Market Overview

Hexion Inc. Announces Second Quarter 2018 Results

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Second Quarter 2018 Highlights

  • Net sales of $995 million, a 9% increase versus prior year
  • Net loss of $21 million
  • Segment EBITDA of $128 million, a 28% increase versus prior year
  • Liquidity of $322 million

Hexion Inc. ("Hexion" or the "Company") today announced results for the
second quarter ended June 30, 2018.

"Strong results in our base epoxy resins and forest products businesses
drove year over year Segment EBITDA gains of 28% and sales growth of 9%
in the second quarter of 2018," said Craig A. Rogerson, Chairman,
President and CEO. "Our results also reflected improved performance in
our specialty epoxy resins business, primarily due to ongoing growth in
our waterborne coatings business, as well as the positive impact of our
recent structural cost reduction initiatives."

Mr. Rogerson added: "We continue to expect strong year-over-year Segment
EBITDA growth in the second half of 2018 reflecting solid demand in our
global forest products business and continued strength in market
fundamentals in base epoxy resins, which are expected to persist for the
foreseeable future. We also anticipate that continued environmental
regulation and long-term secular growth in renewable energy will support
gains in our waterborne coatings and wind energy business over the next
few years. Finally, we generated $41 million of operating cash flow in
the second quarter and we remain focused on generating improved cash
flow in 2018."

Second Quarter 2018 Results

Net Sales. Net sales for the quarter ended June 30, 2018 were
$995 million, an increase of 9% compared with $912 million in the prior
year period. The increase in reported net sales was driven by the
pass-through of higher raw material costs and pricing actions primarily
in the base epoxy resins business.

Segment EBITDA. Segment EBITDA for the quarter ended June 30,
2018 was $128 million, an increase of 28% compared with the prior year
period. Segment EBITDA in the second quarter of 2018 increased by $29
million, or 29%, when adjusted for divestitures. Second quarter 2018
results reflected cost reduction actions and improved margins primarily
in the Company's base epoxy resins, phenolic specialty resins, and
global formaldehyde businesses.

Global Restructuring Programs

Hexion recently identified $53 million of structural cost savings that
it expects to realize during 2018. In the first six months of 2018, the
Company achieved $25 million of cost savings, including reductions in
selling, general and administrative expenses and targeted site
rationalizations. At June 30, 2018, Hexion had approximately $28 million
of total in-process savings that it expects to be substantially realized
by year-end 2018.

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the
second quarter ended June 30, 2018 and 2017. See "Non-U.S. GAAP
Measures" for further information regarding Segment EBITDA and a
reconciliation of net loss to Segment EBITDA.

     
Three Months Ended
June 30,
Six Months
Ended June 30,

(In millions)

2018     2017 2018     2017
Net Sales (1):
Epoxy, Phenolic and Coating Resins $ 564 $ 517 $ 1,104 $ 1,009
Forest Products Resins 431   395   837   773  
Total Net Sales 995 912 1,941 1,782

Adjustment for disposition (2)

  (4 )   (8 )
Adjusted Net Sales $ 995   $ 908   $ 1,941   $ 1,774  
 
Segment EBITDA:
Epoxy, Phenolic and Coating Resins $ 72 $ 46 $ 142 $ 98
Forest Products Resins 76 68 143 129
Corporate and Other (20 ) (14 ) (39 ) (32 )
Total Segment EBITDA 128 100 246 195

Adjustment for disposition (2)

  (1 )   (2 )
Adjusted Segment EBITDA $ 128   $ 99   $ 246   $ 193  
 
(1)   Intersegment sales are not significant and, as such, are eliminated
within the selling segment.
(2) Adjustment for disposition impacts the Forest Products Resins
segment.
 

