Guarantor Non-Guarantor Subsidiary Financial Information

6 Months Ended

Jun. 30, 2018

Guarantor Non Guarantor Subsidary Financial Information [Abstract]

Guarantor/Non-Guarantor Subsidiary Financial Information

Guarantor/Non-Guarantor Subsidiary Financial Information

The Company’s 6.625% First-Priority Senior Secured Notes due 2020, 10.00% First-Priority Senior Secured Notes due 2020, 10.375% First Priority Senior Secured Notes due 2022, 13.75% Senior Secured Notes due 2022 and 9.00% Second-Priority Senior Secured Notes due 2020 are guaranteed by certain of its U.S. subsidiaries.

The following information contains the condensed consolidating financial information for Hexion Inc. (the parent), the combined subsidiary guarantors (Hexion Investments Inc.; Lawter International, Inc.; Hexion Deer Park LLC (became a subsidiary guarantor in June 2018); HSC Capital Corporation (dissolved in April 2017); Hexion International Inc.; Hexion CI Holding Company (China) LLC; NL COOP Holdings LLC and Oilfield Technology Group, Inc. (dissolved in September 2017)) and the combined non-guarantor subsidiaries, which includes all of the Company’s foreign subsidiaries.

All of the subsidiary guarantors are 100% owned by Hexion Inc. All guarantees are full and unconditional, and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its domestic subsidiaries by dividend or loan. While the Company’s Australian, New Zealand and Brazilian subsidiaries are restricted in the payment of dividends and intercompany loans due to the terms of their credit facilities, there are no material restrictions on the Company’s ability to obtain cash from the remaining non-guarantor subsidiaries.

These financial statements are prepared on the same basis as the consolidated financial statements of the Company except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.

This information includes allocations of corporate overhead to the combined non-guarantor subsidiaries based on net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates.

HEXION INC.

JUNE 30, 2018

CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)

	Hexion Inc.			Combined Subsidiary Guarantors			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $0 and $16, respectively)	$	42		$	—		$	88		$	—		$	130
Accounts receivable, net	116			1			356			—			473
Intercompany accounts receivable	58			—			56			(114		)	—
Intercompany loans receivable - current portion	123			—			—			(123		)	—
Inventories:
Finished and in-process goods	97			—			148			—			245
Raw materials and supplies	39			—			64			—			103
Other current assets	23			—			39			—			62
Total current assets	498			1			751			(237		)	1,013
Investment in unconsolidated entities	144			14			21			(157		)	22
Deferred income taxes	—			—			9			—			9
Other assets, net	13			7			22			—			42
Intercompany loans receivable	1,098			—			135			(1,233		)	—
Property and equipment, net	374			—			484			—			858
Goodwill	52			—			58			—			110
Other intangible assets, net	23			—			9			—			32
Total assets	$	2,202		$	22		$	1,489		$	(1,627	)	$	2,086
Liabilities and Deficit
Current liabilities:
Accounts payable	$	130		$	—		$	267		$	—		$	397
Intercompany accounts payable	56			—			58			(114		)	—
Debt payable within one year	8			—			74			—			82
Intercompany loans payable within one year	—			—			123			(123		)	—
Interest payable	81			—			1			—			82
Income taxes payable	5			—			5			—			10
Accrued payroll and incentive compensation	31			—			29			—			60
Other current liabilities	69			—			50			—			119
Total current liabilities	380			—			607			(237		)	750
Long-term liabilities:
Long-term debt	3,520			—			158			—			3,678
Intercompany loans payable	135			—			1,098			(1,233		)	—
Accumulated losses of unconsolidated subsidiaries in excess of investment	804			157			—			(961		)	—
Long-term pension and post employment benefit obligations	29			—			217			—			246
Deferred income taxes	1			—			10			—			11
Other long-term liabilities	110			—			68			—			178
Total liabilities	4,979			157			2,158			(2,431		)	4,863
Total deficit	(2,777		)	(135		)	(669		)	804			(2,777		)
Total liabilities and deficit	$	2,202		$	22		$	1,489		$	(1,627	)	$	2,086

HEXION INC.

