First Quarter 2020 Highlights
- Net sales of $826 million
- Net loss of $59 million
- Segment EBITDA of $89 million
- Liquidity of $440 million as of March 31, 2020
Hexion Inc. (“Hexion” or the “Company”) today announced results for the first quarter ended March 31, 2020.
“In the first quarter of 2020, our diverse customer base and broad geographic footprint drove improved volumes in our Coatings and Composites segment, while our overall results were offset by weaker conditions that emerged late in the quarter due to the coronavirus pandemic,” said George Knight, Acting Chief Executive Officer and Chief Financial Officer. “We estimate that COVID-19 and the strengthening of the U.S. dollar compared to other foreign currencies negatively impacted our first quarter 2020 results by approximately $4 million and $2 million, respectively. We remain focused on the health and safety of our associates while taking the appropriate actions to continue to operate our sites, such as maintaining social distancing practices and enhanced hygiene at our manufacturing facilities, as well as working remotely at our corporate headquarters and global research and development centers. We are also following the guidelines of each country in which we operate as it relates to being deemed a business considered “critical infrastructure” enabling us to keep our sites running. For example, the U.S. Department of Homeland Security has identified the U.S. chemical industry and its workers as Essential Critical Infrastructure. During the first quarter and as of today, we maintained operations at the vast majority of our manufacturing sites. We were also pleased to support the communities in which we live and work through a variety of COVID-19 relief initiatives.”
Mr. Knight added: “We are seeing a more significant impact in the second quarter of 2020 from the pandemic. Because neither the duration nor scope of the coronavirus impact can be predicted, the negative financial impact to our results cannot be reasonably estimated. We remain focused on the things we can control, such as aggressively managing our costs, optimizing our net working capital and reducing our 2020 planned capital expenditures. We are also encouraged by the resiliency of our customers in certain end markets, such as wind energy and agriculture. Supported by our strong liquidity, we believe we are well-positioned for the eventual economic recovery.”
Fresh Start Accounting
Upon emerging from Chapter 11 on July 1, 2019 (“Effective Date”) and qualifying for the application of fresh-start accounting, Hexion’s assets and liabilities were recorded at their estimated fair values which, in some cases, were significantly different than amounts included in the Company’s financial statements prior to the Effective Date. Accordingly, Hexion’s financial condition and results of operations on and after the Effective Date are not directly comparable to our financial condition and results of operations prior to the Effective Date. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the reorganized Company subsequent to the Effective Date. References to “Predecessor” or “Predecessor Company” refer to the financial position and results of operations of the Company on or before the Effective Date.
First Quarter 2020 Results
In the first quarter of 2020, Hexion updated its reportable segments to align around two growth platforms: Adhesives; and Coatings and Composites. The Adhesives Segment is organized around Construction Adhesives, Industrial Adhesives, and Intermediates and Derivatives, while the Coatings and Composites Segment is organized around Composites, Performance Coatings, and Base Chemicals. Corporate and Other continues to be a reportable segment.
Total net sales for the quarter ended March 31, 2020 were $826 million, a decrease of 7% compared with $886 million in the prior year period. Pricing negatively impacted sales by $57 million due primarily to raw material price decreases contractually passed through to customers across many of our businesses, as well as continued competitive market conditions in our base epoxy resins business. Foreign currency translation negatively impacted net sales by $15 million due to the weakening of various foreign currencies against the U.S. dollar against in the first quarter of 2020 compared to the first quarter of 2019. Volume increases positively impacted net sales by $12 million related to improved volumes in our base and specialty epoxy resins businesses driven by strong demand, most notably in global wind energy. These volume increases were partially offset by volume reductions in our phenolic specialty resins and Latin American resins businesses driven by overall weakness in the market, primarily in the automotive and construction industries.
Net loss for the Successor three months ended March 31, 2020 was $59 million compared to a net loss of $52 million in the Predecessor three months ended March 31, 2019. Total Segment EBITDA for the quarter ended March 31, 2020 was $89 million, a decrease of $14 million compared with the prior year period, driven primarily by margin reductions in our base epoxy resins business due to competitive pressures partially offset by margin and volume improvements in our Versatic™ Acids and Derivatives and specialty epoxy businesses.
Following are net sales and Segment EBITDA by reportable segment for the first quarter ended March 31, 2020 and 2019. See “Non-U.S. GAAP Measures” for further information regarding Segment EBITDA and a reconciliation of net loss to Segment EBITDA.
|Three Months Ended March 31,|
|Net Sales (1):|
|Coatings and Composites||358||343|
|Coatings and Composites||39||44|
|Corporate and Other||(21||)||(17||)|
|(1)||Intersegment sales are not significant and, as such, are eliminated within the selling segment.|
Efficiency and Cost Savings Initiatives
Hexion recently announced creation of a business services group within Hexion and a partnership with Capgemini to provide certain administrative functions to further improve Hexion’s organizational efficiency and reduce costs. By partnering with Capgemini, Hexion intends to create a best-in-class organization that focuses on gaining efficiencies and process improvements by leveraging automation and state of the art technology for service delivery, while also reducing the Company’s costs.
In the first quarter of 2020, the Company achieved $8 million of cost savings related to its cost savings initiatives. At March 31, 2020, Hexion had approximately $15 million of total in-process savings that it expects to realize over the next 12 months.
Liquidity and Capital Resources
As of March 31, 2020, total debt was approximately $1.9 billion and consisted primarily of the Company’s approximately $1.2 billion Senior Secured Term Loans due 2026 and $450 million Senior Notes due 2027. At March 31, 2020, the Company had $440 million in liquidity, including $246 million of unrestricted cash and cash equivalents. In addition, Hexion has no upcoming maturities on its term loan or bonds until 2026. Hexion expects to have adequate liquidity to fund its ongoing operations for the next twelve months from cash on its balance sheet, cash flows provided by operating activities and amounts available for borrowings under its credit facilities.
Hexion has also taken several actions in its efforts to improve its cost structure and strengthen its liquidity and cash position, including:
- Reducing its 2020 capital expenditures to range between $100 million to $110 million and reviewing the timing of manufacturing turnarounds at certain sites.
- Continuing to focus on reducing working capital (defined as accounts receivable and inventories less accounts and drafts payable) in 2020. Hexion expects to see a positive impact on its net working capital levels from lower oil prices in the second quarter of 2020 from the pass through of significantly lower-priced raw materials.
- Reducing general sales, general and administrative spending wherever possible, such as travel restrictions, instituting a hiring freeze and reviewing other discretionary spending items.
- Delaying approximately $15 million of certain tax payments to later in 2020 and deferring $5 million of certain tax payments to future years in conjunction with the Coronavirus Aid, Relief, and Economic Security (CARES) Act and tax relief measures in other jurisdictions where the Company operates.
- The Company drew down $164 million of revolving credit loans under its credit facilities as a precautionary measure to increase cash balances and preserve financial flexibility.
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