Liquidity and Capital Resources

At June 30, 2018, Hexion had total debt of approximately $3.8 billion
compared to $3.7 billion at December 31, 2017. In addition, at June 30,
2018, the Company had $322 million in liquidity comprised of $114
million of unrestricted cash and cash equivalents, $180 million of
borrowings available under the Company's senior secured asset-based
revolving credit facility (the "ABL Facility") and $28 million of time
drafts and availability under credit facilities at certain international
subsidiaries. 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.

Earnings Call

Hexion will host a teleconference to discuss Second Quarter 2018 results
on Tuesday, August 7, 2018, at 8:00 a.m. Eastern Time. Interested
parties are asked to dial-in approximately 10 minutes before the call
begins at the following numbers:

U.S. Participants: (844) 492-6045
International Participants: +1
(574) 990-2716
Participant Passcode: 2177957

Live Internet access to the call and presentation materials will be
available through the Investor Relations section of the Company's
website: www.hexion.com.
A replay of the call will be available for one week beginning at 11:00
a.m. Eastern Time on August 7, 2018. The playback can be accessed by
dialing (855) 859-2056 (U.S.) and +1 (404) 537-3406 (International). The
passcode is 2177957. A replay will also be available through the
Investor Relations section of the Company's website.

Covenant Compliance

The instruments that govern the Company's indebtedness contain, among
other provisions, restrictive covenants regarding indebtedness
(including an Adjusted EBITDA to Fixed Charges ratio incurrence test),
dividends and distributions, mergers and acquisitions, asset sales,
affiliate transactions and capital expenditures.

The indentures that govern the Company's 6.625% First-Priority Senior
Secured Notes, 10.00% First-Priority Senior Secured Notes, 10.375%
First-Priority Senior Secured Notes, 13.75% Senior Secured Notes and
9.00% Second-Priority Senior Secured Notes (collectively, the "Secured
Indentures") contain an Adjusted EBITDA to Fixed Charges ratio
incurrence test which may restrict our ability to take certain actions
such as incurring additional debt or making acquisitions if the Company
is unable to meet this ratio (measured on a last twelve months, or LTM,
basis) of at least 2.0:1. The Adjusted EBITDA to Fixed Charges ratio
under the Secured Indentures is generally defined as the ratio of (a)
Adjusted EBITDA to (b) net interest expense excluding the amortization
or write-off of deferred financing costs, each measured on a last twelve
months ("LTM") basis. See "Non-U.S. GAAP Measures" for further
information regarding Adjusted EBITDA and Schedule 5 to the release for
a calculation of the Adjusted EBITDA to Fixed Charges ratio.

The Company's ABL Facility does not have any financial maintenance
covenant other than a minimum Fixed Charge Coverage Ratio of 1.0 to 1.0
that would only apply if the Company's availability under the ABL
Facility at any time is less than the greater of (a) $35 million and (b)
12.5% of the lesser of the borrowing base and the total ABL Facility
commitments at such time. The Fixed Charge Coverage Ratio under the
credit agreement governing the ABL Facility is generally defined as the
ratio of (a) Adjusted EBITDA minus non-financed capital expenditures and
cash taxes to (b) debt service plus cash interest expense plus certain
restricted payments, each measured on an LTM basis. At June 30, 2018,
the Company's availability under the ABL Facility exceeded such levels;
therefore, the minimum fixed charge coverage ratio did not apply.

Non-U.S. GAAP Measures

Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash
and non-recurring expenses. Segment EBITDA is an important measure used
by the Company's senior management and board of directors to evaluate
operating results and allocate capital resources among segments.
Corporate and Other primarily represents certain corporate, general and
administrative expenses that are not allocated to the other segments.
Segment EBITDA should not be considered a substitute for net loss or
other results reported in accordance with U.S. GAAP. Segment EBITDA may
not be comparable to similarly titled measures reported by other
companies. Adjusted Segment EBITDA is defined as Segment EBITDA adjusted
for disposition. See Schedule 4 to this release for reconciliation of
net loss to Segment EBITDA and Adjusted Segment EBITDA.

