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HEXION : Management's Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in millions) (form 10-Q)

08/11/2021 | 04:45pm EST
The following commentary should be read in conjunction with the audited
Consolidated Financial Statements and the accompanying notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
Within the following discussion, unless otherwise stated, "the second quarter of
2021" refers to the three months ended June 30, 2021 and "the second quarter of
2020" refers to the three months ended June 30, 2020, "the first half of 2021"
refers to the six months ended June 30, 2021 and "the first half of 2020" refers
to the six months ended June 30, 2020.
Forward-Looking and Cautionary Statements
Certain statements in this report, including without limitation, certain
statements made under the caption "Overview and Outlook," are forward-looking
statements within the meaning of and made pursuant to the safe harbor provisions
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, our management may
from time to time make oral forward-looking statements. All statements, other
than statements of historical facts, are forward-looking statements.
Forward-looking statements may be identified by the words "believe," "expect,"
"anticipate," "project," "might," "plan," "estimate," "may," "will," "could,"
"should," "seek" or "intend" and similar expressions. Forward-looking statements
reflect our current expectations and assumptions regarding our business, the
economy and other future events and conditions and are based on currently
available financial, economic and competitive data and our current business
plans. Actual results could vary materially depending on risks and uncertainties
that may affect our operations, markets, services, prices and other factors as
discussed in the Risk Factors section of this report and our other filings with
the SEC. While we believe our assumptions are reasonable, we caution you against
relying on any forward-looking statements as it is very difficult to predict the
impact of known factors, and it is impossible for us to anticipate all factors
that could affect our actual results. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include, but are not limited to, a weakening of global economic and financial
conditions, interruptions in the supply of or increased cost of raw materials,
the loss of, or difficulties with the further realization of, cost savings in
connection with our strategic initiatives, the impact of our indebtedness, our
failure to comply with financial covenants under our credit facilities or other
debt, pricing actions by our competitors that could affect our operating
margins, changes in governmental regulations and related compliance and
litigation costs, uncertainties related to COVID-19 and the impact of our
responses to it and the other factors listed in the Risk Factors section of this
report and in our other SEC filings. For a more detailed discussion of these and
other risk factors, see the Risk Factors section of this report and our most
recent filings made with the SEC. All forward-looking statements are expressly
qualified in their entirety by this cautionary notice. The forward-looking
statements made by us speak only as of the date on which they are made. Factors
or events that could cause our actual results to differ may emerge from time to
time. We undertake no obligation to publicly update or revise any
forward-looking statement as a result of new information, future events or
otherwise, except as otherwise required by law.
Overview and Outlook
Business Overview
We are a large participant in the specialty chemicals industry, one of the
world's largest producers of thermosetting resins, or thermosets, and a leading
producer of adhesive and structural resins and coatings. Thermosets are a
critical ingredient for most paints, coatings, glues and other adhesives
produced for consumer or industrial uses. We provide a broad array of thermosets
and associated technologies and have significant market positions in all of the
key markets that we serve.
Our products are used in thousands of applications and are sold into diverse
markets, such as forest products, architectural and industrial paints,
packaging, consumer products and automotive coatings, as well as higher growth
markets, such as wind energy and electrical composites. Major industry sectors
that we serve include industrial/marine, construction, consumer/durable goods,
automotive, wind energy, aviation, electronics, architectural, civil
engineering, repair/remodeling and oil and gas drilling. Key drivers for our
business include general economic and industrial conditions, including housing
starts and auto build rates. In addition, due to the nature of our products and
the markets we serve, competitor capacity constraints and the availability of
similar products in the market may impact our results. As is true for many
industries, our financial results are impacted by the effect on our customers of
economic upturns or downturns, as well as by the impact on our own costs to
produce, sell and deliver our products. Our customers use most of our products
in their production processes. As a result, factors that impact their industries
can and have significantly affected our results.
Through our worldwide network of strategically located production facilities, we
serve more than 2,000 customers in approximately 80 countries. Our global
customers include large companies in their respective industries, such as Akzo
Nobel, BASF, Norbord, Louisiana Pacific, Bayer, Owens Corning, PPG Industries,
Sherwin Williams, Sinoma, Aeolon and Weyerhaeuser.
COVID-19 Impact
In March 2020, the World Health Organization categorized COVID-19 as a global
pandemic. Around the world, local governments' responses to COVID-19 continued
to evolve, which led to stay-at-home orders, social distancing guidelines and
other preventative measures that disrupted various industries in the global
economy and the markets in which our products are manufactured, distributed and
sold. Many governments determined our businesses to be essential, and in
response, we implemented additional guidelines to further protect the health and
safety of our employees as we continued to operate with our suppliers and
                      Hexion Inc. | 21 | Q2 2021 Form 10-Q
  Table of     Content    s
During the first six months of 2021, multiple COVID-19 vaccinations became
publicly available, leading to decreased infection rates and the recovery of
many industries as in-person activities expanded. In June 2021, the Company
began allowing limited return to work in corporate offices and have continued to
maintain a paramount focus on the safety of our employees and on adherence to
local guidelines. Though our strong results reflect a recovering economy, the
impact of COVID-19 continues to evolve, and its ultimate impact on our future
financial position, operating results and cash flows involves numerous risks and
uncertainties, including new information which may emerge concerning the
severity and duration of COVID-19 and actions to contain the virus or treat its
Sale of Phenolic Specialty Resins Business
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 subsequent post-closing
adjustment to the purchase price of $2 was made in accordance with the Purchase
Agreement. The Company will use a portion of the net proceeds to invest in our
business, and in May 2021, the Company used a portion of the 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.
For the six months ended June 30, 2021, we reported the results of the Held for
Sale Business 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.
Unless otherwise noted, the tables and discussion below represent the Company's
continuing operations and excludes the Held for Sale Business.
Reportable Segments in 2021
Our reporting segments are aligned around our two growth platforms: (i)
Adhesives and (ii) Coatings and Composites. At June 30, 2021, we have three
reportable segments, which consist of the following businesses:
•Adhesives: these businesses are focused on the global adhesives market. They
include the Company's global wood adhesives and global formaldehyde businesses,
with assets in North America, Latin America, Australia and New Zealand.
Adhesives also includes the oilfield technology group.
•Coatings and Composites: these businesses are focused on the global coatings
and composites market. They include our base and specialty epoxy resins and
Versatic™ acid and derivatives businesses.
•Corporate and Other: primarily corporate general and administrative expenses
that are not allocated to the other segments, such as shared service and
administrative functions and foreign exchange gains and losses.

