Discontinued Operations and Disposal Groups

3 Months Ended

Mar. 31, 2021

Discontinued Operations and Disposal Groups [Abstract]

Disposal Groups, Including Discontinued Operations, Disclosure

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.

On April 30, 2021, the Company completed the sale (the “Transaction”) of its Held for Sale Business pursuant to the terms of the Purchase Agreement with the Buyers. The Company received gross cash consideration for the Held for Sale Business in the amount of $304. In addition, the Buyers assumed approximately $31 of certain liabilities, net of preliminary working capital and other closing adjustments as part of the Purchase Agreement. A subsequent post-closing adjustment to the initial cash consideration will be made in accordance with the Purchase Agreement. Hexion expects to use a portion of the net proceeds to invest in its business, and in May 2021, the Company used a portion of its net proceeds to reduce its borrowings under its Senior Secured Term Loan, in accordance with its credit agreement. See Note 8 for further information on reduction to the Company’s Senior Secured Term Loan.

As part of the Transaction, the Company will provide certain transitional services to the Buyers for an initial period of up to six months pursuant to a Transitional Services Agreement, which certain services may be extended two times for an additional three months for each extension by the Buyers. The purpose of these services is to provide short-term assistance to the Buyers in assuming the operations of the Business. These services do not confer to the Company the ability to influence the operating or financial policies of the Business under its new ownership.

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 $493 in 2020.

Until the closing date, the Company has agreed to operate the Held for Sale Business in the ordinary course.

As of March 31, 2021, the Company classified the assets and liabilities of the Held for Sale Business as held for sale on the unaudited Condensed Consolidated Balance Sheets and reported the results of the operations for the three months ended March 31, 2021 as “Loss from discontinued operations, net of tax” on the unaudited Condensed 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 March 31, 2021 and December 31, 2020 and $61 of other intangible assets at both March 31, 2021 and December 31, 2020. 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 $16 during the three months ended March 31, 2021 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 March 31, 2021 for a total impairment charge of $91 since entering into the Purchase Agreement. 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, fiscal years 2021, 2022 and 2023, 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 unaudited Condensed Consolidated Balance Sheets:

	March 31, 2021		December 31, 2020
Carrying amounts of major classes of assets held for sale:
Accounts receivable	$	86	$	66
Finished and in-process goods	20		18
Raw materials and supplies	24		17
Other current assets	11		12
Total current assets	141		113
Investment in unconsolidated entities	6		5
Deferred tax assets	8		2
Other long-term assets	7		7
Property, plant and equipment, net	307		310
Operating lease assets	13		13
Goodwill	14		14
Other intangible assets, net	61		61
Discontinued operations impairment	(91)		(75)
Total long-term assets	325		337
Total assets held for sale	$	466	$	450
Carrying amounts of major classes of liabilities held for sale:
Accounts payable	$	69	$	52
Income taxes payable	2		1
Accrued payroll	6		3
Current portion of operating lease liabilities	3		2
Other current liabilities	8		9
Total current liabilities	88		67
Long-term pension and post employment benefit obligations	35		36
Deferred income taxes	26		22
Operating lease liabilities	5		5
Other long-term liabilities	8		8
Total long-term liabilities	74		71
Total liabilities held for sale	$	162	$	138

The following table shows the financial results of discontinued operations for the periods presented:

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Major line items constituting pretax income of discontinued operations:
Net sales	$	163	$	145
Cost of sales (exclusive of depreciation and amortization)	137		121
Selling, general and administrative expense	11		11
Depreciation and amortization	—		9
Asset impairments	16		—
Business realignment costs	—		1
Other operating income, net	(1)		—
Income from discontinued operations before income tax, earnings from unconsolidated entities	—		3
Income tax expense	2		6
Loss from discontinued operations, net of tax	$	(2)	$	(3)
Earnings from unconsolidated entities, net of tax	1		—
Net loss attributable to discontinued operations	$	(1)	$	(3)

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:

	March 31, 2021		December 31, 2020
Current assets	$	7	$	7
Non-current assets	1		1
Current liabilities	1		2
Non-current liabilities	6		6

	Three Months Ended March 31, 2021		Three Months Ended March 31, 2020
Net sales	$	9	$	9
Gross profit	2		2
Pre-tax income (loss)	1		(1)
Net income (loss)	1		(1)