Adjusted EBITDA is defined as EBITDA adjusted for certain non-cash and
certain non-recurring items and other adjustments calculated on a pro
forma basis, including the expected future cost savings from business
optimization programs or other programs and the expected future impact
of acquisitions, in each case as determined under the governing debt
instrument. As the Company is highly leveraged, it believes that
including the supplemental adjustments that are made to calculate
Adjusted EBITDA provides additional information to investors about the
Company's ability to comply with its financial covenants and to obtain
additional debt in the future. Adjusted EBITDA and Fixed Charges are not
defined terms under U.S. GAAP. Adjusted EBITDA is not a measure of
financial condition, liquidity or profitability, and should not be
considered as an alternative to net loss determined in accordance with
U.S. GAAP or operating cash flows determined in accordance with U.S.
GAAP. Additionally, Adjusted EBITDA is not intended to be a measure of
free cash flow for management's discretionary use, as it does not take
into account certain items such as interest and principal payments on
our indebtedness, depreciation and amortization expense (because the
Company uses capital assets, depreciation and amortization expense is a
necessary element of our costs and ability to generate revenue), working
capital needs, tax payments (because the payment of taxes is part of our
operations, it is a necessary element of our costs and ability to
operate), non-recurring expenses and capital expenditures. Fixed Charges
under the Secured Indentures should not be considered an alternative to
interest expense. See Schedule 5 to this release for reconciliation of
net loss to Adjusted EBITDA and the Fixed Charges Ratio.

Forward Looking Statements

Certain statements in this press release 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," "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 our
filings with the Securities and Exchange Commission (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 substantial
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 and the other factors listed
in our SEC filings. For a more detailed discussion of these and other
risk factors, see the Risk Factors section in our most recent Annual
Report on Form 10-K and Quarterly Report on Form 10-Q and our other
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.

About the Company

Based in Columbus, Ohio, Hexion Inc. is a global leader in thermoset
resins. Hexion Inc. serves the global wood and industrial markets
through a broad range of thermoset technologies, specialty products and
technical support for customers in a diverse range of applications and
industries. Hexion Inc. is controlled by investment funds affiliated
with Apollo Global Management, LLC. Additional information about Hexion
Inc. and its products is available at www.hexion.com.

See Attached Financial Statements

       

HEXION INC.

SCHEDULE 1: CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

 
Three Months Ended June 30, Six Months Ended June 30,

(In millions)

2018     2017 2018     2017
Net sales $ 995 $ 912 $ 1,941 $ 1,782
Cost of sales 829   778   1,618   1,515  
Gross profit 166 134 323 267
Selling, general and administrative expense 77 77 159 156
Gain on disposition (44 )
Asset impairments 25
Business realignment costs 5 10 14 17
Other operating expense, net 11   9   20   3  
Operating income 73 38 149 91
Interest expense, net 84 82 167 165
Loss on extinguishment of debt 3
Other non-operating expense (income), net 8   (7 ) 7   (5 )
Loss before income tax and earnings from unconsolidated entities (19 ) (37 ) (25 ) (72 )
Income tax expense (benefit) 3   (1 ) 11   7  
Loss before earnings from unconsolidated entities (22 ) (36 ) (36 ) (79 )
Earnings from unconsolidated entities, net of taxes 1   2   2   3  
Net loss $ (21 ) $ (34 ) $ (34 ) $ (76 )
Net income attributable to noncontrolling interest (1 )   (1 )  
Net loss attributable to Hexion Inc. $ (22 ) $ (34 ) $ (35 ) $ (76 )
 
       

HEXION INC.