2021 Overview
Following are highlights from our results of continuing operations for the six
months ended June 30, 2021 and 2020:
                                              Six Months Ended        Six 

Months Ended

                                                June 30, 2021           June 30, 2020           $ Change             % Change
Statements of Operations:
Net sales                                     $        1,605$        1,222$     383                      31  %
Operating income (loss)                                  119                     (62)               181                        n/m
Income (loss) before income tax                           78                    (109)               187                        n/m
Net income (loss) from continuing
operations                                                54                     (98)               152                        n/m
Segment EBITDA:
Adhesives                                     $          143          $           98                 45                      46  %
Coatings and Composites                                  173                      65                108                     166  %
Corporate and Other                                      (42)                    (34)                (8)                     24  %
Total                                         $          274          $          129          $     145                     112  %

                      Hexion Inc. | 22 | Q2 2021 Form 10-Q
  Table of     Content    s
•Net Sales-In the first six months of 2021, net sales increased by $383, or 31%,
compared to the first six months of 2020. Pricing positively impacted sales by
$246 due to raw material price increases passed through to customers and tight
market conditions in our base and specialty epoxy businesses. Volumes positively
impacted net sales by $84, which was primarily related to volume increases in
our North and Latin American resins and formaldehyde businesses driven by strong
demand across key end-markets. These increases were partially offset by volume
decreases in our base epoxy business mainly driven by winter storm Uri in the
U.S. gulf coast in the first quarter of 2021. Foreign currency translation
positively impacted net sales by $53 due to the strengthening of various foreign
currencies against the U.S. dollar in the first six months of 2021 compared to
the first six months of 2020.
•Net Income (Loss) from continuing operations-In the first six months of 2021,
net income from continuing operations increased by $152 from a net loss of $98
as compared to the first six months of 2020. The increase was driven by an
increase in operating income of $181, primarily due to an increase in gross
profit resulting from improved market conditions across our key businesses. This
increase was partially offset by an increase in selling, general, and
administrative expense as a result of increased variable compensation costs.
•Segment EBITDA-For the first six months of 2021, Segment EBITDA was $274, an
increase of 112% compared with $129 in the first six months of 2020. This
increase was primarily due to ongoing COVID economic recovery and improved
market conditions, resulting in margin expansion within our base and specialty
epoxy businesses and higher volumes within our Adhesives segment. These
increases were partially offset by temporary manufacturing outages caused by
winter storm Uri in the U.S. gulf coast. Additionally, our Corporate and Other
charges in the first six months of 2021 increased by $8 compared to the first
six months of 2020 due primarily to increased employee variable compensation
•Growth Initiatives and New Product Development- We continue to focus on new
product development to further strengthen our industry-leading research and
development, technical services capabilities, and to strategically invest in our
R&D footprint to increase opportunities for innovation and stimulate growth.
These growth activities include the following:
•Our new Adhesives product Armorbuilt™, which is designed to protect the
critical utility pole infrastructure against wildfires. We expect incremental
growth in 2021 from this product.
•Extensive conversions were initiated at several major customers within our
Adhesives segment in 2020 for next generation OSB PF technology for board
surface and core applications, and development works continues to position our
products favorably compared to pMDI.
•An expansion of our Brimbank, Australia facility within our Adhesives segment
to develop fire-resistant cladding materials leveraging proprietary phenolic
resin technology. Production is expected to start at the facility in 2022.
•As an alternative technology, we have also developed BPA-free alternative
coating technologies within our Coatings and Composites segment to address
changing consumer preferences.

