Discontinued Operations and Disposal Groups

6 Months Ended

Jun. 30, 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 received to date consists of $335 in cash and certain assumed liabilities. The remainder consists of future payments of up to $90 based on the performance of the Held for Sale Business. 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 positive subsequent post-closing adjustment to the purchase price of $2 was 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 disposed in the transaction included 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 Held for Sale Business generated annual sales of $493 in 2020, and for the three and six months ended June 30, 2021, net sales totaled $53 and $216, respectively. Until the closing date, the Company operated the Held for Sale Business in the ordinary course.

For the three and six months ended June 30, 2021, we reported the results of the operations as a “Loss from discontinued operations, net of taxes” on the unaudited Condensed Consolidated Statements of Operations. Amounts for prior periods have similarly been retrospectively reclassified for all periods presented. As of December 31, 2020, we reclassified the assets and liabilities of our Held for Sale Business as held for sale on the unaudited Condensed Consolidated Balance Sheets.

The Held for Sale business reported $14 of goodwill and $61 of other intangible assets at 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 was 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 the Company completed the sale on April 30, 2021, there were no balances reported on the unaudited Condensed Consolidated Balance Sheet at June 30, 2021.

As a result of entering into the Purchase Agreement, the Company recognized a pre-tax charge of $16 during the six months ended June 30, 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 June 30, 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 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 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:

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

In addition to the Held for Sale Business assets and liabilities classified as held for sale in the table above, the Company’s Consolidated Balance Sheets at June 30, 2021 includes an additional $1 of current assets held for sale and $4 of current liabilities associated with assets held for sale related to the Company’s other restructuring activities.

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

	Three Months Ended June 30, 2021		Three Months Ended June 30, 2020		Six Months Ended June 30, 2021		Six Months Ended June 30, 2020
Major line items constituting pretax income of discontinued operations:
Net sales	$	53	$	97	$	216	$	242
Cost of sales (exclusive of depreciation and amortization)	46		84		183		205
Selling, general and administrative expense	5		10		16		21
Depreciation and amortization	—		9		—		18
Loss on sale of business	10		—		10		—
Asset impairments	—		—		16		—
Business realignment costs	—		—		—		1
Other operating income, net	—		(1)		—		(1)
Operating (loss) income	(8)		(5)		(9)		(2)
Other non-operating income, net	(5)		—		(5)		—
Loss from discontinued operations before income tax, earnings from unconsolidated entities	(3)		(5)		(4)		(2)
Income tax expense (benefit)	1		(5)		2		1
Loss from discontinued operations, net of tax	$	(4)	$	—	$	(6)	$	(3)
Earnings from unconsolidated entities, net of tax	—		—		1		—
Net loss attributable to discontinued operations	$	(4)	$	—	$	(5)	$	(3)