SCHEDULE 2: CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

 

(In millions, except share data)

June 30,
2018
December 31,
2017
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $16 and $18,
respectively)
$ 130 $ 115
Accounts receivable (net of allowance for doubtful accounts of $18
and 19, respectively)
473 462
Inventories:
Finished and in-process goods 245 221
Raw materials and supplies 103 92
Current assets held for sale 6
Other current assets 62   44  
Total current assets 1,013   940  
Investment in unconsolidated entities 22 20
Deferred income taxes 9 8
Long-term assets held for sale 2
Other long-term assets 42 49
Property and equipment:
Land 87 84
Buildings 282 291
Machinery and equipment 2,299   2,327  
2,668 2,702
Less accumulated depreciation (1,810 ) (1,778 )
858 924
Goodwill 110 112
Other intangible assets, net 32   42  
Total assets $ 2,086   $ 2,097  
Liabilities and Deficit
Current liabilities:
Accounts payable $ 397 $ 402
Debt payable within one year 82 125
Interest payable 82 82
Income taxes payable 10 12
Accrued payroll and incentive compensation 60 47
Current liabilities associated with assets held for sale 2
Other current liabilities 119   135  
Total current liabilities 750   805  
Long-term liabilities:
Long-term debt 3,678 3,584
Long-term pension and post employment benefit obligations 246 262
Deferred income taxes 11 11
Other long-term liabilities 178   177  
Total liabilities 4,863   4,839  
Deficit
Common stock—$0.01 par value; 300,000,000 shares authorized,
170,605,906 issued and 82,556,847 outstanding at June 30, 2018 and
December 31, 2017
1 1
Paid-in capital 526 526
Treasury stock, at cost—88,049,059 shares (296 ) (296 )
Accumulated other comprehensive loss (10 ) (8 )
Accumulated deficit (2,998 ) (2,964 )
Total Hexion Inc. shareholder's deficit (2,777 ) (2,741 )
Noncontrolling interest   (1 )
Total deficit (2,777 ) (2,742 )
Total liabilities and deficit $ 2,086   $ 2,097  
 
   

HEXION INC.

SCHEDULE 3: CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Six Months Ended June 30,

(In millions)

2018     2017
Cash flows used in operating activities
Net loss $ (34 ) $ (76 )
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 58 56
Non-cash asset impairments 25
Deferred tax benefit (2 )
Loss (gain) on sale of assets 2 (2 )
Gain on disposition (44 )
Amortization of deferred financing fees 8 8
Loss on extinguishment of debt 3
Unrealized foreign currency losses 12 4
Other non-cash adjustments (2 ) (2 )
Net change in assets and liabilities:
Accounts receivable (27 ) (96 )
Inventories (40 ) (50 )
Accounts payable 12 13
Income taxes payable 1 1
Other assets, current and non-current (18 ) 2
Other liabilities, current and long-term 5   (54 )
Net cash used in operating activities (42 ) (195 )
Cash flows provided by (used in) investing activities
Capital expenditures (43 ) (57 )
Proceeds from disposition, net 49
Proceeds from sale of assets, net 1   4  
Net cash provided by (used in) investing activities 7   (53 )
Cash flows provided by financing activities
Net short-term debt borrowings 3 8
Borrowings of long-term debt 294 1,119
Repayments of long-term debt (243 ) (928 )
Long-term debt and credit facility financing fees paid (1 ) (24 )
Net cash provided by financing activities 53   175  
Effect of exchange rates on cash and cash equivalents (3 ) 5
Change in cash and cash equivalents 15 (68 )
Cash and cash equivalents at beginning of period 115   196  
Cash and cash equivalents at end of period $ 130   $ 128  
Supplemental disclosures of cash flow information
Cash paid for:
Interest, net $ 159 $ 147
Income taxes, net 10 9
 
     

HEXION INC.

