Fresh Start Accounting (Tables)

12 Months Ended

Dec. 31, 2020

Schedule of Fresh-Start Adjustments [Table Text Block]

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

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


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.

(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.

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

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.