Guarantor Non-Guarantor Subsidiary Financial Information

3 Months Ended

Mar. 31, 2019

Guarantor Non Guarantor Subsidary Financial Information [Abstract]

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. and foreign 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); Hexion International Inc.; Hexion CI Holding Company (China) LLC and NL COOP Holdings LLC) and the combined non-guarantor subsidiaries, which includes a majority 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.

MARCH 31, 2019

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 $15, respectively)	$	16		$	—		$	95		$	—		$	111
Accounts receivable, net	130			—			366			—			496
Intercompany accounts receivable	46			—			56			(102		)	—
Intercompany loans receivable—current portion	44			—			133			(177		)	—
Inventories:
Finished and in-process goods	100			—			158			—			258
Raw materials and supplies	38			—			56			—			94
Other current assets	21			—			46			—			67
Total current assets	395			—			910			(279		)	1,026
Investment in unconsolidated entities	121			14			20			(135		)	20
Other assets, net	11			7			22			—			40
Intercompany loans receivable	1,132			—			52			(1,184		)	—
Property and equipment, net	355			—			469			—			824
Operating lease assets (see Note 8)	44			—			55			—			99
Goodwill	52			—			56			—			108
Other intangible assets, net	18			—			7			—			25
Total assets	$	2,128		$	21		$	1,591		$	(1,598	)	$	2,142
Liabilities and Deficit
Current liabilities:
Accounts payable	$	96		$	—		$	258		$	—		$	354
Intercompany accounts payable	56			—			46			(102		)	—
Debt payable within one year	3,589			—			286			—			3,875
Intercompany loans payable within one year	133			—			44			(177		)	—
Interest payable	99			—			1			—			100
Income taxes payable	2			—			6			—			8
Accrued payroll and incentive compensation	12			—			35			—			47
Current portion of operating lease liabilities (see Note 8)	11			—			12			—			23
Other current liabilities	64			—			41			—			105
Total current liabilities	4,062			—			729			(279		)	4,512
Long-term liabilities:
Long-term debt	50			—			44			—			94
Intercompany loans payable	52			—			1,132			(1,184		)	—
Accumulated losses of unconsolidated subsidiaries in excess of investment	734			135			—			(869		)	—
Long-term pension and post employment benefit obligations	33			—			182			—			215
Deferred income taxes	11			—			4			—			15
Operating lease liabilities (see Note 8)	33			—			43			—			76
Other long-term liabilities	117			—			79			—			196
Total liabilities	5,092			135			2,213			(2,332		)	5,108
Total Hexion Inc. shareholder’s deficit	(2,964		)	(114		)	(620		)	734			(2,964		)
Noncontrolling interest	—			—			(2		)	—			(2		)
Total deficit	(2,964		)	(114		)	(622		)	734			(2,966		)
Total liabilities and deficit	$	2,128		$	21		$	1,591		$	(1,598	)	$	2,142

HEXION INC.

DECEMBER 31, 2018

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 $15, respectively)	$	20		$	—		$	108		$	—		$	128
Accounts receivable, net	98			—			314			—			412
Intercompany accounts receivable	40			—			66			(106		)	—
Intercompany loans receivable—current portion	82			—			101			(183		)	—
Inventories:
Finished and in-process goods	100			—			140			—			240
Raw materials and supplies	36			—			58			—			94
Other current assets	28			—			29			—			57
Total current assets	404			—			816			(289		)	931
Investment in unconsolidated entities	134			12			19			(146		)	19
Deferred income taxes	—			—			—			—			—
Other long-term assets	10			7			17			—			34
Intercompany loans receivable	1,114			—			—			(1,114		)	—
Property and equipment, net	363			—			478			—			841
Goodwill	53			—			56			—			109
Other intangible assets, net	19			—			8			—			27
Total assets	$	2,097		$	19		$	1,394		$	(1,549	)	$	1,961
Liabilities and Deficit
Current liabilities:
Accounts payable	$	126		$	—		$	258		$	—		$	384
Intercompany accounts payable	66			—			40			(106		)	—
Debt payable within one year	3,563			—			153			—			3,716
Intercompany loans payable within one year	101			—			82			(183		)	—
Interest payable	81			—			1			—			82
Income taxes payable	3			—			2			—			5
Accrued payroll and incentive compensation	22			—			30			—			52
Other current liabilities	61			—			45			—			106
Total current liabilities	4,023			—			611			(289		)	4,345
Long term liabilities:
Long-term debt	52			—			47			—			99
Intercompany loans payable	—			—			1,114			(1,114		)	—
Accumulated losses of unconsolidated subsidiaries in excess of investment	781			146			—			(927		)	—
Long-term pension and post employment benefit obligations	34			—			187			—			221
Deferred income taxes	2			—			13			—			15
Other long-term liabilities	117			—			78			—			195
Total liabilities	5,009			146			2,050			(2,330		)	4,875
Total Hexion Inc. shareholder’s deficit	(2,912		)	(127		)	(654		)	781			(2,912		)
Noncontrolling interest	—			—			(2		)	—			(2		)
Total deficit	(2,912		)	(127		)	(656		)	781			(2,914		)
Total liabilities and deficit	$	2,097		$	19		$	1,394		$	(1,549	)	$	1,961

HEXION INC.