Short-term Outlook
As we look towards the second half of 2021, we anticipate strong performance as
market conditions continue to recover from the impacts of the COVID-19 pandemic
and Winter Storm Uri. Though we continued to operate as an essential business
during the first half of 2020, we experienced weak economic conditions in our
key markets, specifically within automotive and certain industrial markets. In
the second half of 2020 and in the first half of 2021, we saw sequential
improvement in many of the industries in which our businesses operate and
year-over-year Segment EBITDA improvement as the overall economy continued to
recover from the global pandemic. We continue to expect strong performance
across our businesses and strong demand in our key end markets in second half of
Within our Coatings and Composites segment, we continue to expect significant
year over year improvement in both our base and specialty epoxy businesses in
second half of 2021 as key end-markets recover from COVID-19 and Winter Storm
Uri disruptions. Additionally, we expect our VersaticTM acid and derivatives
business continues to experience modest growth in architectural coatings.
Within our Adhesives segment, we anticipate improvement in Segment EBITDA within
our North and Latin American Wood Adhesives business in 2021 based on the latest
expectations in U.S. and Canadian housing starts, remodeling and ongoing
macroeconomic recovery from the COVID-19 pandemic. We also expect that continued
economic recovery and strong market demand will positively impact our North
American formaldehyde business in the remainder of 2021.
Matters Impacting Comparability of Results
Raw Material Prices
Raw materials comprise approximately 75% of our cost of sales (excluding
depreciation expense). The three largest raw materials used in our production
processes are phenol, methanol and urea. These materials represent about half of
our total raw material costs. Fluctuations in energy costs, such as volatility
in the price of crude oil and related petrochemical products, as well as the
cost of natural gas have historically caused volatility in our raw material and
utility costs. In the first six months of 2021 compared to the first six months
of 2020, the average price of phenol, urea and methanol increased by
approximately 112%, 72% and 68%, respectively. The impact of passing through raw
material price changes to customers can result in significant variances in sales
comparisons from year to year.
                      Hexion Inc. | 23 | Q2 2021 Form 10-Q
  Table of     Content    s
We expect long-term raw material cost volatility to continue because of price
movements of key feedstocks. To help mitigate raw material volatility, we have
purchase and sale contracts and commercial arrangements with many of our vendors
and customers that contain periodic price adjustment mechanisms. Due to
differences in timing of the pricing trigger points between our sales and
purchase contracts, there is often a "lead-lag" impact. In many cases this
"lead-lag" impact can negatively impact our margins in the short term in periods
of rising raw material prices and positively impact them in the short term in
periods of falling raw material prices.
Foreign Currency Exchange
The impact of foreign currency translation is driven by the translation of
assets and liabilities of our foreign subsidiaries which are denominated in
functional currencies other than the U.S. dollar. Our non-U.S. operations
accounted for approximately 55% of our sales in the first six months of 2021.
The primary assets and liabilities driving the adjustments are cash and cash
equivalents; accounts receivable; inventory; property, plant and equipment;
accounts payable; pension and other postretirement benefit obligations and
certain intercompany loans payable and receivable. The primary currencies in
which these assets and liabilities are denominated are the euro, Brazilian real,
Chinese yuan, Canadian dollar and Australian dollar.
                      Hexion Inc. | 24 | Q2 2021 Form 10-Q


Table of Content s

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