Wilmington Trust, National Association, as senior-priority agent for the existing first lien notes, Wilmington Trust, National Association, as trustee and senior-priority agent for the new first lien notes, Wilmington Trust, National Association, as trustee and second-priority agent for the new 1.5 lien notes, Hexion LLC, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.5 2/10/2017
10.79 Fourth Joinder and Supplement to Intercreditor Agreement, dated as of February 8, 2017, among JPMorgan Chase Bank, N.A., as intercreditor agent, JPMorgan Chase Bank, N.A., as senior-priority agent for the ABL secured parties, Wilmington Trust, National Association, as trustee and senior-priority agent for the existing first lien notes, Wilmington Trust, National Association, as senior-priority agent for the new first lien notes, Wilmington Trust, National Association, as senior-priority agent for the new 1.5 lien notes, Wilmington Trust Company, as trustee and second-priority agent for the existing second lien notes, Hexion LLC, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.6 2/10/2017
10.80 Additional Extending Lender Joinder Agreement and Amendment, dated as of January 18, 2017, related to the Amended and Restated Asset-Based Revolving Credit Agreement, dated as of December 21, 2016, among Hexion LLC, Hexion Inc., as U.S. Borrower, Hexion Canada Inc., as Canadian Borrower, Hexion B.V., as Dutch Borrower, Hexion UK Limited and Borden Chemical UK Limited, as UK Borrowers, Hexion GmbH, as German Borrower, each subsidiary loan party party thereto, the lenders party thereto from time to time and JPMorgan Chase Bank, N.A., as administrative agent, collateral agent, swingline lender and initial issuing bank.
10-K 001-00071 10.84 3/8/2017
10.81‡ Hexion Holdings LLC 2017 Incentive Compensation Plan
10-Q 001-00071 10.3 5/5/2017
10.82 Additional Secured Party Consent, dated as of May 12, 2017, among Wilmington Trust, National Association, as authorized representative for the new secured parties, Wilmington Trust, National Association, as collateral agent, Wilmington Trust, National Association, as authorized representative for the notes obligations, Wilmington Trust, National Association, as authorized representative for the initial other first priority obligations, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.1 5/12/2017
10.83 Fifth Joinder and Supplement to Intercreditor Agreement, dated as of May 12, 2017, by and among JPMorgan Chase Bank, N.A., as intercreditor agent, JPMorgan Chase Bank, N.A., as senior-priority agent for the ABL secured parties, Wilmington Trust, National Association, as trustee and senior-priority agent for the existing first lien notes, Wilmington Trust, National Association, as senior-priority agent for the new notes, Wilmington Trust, National Association, as senior-priority agent for the 1.5 lien notes, Wilmington Trust Company, as trustee and second-priority agent for the existing second lien notes, Hexion LLC, Hexion Inc. and subsidiaries of Hexion Inc. party thereto.
8-K 001-00071 10.2 5/12/2017
10.84‡ Employment Agreement, by and between Hexion Inc. and Craig A. Rogerson
10-Q 001-00071 10.2 8/11/2017
10.85‡ Long Term Incentive Compensation Award Agreement, by and between Hexion Inc. and Craig A. Rogerson
10-Q 001-00071 10.3 8/11/2017
Hexion Inc. | 161 | 2020 Form 10-K
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
10.86 2017 Audited Financial Statements of Unconsolidated Affiliate of Hexion Inc.
10-K 001-00071 10.90 3/2/2018
10.87‡ Hexion Holding LLC 2018 Incentive Compensation Plan
10-Q 001-00071 10.1 5/14/2018
10.88 The Deer Park Site Services, Utilities, Materials & Facilities Agreement, dated as of April 1, 2018, by and between Shell Chemical LP, on its own behalf and as authorized agent of Shell Oil Company pursuant to the Shell Chemical Authorization Agreement dated March 1, 1995 and Hexion Deer Park LLC as successor in interest to Shell Epoxy Resins LLC and Hexion Inc.
10-Q 001-00071 10.2 5/14/2018
10.89 Moerdijk Vad Site Services, Utilities, Materials and Facilties Agreement, dated as of April 1, 2018, between Hexion Vad B.V. and Shell Nederland Chemie B.V.
10-Q 001-00071 10.3 5/14/2018
10.90 Pernis Vad Site Services, Utilities, Materials and Facilities Agreement, dated as of April 1, 2018, between Hexion Vad B.V. and Shell Nederland Raffin Aderij B.V.
10-Q 001-00071 10.4 5/14/2018
10.91 Pernis Beri Site Services, Utilities, Materials and Facilities Agreement, dated as of April 1, 2018 between Hexion B.V. and Shell Nederland Raffin Aderij B.V.
10-Q 001-00071 10.5 5/14/2018
10.92 Assignment & Assumption of Deep Park Ground Lease and Grant of Easements and Extension of Term, dated as of April 1, 2018, by and between Shell Chemical LP, on its own behalf and as authorized agent of Shell Oil Company pursuant to the Chemical Authorization dated March 1, 1995, Hexion Inc., as successor in interest to Shell Epoxy Resins LLC and Hexion Deer Park LLC.
10-Q 001-00071 10.6 5/14/2018
10.93 Partial Assignment & Extension of the Amended and Restated Agreement of Sub-lease (Pernis), dated as of April 1, 2018, between Hexion Pernis Lease B.V., Hexion Vad B.V., and Shell Nederland Raffin Aderij B.V.