DECEMBER 31, 2017

CONDENSED CONSOLIDATING BALANCE SHEET

	Hexion Inc.			Combined Subsidiary Guarantors			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $0 and $18, respectively)	$	13		$	—		$	102		$	—		$	115
Accounts receivable, net	126			1			335			—			462
Intercompany accounts receivable	121			—			80			(201		)	—
Intercompany loans receivable - current portion	1			—			22			(23		)	—
Inventories:
Finished and in-process goods	85			—			136			—			221
Raw materials and supplies	36			—			56			—			92
Current assets held-for-sale	1			—			5			—			6
Other current assets	19			—			25			—			44
Total current assets	402			1			761			(224		)	940
Investment in unconsolidated entities	158			13			20			(171		)	20
Deferred income taxes	—			—			8			—			8
Long-term assets held for sale	—			—			2			—			2
Other long-term assets	17			8			24			—			49
Intercompany loans receivable	1,114			—			190			(1,304		)	—
Property and equipment, net	410			—			514			—			924
Goodwill	52			—			60			—			112
Other intangible assets, net	32			—			10			—			42
Total assets	$	2,185		$	22		$	1,589		$	(1,699	)	$	2,097
Liabilities and Deficit
Current liabilities:
Accounts payable	$	129		$	—		$	273		$	—		$	402
Intercompany accounts payable	80			—			121			(201		)	—
Debt payable within one year	10			—			115			—			125
Intercompany loans payable within one year	22			—			1			(23		)	—
Interest payable	80			—			2			—			82
Income taxes payable	6			—			6			—			12
Accrued payroll and incentive compensation	22			—			25			—			47
Current liabilities associated with assets held for sale	—			—			2			—			2
Other current liabilities	70			—			65			—			135
Total current liabilities	419			—			610			(224		)	805
Long term liabilities:
Long-term debt	3,507			—			77			—			3,584
Intercompany loans payable	190			—			1,114			(1,304		)	—
Accumulated losses of unconsolidated subsidiaries in excess of investment	668			171			—			(839		)	—
Long-term pension and post employment benefit obligations	31			—			231			—			262
Deferred income taxes	2			—			9			—			11
Other long-term liabilities	109			—			68			—			177
Total liabilities	4,926			171			2,109			(2,367		)	4,839
Total Hexion Inc. shareholder’s deficit	(2,741		)	(149		)	(519		)	668			(2,741		)
Noncontrolling interest	—			—			(1		)	—			(1		)
Total deficit	(2,741		)	(149		)	(520		)	668			(2,742		)
Total liabilities and deficit	$	2,185		$	22		$	1,589		$	(1,699	)	$	2,097

HEXION INC.

THREE MONTHS ENDED JUNE 30, 2018

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

	Hexion Inc.			Combined Subsidiary Guarantors		Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	460		$	—	$	583		$	(48	)	$	995
Cost of sales	370			—		507			(48		)	829
Gross profit	90			—		76			—			166
Selling, general and administrative expense	44			—		33			—			77
Business realignment costs	3			—		2			—			5
Other operating expense, net	3			—		8			—			11
Operating income	40			—		33			—			73
Interest expense, net	80			—		4			—			84
Intercompany interest (income) expense, net	(21		)	—		21			—			—
Other non-operating expense (income), net	36			—		(28		)	—			8
(Loss) income before tax and earnings from unconsolidated entities	(55		)	—		36			—			(19		)
Income tax expense	1			—		2			—			3
(Loss) income before earnings from unconsolidated entities	(56		)	—		34			—			(22		)
Earnings from unconsolidated entities, net of taxes	34			17		1			(51		)	1
Net (loss) income	(22		)	17		35			(51		)	(21		)
Net income attributable to noncontrolling interest	—			—		(1		)	—			(1		)
Net (loss) income attributable to Hexion Inc.	$	(22	)	$	17	$	34		$	(51	)	$	(22	)
Comprehensive (loss) income attributable to Hexion Inc.	$	(38	)	$	16	$	35		$	(51	)	$	(38	)

HEXION INC.