SCHEDULE 4: RECONCILIATION OF NET LOSS TO SEGMENT EBITDA
(Unaudited)

 
Three Months Ended June 30, Six Months Ended June 30,
(In millions) 2018   2017 2018   2017
Reconciliation:
Net loss attributable to Hexion Inc. $ (22 ) $ (34 ) $ (35 ) $ (76 )
Net income attributable to noncontrolling interest (1 )   (1 )  
Net loss (21 ) (34 ) (34 ) (76 )
Income tax expense (benefit) 3 (1 ) 11 7
Interest expense, net 84 82 167 165
Depreciation and amortization 28   28   58   56  
EBITDA $ 94 $ 75 $ 202 $ 152
Items not included in Segment EBITDA:
Asset impairments $ $ $ 25 $
Business realignment costs 5 10 14 17
Gain on disposition (44 )
Realized and unrealized foreign currency losses (gains) 15 (1 ) 22 (2 )
Loss on extinguishment of debt 3
Other 14   16   27   25  
Total adjustments 34   25   44   43  
Segment EBITDA $ 128   $ 100   $ 246   $ 195  
 
Segment EBITDA:
Epoxy, Phenolic and Coating Resins $ 72 $ 46 $ 142 $ 98
Forest Products Resins 76 68 143 129
Corporate and Other (20 ) (14 ) (39 ) (32 )
Total $ 128   $ 100   $ 246   $ 195  
 
 
Three Months Ended June 30, Six Months Ended June 30,

(In millions)

2018 2017 2018 2017
Segment EBITDA $ 128 $ 100 $ 246 $ 195
Adjustment for disposition(1)   (1 )   (2 )
Adjusted Segment EBITDA $ 128   $ 99   $ 246   $ 193  
 
(1)   Adjustment for disposition impacts the Forest Products Resins
segment.
 
   

HEXION INC.

SCHEDULE 5: RECONCILIATION OF LAST TWELVE MONTHS NET LOSS TO
ADJUSTED EBITDA (Unaudited)

 
June 30, 2018
LTM Period
Net loss $ (192)
Income tax expense 22
Interest expense, net 330
Depreciation and amortization 118
Accelerated depreciation 14
EBITDA 292
Adjustments to EBITDA:
Asset impairments 38
Business realignment costs (1) 49
Realized and unrealized foreign currency losses 27
Gain on disposition (44)
Unrealized gains on pension and postretirement benefits (2) (4)
Other (3) 64
Cost reduction programs savings (4) 28
Adjustment for ATG disposition (5) (2)
Adjusted EBITDA $ 448
Pro forma fixed charges (6) $ 315
Ratio of Adjusted EBITDA to Fixed Charges (7) 1.42
 
(1)   Primarily represents cost related to headcount reduction expenses
and plant rationalization costs related to in-process and recently
completed cost reduction programs, termination costs and other costs
associated with business realignments.
(2) Represents non-cash gains resulting from pension and postretirement
benefit plan liability remeasurements.
(3) Primarily includes certain professional fees related to strategic
projects, retention program costs, business optimization expenses,
management fees and expenses related to legacy liabilities.
(4) Represents pro forma impact of in-process cost reduction programs
savings. Cost reduction program savings represent the unrealized
headcount reduction savings and plant rationalization savings
related to cost reduction programs and other unrealized savings
associated with the Company's business realignments activities, and
represent our estimate of the unrealized savings from such
initiatives that would have been realized had the related actions
been completed at the beginning of the period presented. The savings
are calculated based on actual costs of exiting headcount and
elimination or reduction of site costs.
(5) Represents pro forma LTM Adjusted EBITDA impact of the ATG
disposition, which occurred during the first quarter of 2018.
(6) Reflects pro forma interest expense based on interest rates at June
30, 2018.
(7) The Company's ability to incur additional indebtedness, among other
actions, is restricted under the Secured Indentures, unless the
Company has an Adjusted EBITDA to Fixed Charges ratio of at least
2.0 to 1.0. As of June 30, 2018, we did not satisfy this test. As a
result, we are subject to restrictions on our ability to incur
additional indebtedness and to make investments; however, there are
exceptions to these restrictions, including exceptions that permit
indebtedness under our ABL Facility (available borrowings of which
were $180 at June 30, 2018).

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