10-Q 001-00071 10.7 5/14/2018
10.94 First Amended and Restated Moerdijk Agreement of Lease, between Shell Nederland Chemie B.V. and Shell Epoxy Resins Nederland B.V.
10-Q 001-00071 10.8 5/14/2018
10.95 Extension of the Amended and Restated Agreement of Lease (Moerdijk), dated as of April 1, 2018, between Hexion Moerdijk Lease B.V. and Shell Nederland Chemie B.V.
10-Q 001-00071 10.9 5/14/2018
10.96 Restructuring Support Agreement, dated as of April 1, 2018, among Hexion Holdings LLC, Hexion LLC, Hexion Inc., certain subsidiaries of Hexion Inc. and certain equityholders and creditors of Hexion Inc.
8-K 001-00071 10.1 4/1/2019
10.97 Amended and Restated Senior Secured Debtor-in-Possession Asset-Based Revolving Credit Agreement, dated as of April 3, 2019, among Hexion LLC, Hexion Inc., Hexion Canada Inc., Hexion B.V., Hexion UK Limited, Borden Chemical UK Limited, Hexion GMBH, the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent and collateral agent.
8-K 001-00071 10.1 4/8/2019
10.98 Reaffirmation Agreement, dated as of April 3, 2019, among Hexion LLC, Hexion Inc., Hexion Canada Inc., Hexion B.V., Hexion UK Limited, Borden Chemical UK Limited, Hexion GMBH, each Subsidiary of Hexion Inc. party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent.
8-K 001-00071 10.2 4/8/2019
10.99 Senior Secured Term Loan Agreement, dated as of April 3, 2019, among Hexion LLC, Hexion Inc., Hexion International Holdings B.V., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent.
8-K 001-00071 10.3 4/8/2019
10.100 Guarantee Agreement, dated as of April 3, 2019, among Hexion LLC, Hexion Inc., Hexion International Holdings B.V., each Subsidiary Loan Party identified therein and JPMorgan Chase Bank, N.A., as administrative agent.
8-K 001-00071 10.4 4/8/2019
10.101 2018 Audited Financial Statements of Unconsolidated Affiliate of Hexion Inc.
10-K 001-00071 10.101 4/11/2019
10.102‡
Hexion Holding LLC 2019 Incentive Compensation Plan
10-K 001-00071 10.102 4/11/2019
10.103‡
Separation Agreement by and between Hexion Inc. and Joseph Bevilaqua
10-K 001-00071 10.103 4/11/2019
10.104 Senior Secured Asset-Based Revolving Credit Agreement, dated as of July 1, 2019, among Hexion Intermediate Holding 2, Inc., Hexion Inc., Hexion Canada Inc., Hexion B.V. Hexion GmbH and Hexion UK Limited as lenders party thereto and JP Morgan Chase Bank, N.A. as administrative agent and collateral agent
8-K 001-00071 10.1 7/2/2019
10.105 Senior Secured Credit Agreement, dated as of July 1, 2019, among Hexion Intermediate Holding 2, Inc., Hexion Inc., Hexion International Coӧperatief U.A., the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and collateral agent.
8-K 001-00071 10.2 7/2/2019
Hexion Inc. | 162 | 2020 Form 10-K
Incorporated by Reference
Exhibit
Number Exhibit Description Form File Number Exhibit Filing
Date Filed
Herewith
10.106 ABL Intercreditor Agreement, dated as of July 1, 2019, among JPMorgan Chase Bank, N.A., as administrative agent and collateral agent for the ABL Facility Secured Parties referred to therein, JPMorgan Chase Bank, N.A., as Applicable First-Lien Agent and administrative agent and collateral agent for the First-Lien Secured Parties referred to therein, Hexion Inc., Hexion Intermediate Holding 2, Inc., Hexion International Coӧperatief U.A., the other subsidiaries of Hexion Inc. party thereto, each other First-Priority Lien Obligations and each Other First-Priority Lien Obligations Collateral Agent from time to time party thereto.
8-K 001-00071 10.3 7/2/2019
10.107‡ Hexion Holdings Corporation 2020 Incentive Compensation Plan
10-K 001-00071 10.107 3/3/2020
10.108‡ 2019 PERFORMANCE STOCK UNIT AWARD AGREEMENT
10-Q 001-00071 10.2 5/14/2020
10.109‡ 2019 RESTRICTED STOCK UNIT AWARD AGREEMENT
10-Q 001-00071 10.3 5/14/2020
10.110‡ Hexion Holdings Corporation 2021 Incentive Compensation Plan
10-K X
18.1 Letter from PricewaterhouseCoopers, dated May 13, 2015 regarding preferability of a change in accounting principle
10-Q 001-00071 18.1 5/13/2015
21.1 List of Subsidiaries of Hexion Inc.
X
31.1 Rule 13a-14 Certifications:
(a) Certificate of the Chief Executive Officer
X
(b) Certificate of the Chief Financial Officer
X
32.1 Section 1350 Certifications
X
101.INS* XBRL Instance Document X
101.SCH* XBRL Schema Document X
101.CAL* XBRL Calculation Linkbase Document X
101.LAB* XBRL Label Linkbase Document X
101.PRE* XBRL Presentation Linkbase Document X
101.DEF* XBRL Definition Linkbase Document X
† The schedules and exhibits to these agreements are omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company agrees to furnish supplementally to the SEC, upon request, a copy of any omitted schedule or exhibit.
‡ Represents a management contract or compensatory plan or arrangement.
* Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The financial information in the XBRL-related documents is “unaudited” or “unreviewed.”
Hexion Inc. | 163 | 2020 Form 10-K