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Hexion to Announce Third Quarter 2020 Results

  • Entered into a definitive agreement to sell our Phenolic Specialty Resin, Hexamine and European-based Forest Products Resins businesses for approximately $425 million
  • Net sales from continuing operations of $634 million
  • Loss from continuing operations, net of taxes of $26 million
  • Net loss of $102 million
  • Segment EBITDA from continuing operations of $91 million compared to $104 million in the third quarter 2019. Both periods reflect the treatment of the pending divestiture as discontinued operations. The prior year period also included $18 million of Segment EBITDA related to deferred revenue that was accelerated on July 1, 2019 as part of Fresh Start accounting.

Hexion Inc. announced results for the third quarter ended September 30, 2020.

“Third quarter 2020 results reflected steadily improving volume gains each month during the quarter as ongoing improvement in several key end markets drove Segment EBITDA that exceeded the prior year by 6 percent if excluding the prior year impact of fresh start accounting,” said Craig Rogerson, Chairman, President and Chief Executive Officer. “We were also pleased to post strong sequential Segment EBITDA from continuing operations gains of 60% in the third quarter of 2020 compared to second quarter Segment EBITDA from continuing operations of $56 million. Favorable residential construction trends drove strong sequential improvement in our third quarter volumes and EBITDA for our Adhesives segment. Our Coatings & Composites segment posted positive Segment EBITDA gains in the third quarter of 2020 versus the prior year due to our specialty epoxy resins business and continued positive demand in wind energy, as well as our Versatic Acids™ and Derivatives business due to strength in architectural coatings and recovering automotive demand.”

Mr. Rogerson added: “We were pleased to recently announce a divestiture and continue to explore other portfolio optimization opportunities. Upon closing, we plan to use the proceeds to invest in our business and reduce our debt. While our volumes continued to improve sequentially in October, visibility remains limited regarding the fourth quarter of 2020 because of the pandemic as well as normal year-end volatility. Our balance sheet, liquidity, and ability to generate cash remain strong, and we are encouraged by the recent trends in housing, wind energy, automotive and several other markets, although we continue to keep a close eye on key economic indicators to monitor the impact of COVID-19. In addition, we expect to be free cash flow1 positive in 2020. We remain focused on the things we can control, such as completing the pending divestiture, maintaining our streamlined cost structure and continuing to accelerate new product development, which we believe positions us favorably as demand recovers. We also plan to expand our investments in productivity and growth-oriented capital expenditures to drive future growth in 2021 and future years.”

Hexion Announces Strategic Divestiture

On September 27, 2020, the Company entered into a Purchase Agreement for the sale of its Phenolic Specialty Resin (PSR), Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business” or the “Business”) for approximately $425 million to Black Diamond and Investindustrial. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future proceeds based on the performance of the Held for Sale Business. The final purchase price is subject to customary post-closing adjustments.

The business includes approximately 900 associates and 11 manufacturing facilities globally where phenolic specialty resins and engineered thermoset molding compounds are produced for a wide range of end markets including building and construction, industrial, automotive, electronics, agriculture and consumer. The Company expects to use the net sale proceeds to reduce indebtedness as well as for general corporate purposes including investments in its business. The transaction is intended to close in the first quarter of 2021, subject to regulatory approvals and other customary closing conditions, including Works Council consultation.

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.

Third Quarter 2020 Results

In January 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.

As of September 30, 2020, the Company reclassified the assets and liabilities of our Held for Sale Business as held for sale on the unaudited Condensed Consolidated Balance Sheets and reported the results of its operations for the three and nine months ended September 30, 2020 as “(Loss) income 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. See Schedules 9 and 10 for additional financial information for our Held for Sale Business.

Total net sales for the quarter ended September 30, 2020 were $634 million, a decrease of 9% compared with $693 million in the prior year period. Volumes positively impacted net sales by $13 million due to volume increases in Hexion’s specialty epoxy and base epoxy resins businesses, offset by decreases in the Company’s North American wood adhesives business due to overall weakness in the market, primarily in the non-residential construction industry. Pricing negatively impacted sales by $68 million due primarily to raw material price decreases contractually passed through to customers across many businesses, as well as unfavorable product mix and continued competitive market conditions in base epoxy resins. Foreign currency translation negatively impacted net sales by $4 million due to the weakening of various foreign currencies against the U.S. dollar in the third quarter of 2020 compared to the third quarter of 2019.

Net loss for the Successor three months ended September 30, 2020 was $102 million compared to a net income of $3,054 million for the Predecessor period July 1, 2019 and a net loss of $43 million in the Successor period of July 2, 2019 through September 30, 2019. Total Segment EBITDA from continuing operations for the quarter ended September 30, 2020 was $91 million, a decrease of $13 million compared with the prior year period reflecting improved results in our Versatic™ Acids and Derivatives and specialty epoxy resins businesses, offset by the absence of the $18 million of Segment EBITDA in the prior year related to deferred revenue that was accelerated on July 1, 2019 as part of Fresh Start Accounting.

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the Successor three and nine months ended September 30, 2020 and Successor three and nine months ended September 30, 2019.

  Successor Non-GAAP Combined Successor Non-GAAP Combined
  Three Months Ended
September 30, 2020
 Three Months Ended
September 30, 2019
 Nine Months Ended
September 30, 2020
 Nine Months Ended
September 30, 2019
Net Sales (1):        
Adhesives $293  $361  $874  $1,122 
Coatings and Composites 341  332  981  1,052 
Total $634  $693  $1,855  $2,174 
         
Segment EBITDA:        
Adhesives $58  $77  $156  $194 
Coatings and Composites 50  44  115  140 
Corporate and Other (17)  (17)  (51)  (47) 
Total $91  $104  $220  $287 

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

Efficiency and Cost Savings Initiatives

In the third quarter of 2020, Hexion continued to implement the creation of a business services group with Capgemini to provide certain administrative functions to further improve the Company’s organizational efficiency and reduce its costs in future years. During the first nine months of 2020, the Company also achieved $19 million of cost savings related to its cost savings initiatives. At September 30, 2020, Hexion had approximately $8 million of total in-process savings that it expects to realize over the next 12 months.

Liquidity and Capital Resources

As of September 30, 2020, total debt was approximately $1.8 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 September 30, 2020, the Company had $452 million in liquidity, including $155 million of unrestricted cash and cash equivalents. In addition, Hexion has no upcoming maturities on its term loan or notes 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.

Source: Hexion

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