THREE MONTHS ENDED MARCH 31, 2019

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)



	Hexion Inc.			Combined Subsidiary Guarantors		Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	404		$	—	$	531		$	(49	)	$	886
Cost of sales	341			—		458			(49		)	750
Gross profit	63			—		73			—			136
Selling, general and administrative expense	51			—		40			—			91
Business realignment costs	2			—		2			—			4
Other operating expense, net	7			—		1			—			8
Operating income	3			—		30			—			33
Interest expense, net	76			—		4			—			80
Intercompany interest (income) expense, net	(20		)	—		20			—			—
Other non-operating expense (income), net	18			—		(19		)	—			(1		)
(Loss) income before tax and earnings from unconsolidated entities	(71		)	—		25			—			(46		)
Income tax expense	—			—		7			—			7
(Loss) income before earnings earnings from unconsolidated entities	(71		)	—		18			—			(53		)
Earnings from unconsolidated entities, net of taxes	19			12		1			(31		)	1
Net (loss) income	(52		)	12		19			(31		)	(52		)
Comprehensive (loss) income	$	(52	)	$	12	$	19		$	(31	)	$	(52	)

HEXION INC.

THREE MONTHS ENDED MARCH 31, 2018

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)



	Hexion Inc.			Combined Subsidiary Guarantors			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net sales	$	431		$	—		$	570		$	(55	)	$	946
Cost of sales	357			—			487			(55		)	789
Gross profit	74			—			83			—			157
Selling, general and administrative expense	36			—			46			—			82
Gain on disposition	(24		)	—			(20		)	—			(44		)
Asset impairments	25			—			—			—			25
Business realignment costs	6			—			3			—			9
Other operating expense, net	—			—			9			—			9
Operating income	31			—			45			—			76
Interest expense, net	79			—			4			—			83
Intercompany interest (income) expense, net	(20		)	—			20			—			—
Other non-operating (income) expense, net	(19		)	—			18			—			(1		)
(Loss) income before income tax and (losses) earnings from unconsolidated entities	(9		)	—			3			—			(6		)
Income tax (benefit) expense	(7		)	—			15			—			8
Loss before (losses) earnings from unconsolidated entities	(2		)	—			(12		)	—			(14		)
(Losses) earnings from unconsolidated entities, net of taxes	(11		)	(3		)	1			14			1
Net loss	$	(13	)	$	(3	)	$	(11	)	$	14		$	(13	)
Comprehensive income (loss)	$	1		$	(2	)	$	2		$	—		$	1

HEXION INC.

THREE MONTHS ENDED MARCH 31, 2019

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)



	Hexion Inc.				Combined Subsidiary Guarantors		Combined Non-Guarantor Subsidiaries				Eliminations			Consolidated
Cash flows (used in) provided by operating activities	$	(186	)		$	—	$	32			$	—		$	(154	)
Cash flows provided by (used in) investing activities
Capital expenditures	(7		)		—		(12		)		—			(19		)
Return of capital from subsidiary from sales of accounts receivable	96			(a)	—		—				(96		)	—
	89				—		(12		)		(96		)	(19		)
Cash flows provided by (used in) financing activities
Net short-term debt borrowings	(2		)		—		2				—			—
Borrowings of long-term debt	49				—		147				—			196
Repayments of long-term debt	(24		)		—		(16		)		—			(40		)
Net intercompany loan borrowings (repayments)	70				—		(70		)		—			—
Return of capital to parent from sales of accounts receivable	—				—		(96		)	(a)	96			—
	93				—		(33		)		96			156
Change in cash and cash equivalents	(4		)		—		(13		)		—			(17		)
Cash, cash equivalents and restricted cash at beginning of period	20				—		108				—			128
Cash, cash equivalents and restricted cash at end of period	$	16			$	—	$	95			$	—		$	111

(a)

During the three months ended March 31, 2019, Hexion Inc. contributed receivables of $96 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the three months ended March 31, 2019, 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.

HEXION INC.

THREE MONTHS ENDED MARCH 31, 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	$	(91	)		$	—	$	8			$	—		$	(83	)
Cash flows provided by (used in) investing activities
Capital expenditures	(8		)		—		(17		)		—			(25		)
Proceeds from dispositions, net	24						25							49
Proceeds from sale of assets, net	—						1				—			1
Return of capital from subsidiary from sales of accounts receivable	73			(a)	—		—				(73		)	—
	89				—		9				(73		)	25
Cash flows provided by (used in) financing activities
Net short-term debt borrowings	(3		)		—		(12		)		—			(15		)
Borrowings of long-term debt	50				—		116				—			166
Repayments of long-term debt	(58		)		—		(38		)		—			(96		)
Net intercompany loan borrowings (repayments)	19				—		(19		)		—			—
Long-term debt and credit facility financing fees	—				—		(1		)		—			(1		)
Return of capital to parent from sales of accounts receivable	—				—		(73		)	(a)	73			—
	8				—		(27		)		73			54
Effect of exchange rates on cash and cash equivalents	—				—		2				—			2
Change in cash and cash equivalents	6				—		(8		)		—			(2		)
Cash, cash equivalents and restricted cash at beginning of period	13				—		102				—			115
Cash, cash equivalents and restricted cash at end of period	$	19			$	—	$	94			$	—		$	113

(a)

During the three months ended March 31, 2018, Hexion Inc. contributed receivables of $73 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the three months ended March 31, 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 previously 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.