THREE MONTHS ENDED JUNE 30, 2017

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

	Hexion Inc.			Combined Subsidiary Guarantors			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	417		$	—		$	550		$	(55	)	$	912
Cost of sales	355			—			478			(55		)	778
Gross profit	62			—			72			—			134
Selling, general and administrative expense	34			—			43			—			77
Business realignment costs	6			—			4			—			10
Other operating income, net	3			—			6			—			9
Operating income	19			—			19			—			38
Interest expense, net	78			—			4			—			82
Intercompany interest (income) expense, net	(18		)	—			18			—			—
Other non-operating (income) expense, net	(50		)	—			43			—			(7		)
Income (loss) before income tax and (losses) earnings from unconsolidated entities	9			—			(46		)	—			(37		)
Income tax expense (benefit)	2			—			(3		)	—			(1		)
Income (loss) before (losses) earnings from unconsolidated entities	7			—			(43		)	—			(36		)
(Losses) earnings from unconsolidated entities, net of taxes	(41		)	(32		)	1			74			2
Net loss	$	(34	)	$	(32	)	$	(42	)	$	74		$	(34	)
Comprehensive loss	$	(25	)	$	(31	)	$	(46	)	$	77		$	(25	)

HEXION INC.

SIX MONTHS ENDED JUNE 30, 2018

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

	Hexion Inc.			Combined Subsidiary Guarantors		Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	891		$	—	$	1,153		$	(103	)	$	1,941
Cost of sales	727			—		994			(103		)	1,618
Gross profit	164			—		159			—			323
Selling, general and administrative expense	80			—		79			—			159
Gain on disposition	(24		)	—		(20		)	—			(44		)
Asset impairments	25			—		—			—			25
Business realignment costs	9			—		5			—			14
Other operating expense, net	3			—		17			—			20
Operating income	71			—		78			—			149
Interest expense, net	159			—		8			—			167
Intercompany interest (income) expense, net	(41		)	—		41			—			—
Other non-operating expense (income), net	17			—		(10		)	—			7
(Loss) income before tax and earnings from unconsolidated entities	(64		)	—		39			—			(25		)
Income tax expense	(6		)	—		17			—			11
(Loss) income before earnings earnings from unconsolidated entities	(58		)	—		22			—			(36		)
Earnings from unconsolidated entities, net of taxes	23			14		2			(37		)	2
Net (loss) income	(35		)	14		24			(37		)	(34		)
Net income attributable to noncontrolling interest	—			—		(1		)	—			(1		)
Net (loss) income attributable to Hexion Inc.	$	(35	)	$	14	$	23		$	(37	)	$	(35	)
Comprehensive (loss) income	$	(37	)	$	14	$	37		$	(51	)	$	(37	)

HEXION INC.

SIX MONTHS ENDED JUNE 30, 2017

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)

	Hexion Inc.			Combined Subsidiary Guarantors			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	795		$	—		$	1,093		$	(106	)	$	1,782
Cost of sales	677			—			944			(106		)	1,515
Gross profit	118			—			149			—			267
Selling, general and administrative expense	67			—			89			—			156
Business realignment costs	10			—			7			—			17
Other operating (income) expense, net	(3		)	—			6			—			3
Operating income	44			—			47			—			91
Interest expense, net	158			—			7			—			165
Intercompany interest (income) expense, net	(35		)	—			35			—			—
Loss on extinguishment of debt	3			—			—			—			3
Other non-operating (income) expense, net	(58		)	—			53			—			(5		)
Loss before income tax and (losses) earnings from unconsolidated entities	(24		)	—			(48		)	—			(72		)
Income tax (benefit) expense	(4		)	—			11			—			7
Loss before (losses) earnings from unconsolidated entities	(20		)	—			(59		)	—			(79		)
(Losses) earnings from unconsolidated entities, net of taxes	(56		)	(34		)	2			91			3
Net loss	$	(76	)	$	(34	)	$	(57	)	$	91		$	(76	)
Comprehensive loss	$	(61	)	$	(34	)	$	(49	)	$	83		$	(61	)

HEXION INC.

