Segment Information

6 Months Ended

Jun. 30, 2020

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 June 30, 2020, the Company 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, including: forest products resin assets in North America, Latin America, Europe, Australia and New Zealand; global formaldehyde; and the global phenolic specialty resins business, which now also includes the oilfield technologies group.

•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 Predecessor three and six months ended June 30, 2019 to reflect the new reportable segments. The recast of previously issued financial information does not represent a correction of error with respect to, and has no impact on, the Company’s previously issued financial statements.

Reportable Segments

Following are net sales and Segment EBITDA 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 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.

Following is net sales by reportable segment disaggregated by geographic region:


	Successor										Predecessor
	Three Months Ended June 30, 2020										Three Months Ended June 30, 2019 ⁽²⁾
	Adhesives		Coatings and Composites		Total		Adhesives		Coatings and Composites		Total
North America	$	224	$	104	$	328	$	326	$	149	$	475
Europe	69		106		175		103		152		255
Asia Pacific	30		72		102		40		74		114
Latin America	23		—		23		48		—		48
Total	$	346	$	282	$	628	$	517	$	375	$	892

	Successor										Predecessor
	Six Months Ended June 30, 2020										Six Months Ended June 30, 2019⁽²⁾
	Adhesives		Coatings and Composites		Total		Adhesives		Coatings and Composites		Total
North America	$	520	$	258	$	778	$	659	$	285	$	944
Europe	171		260		431		217		304		521
Asia Pacific	62		122		184		81		129		210
Latin America	61		—		61		103		—		103
Total	$	814	$	640	$	1,454	$	1,060	$	718	$	1,778

(1)Intersegment sales are not significant and, as such, are eliminated within the selling segment.

(2)Previously reported Net Sales by reportable segment for the Predecessor three and six months ended June 30, 2019 is shown below:


	Predecessor
	Three Months Ended June 30, 2019										Six Months Ended June 30, 2019
	Forest Products Resins		Epoxy, Phenolic and Coating Resins		Total		Forest Products Resins		Epoxy, Phenolic and Coating Resins		Total
North America	$	259	$	216	$	475	$	519	$	425	$	944
Europe	43		212		255		90		431		521
Asia Pacific	30		84		114		63		147		210
Latin America	48		—		48		103		—		103
Total	$	380	$	512	$	892	$	775	$	1,003	$	1,778

Reconciliation of Net Loss to Segment EBITDA:


	Successor		Predecessor		Successor		Predecessor
	Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Reconciliation:
Net loss attributable to Hexion Inc.	$	(42)	$	(108)	$	(101)	$	(160)
Net income attributable to noncontrolling interest	—		(1)		—		(1)
Net loss	$	(42)	$	(107)	$	(101)	$	(159)
Income tax (benefit) expense	(11)		8		(8)		15
Interest expense, net	25		9		51		89
Depreciation and amortization ⁽¹⁾	56		26		114		52

EBITDA	28		(64)		56		(3)
Adjustments to arrive at Segment EBITDA:
Asset impairments	$	—	$	—	$	16	$	—
Business realignment costs ⁽²⁾	18		11		39		15


Transaction costs ⁽³⁾	4		3		7		26
Realized and unrealized foreign currency (gains) losses	—		(7)		6		(6)


Reorganization items, net ⁽⁴⁾	—		156		—		156

Other non-cash items ⁽⁵⁾	13		7		25		9
Other ⁽⁶⁾	2		6		5		18
Total adjustments	37		176		98		218
Segment EBITDA	$	65	$	112	$	154	$	215

Segment EBITDA ⁽⁷⁾:
Adhesives	$	51	$	73	$	122	$	149
Coatings and Composites	26		52		65		96
Corporate and Other	(12)		(13)		(33)		(30)
Total	$	65	$	112	$	154	$	215

(1)For the three and six months ended June 30, 2020, accelerated depreciation of less than $1 and $2, respectively, has been included in “Depreciation and amortization.”

(2)Business realignment costs for the three and six months ended June 30, 2020 and 2019 included:


	Successor		Predecessor		Successor		Predecessor
	Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Severance costs	$	2	$	7	$	10	$	9
In-process facility rationalizations	5		1		12		3
Business services implementation	8		—		12		—
Legacy environmental reserves	2		1		4		1
Other	1		2		1		2

(3)For the Successor three and six months ended June 30, 2020, transaction costs included certain professional fees related to strategic projects. For the Predecessor three and six months ended June 30, 2019, transaction costs primarily included $2 and $21, 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.

(5)Other non-cash items for the three and six months ended June 30, 2020 and 2019 included:


	Successor		Predecessor		Successor		Predecessor
	Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Fixed asset write-offs	$	6	$	2	$	8	$	3
Stock-based compensation costs	4		—		9		—
Long-term retention programs	3		4		6		5
Other	—		1		2		1

(6)Other for the three and six months ended June 30, 2020 and 2019 included:


	Successor		Predecessor		Successor		Predecessor
	Three Months Ended June 30, 2020		Three Months Ended June 30, 2019		Six Months Ended June 30, 2020		Six Months Ended June 30, 2019
Legacy expenses	$	2	$	—	$	5	$	3
IT outage costs (recoveries), net	(2)		5		(4)		10
Management fees and other	2		1		4		5

(7)Previously reported Segment EBITDA by reportable segment for the Predecessor three and six months ended June 30, 2019 is shown below:


	Predecessor
	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Segment EBITDA:
Forest Products Resins	$	66	$	134
Epoxy, Phenolic and Coating Resins	59		111
Corporate and Other	(13)		(30)
Total	$	112	$	215