SIX MONTHS ENDED JUNE 30, 2018

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

	Hexion Inc. (b)				Combined Subsidiary Guarantors		Combined Non-Guarantor Subsidiaries (b)				Eliminations			Consolidated
Cash flows (used in) provided by operating activities	$	(185	)		$	—	$	143			$	—		$	(42	)
Cash flows provided by (used in) investing activities
Capital expenditures	(13		)		—		(30		)		—			(43		)
Proceeds from disposition, net	24				—		25				—			49
Proceeds from sale of assets, net	—				—		1				—			1
Return of capital from subsidiary from sales of accounts receivable	172			(a)	—		—				(172		)	—
	183				—		(4		)		(172		)	7
Cash flows provided by (used in) financing activities
Net short-term debt borrowings	(5		)		—		8				—			3
Borrowings of long-term debt	150				—		144				—			294
Repayments of long-term debt	(140		)		—		(103		)		—			(243		)
Net intercompany loan borrowings (repayments)	26				—		(26		)		—			—
Long-term debt and credit facility financing fees paid	—				—		(1		)		—			(1		)
Return of capital to parent from sales of accounts receivable	—				—		(172		)	(a)	172			—
	31				—		(150		)		172			53
Effect of exchange rates on cash and cash equivalents	—				—		(3		)		—			(3		)
Change in cash and cash equivalents	29				—		(14		)		—			15
Cash and cash equivalents at beginning of period	13				—		102				—			115
Cash and cash equivalents at end of period	$	42			$	—	$	88			$	—		$	130

(a) During the six months ended June 30, 2018, Hexion Inc. contributed receivables of $172 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the six months ended June 30, 2018, the non-guarantor subsidiary sold the contributed receivables to certain banks under various supplier financing agreements. The cash proceeds were returned to Hexion Inc. by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined non-guarantor subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and Hexion Inc., respectively.

(b) Reflected in the “Hexion Inc.” and the “Combined Non-Guarantor Subsidiaries” columns is a correction of an error presented in the three months ended March 31, 2018 Condensed Consolidating Statement of Cash Flows. The impact of this correction is a decrease of $42 to “Cash flows (used in) provided by operating activities” and “Net intercompany loan borrowings (repayments)” for the “Hexion Inc.” and “Combined Non-guarantor Subsidiaries” columns, respectively, and an increase of $42 to “Net intercompany loan borrowings (repayments)” and “Cash flows (used in) provided by operating activities” for the “Hexion Inc.” and “Combined Non-Guarantor Subsidiaries” columns, respectively. Management does not believe that this error correction is material to the unaudited Condensed Consolidated Financial Statements for the three months ended March 31, 2018 or the six months ended June 30, 2018.

HEXION INC.

SIX MONTHS ENDED JUNE 30, 2017

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)

	Hexion Inc.				Combined Subsidiary Guarantors		Combined Non-Guarantor Subsidiaries				Eliminations			Consolidated
Cash flows used in operating activities	$	(186	)		$	—	$	(9	)		$	—		$	(195	)
Cash flows provided by (used in) investing activities
Capital expenditures	(23		)		—		(34		)		—			(57		)
Proceeds from sale of assets, net	4				—		—				—			4
Return of capital from subsidiary from sales of accounts receivable	68			(a)	—		—				(68		)	—
	49				—		(34		)		(68		)	(53		)
Cash flows provided by (used in) financing activities
Net short-term debt (repayments) borrowings	(5		)		—		13				—			8
Borrowings of long-term debt	915				—		204				—			1,119
Repayments of long-term debt	(801		)		—		(127		)		—			(928		)
Net intercompany loan borrowings (repayments)	31				—		(31		)		—			—
Long-term debt and credit facility financing fees	(20		)		—		(4		)		—			(24		)
Return of capital to parent from sales of accounts receivable	—				—		(68		)	(a)	68			—
	120				—		(13		)		68			175
Effect of exchange rates on cash and cash equivalents	—				—		5				—			5
Change in cash and cash equivalents	(17		)		—		(51		)		—			(68		)
Cash and cash equivalents at beginning of period	28				—		168				—			196
Cash and cash equivalents at end of period	$	11			$	—	$	117			$	—		$	128

(a) During the six months ended June 30, 2017, Hexion Inc. contributed receivables of $68 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the six months ended June 30, 2017, the non-guarantor subsidiary sold the contributed receivables to certain banks under various supplier financing agreements. The cash proceeds were returned to Hexion Inc. by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined non-guarantor subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and Hexion Inc., respectively.