UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q



x☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, ~~2017~~2020



o☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number 1-71

HEXION INC.

(Exact name of registrant as specified in its charter)



New Jersey						13-0511250
(State or other jurisdiction of incorporation or organization)						(I.R.S. Employer Identification No.)



180 East Broad St., Columbus, OH 43215						614-225-4000
(Address of principal executive offices including zip code)						(Registrant’s telephone number including area code)




(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
None		None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☐ No o☒

Explanatory Note: While the registrant is not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, it has filed all reports required to be filed by such filing requirements during the preceding 12 months.

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes x☒ No o☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer” ~~and~~, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. ~~(Check one):~~

Large accelerated filer

☐

Accelerated filer

☐

~~Large accelerated filer~~

~~Accelerated filer~~

Non-accelerated filer

x☒

~~(Do not check if a smaller reporting company)~~

Smaller reporting company

o☐

Emerging growth company

o☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x.☒.

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ☒ No ☐

Number of shares of common stock, par value $0.01 per share, outstanding as of the close of business on November 1, ~~2017: 82,556,847~~2020: 100

Table of ~~Contents~~ Content s

HEXION INC.

INDEX


				Page
PART I – FINANCIAL INFORMATION

			~~Page~~
~~PART I – FINANCIAL INFORMATION~~

Item 1.	Hexion Inc. Condensed Consolidated Financial Statements (Unaudited)

		Condensed Consolidated Balance Sheets ~~at September 30, 2017 and December 31, 2016~~		3

		Condensed Consolidated Statements of Operations ~~for the three~~ ~~and nine months ended September 30, 2017 and 2016~~		4

		Condensed Consolidated Statements of Comprehensive (Loss) Income ~~for the three and nine months ended September 30, 2017 and 2016~~		5

		Condensed Consolidated Statements of Cash Flows ~~for the~~ ~~nine months ended September 30, 2017 and 2016~~		6

		Condensed Consolidated ~~Statement~~Statements of ~~Deficit for the~~ Equity (Deficit)~~nine months ended September 30, 2017~~		7

		Notes to Condensed Consolidated Financial Statements		8

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		2725

Item 3.		Quantitative and Qualitative Disclosures about Market Risk		3943

Item 4.		Controls and Procedures		3943

PART II – OTHER INFORMATION

Item 1.		Legal Proceedings		4044

Item 1A.		Risk Factors		4044

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		4044

Item 3.		Defaults upon Senior Securities		4044

Item 4.		Mine Safety Disclosures		4044

Item 5.		Other Information		4044

Item 6.		Exhibits		4045

Table of Content s

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

HEXION INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)


(In millions, except share data)	September 30, 2017			December 31, 2016			(In millions, except share data)	September 30, 2020		December 31, 2019
Assets							Assets
Current assets:							Current assets:
Cash and cash equivalents (including restricted cash of $18 and $17, respectively)	$	118		$	196
Accounts receivable (net of allowance for doubtful accounts of $18 and $17, respectively)	500			390
Cash and cash equivalents (including restricted cash of $3 and $4, respectively)							Cash and cash equivalents (including restricted cash of $3 and $4, respectively)	$	158	$	254

Accounts receivable (net of allowance for doubtful accounts of $3)							Accounts receivable (net of allowance for doubtful accounts of $3)	363		316
Inventories:							Inventories:
Finished and in-process goods	240			199			Finished and in-process goods	191		211
Raw materials and supplies	92			88			Raw materials and supplies	70		82
Current assets held for sale (see Note 4)							Current assets held for sale (see Note 4)	103		99
Other current assets	49			45			Other current assets	51		40
Total current assets	999			918			Total current assets	936		1,002
Investment in unconsolidated entities	20			18			Investment in unconsolidated entities	16		14
Deferred income taxes	12			10
Deferred tax assets							Deferred tax assets	6		6
Long-term assets held for sale (see Note 4)							Long-term assets held for sale (see Note 4)	318		400
Other long-term assets	49			43			Other long-term assets	60		44
Property and equipment:							Property and equipment:
Land	84			79			Land	78		82
Buildings	288			273			Buildings	124		114
Machinery and equipment	2,312			2,353			Machinery and equipment	1,207		1,148
	2,684			2,705				1,409		1,344
Less accumulated depreciation	(1,766		)	(1,812		)	Less accumulated depreciation	(187)		(63)
	918			893				1,222		1,281
Operating lease assets							Operating lease assets	105		110
Goodwill	113			121			Goodwill	164		164
Other intangible assets, net	45			52			Other intangible assets, net	1,082		1,125
Total assets	$	2,156		$	2,055		Total assets	$	3,909	$	4,146
Liabilities and Deficit
Liabilities and Equity							Liabilities and Equity
Current liabilities:							Current liabilities:
Accounts payable	$	347		$	368		Accounts payable	$	265	$	289
Debt payable within one year	121			107			Debt payable within one year	77		70

Interest payable	101			70			Interest payable	21		35
Income taxes payable	13			13			Income taxes payable	6		17
Accrued payroll and incentive compensation	47			55			Accrued payroll and incentive compensation	40		43
Current liabilities associated with assets held for sale (see Note 4)							Current liabilities associated with assets held for sale (see Note 4)	67		69
Current portion of operating lease liabilities							Current portion of operating lease liabilities	19		20

Other current liabilities	126			159			Other current liabilities	112		95
Total current liabilities	755			772			Total current liabilities	607		638
Long-term liabilities:							Long-term liabilities:
Long-term debt	3,612			3,397			Long-term debt	1,756		1,715
Long-term pension and post employment benefit obligations	263			246			Long-term pension and post employment benefit obligations	223		223
Deferred income taxes	13			13			Deferred income taxes	153		149
Operating lease liabilities							Operating lease liabilities	78		82
Long-term liabilities associated with assets held for sale (see Note 4)							Long-term liabilities associated with assets held for sale (see Note 4)	59		56
Other long-term liabilities	173			166			Other long-term liabilities	206		208
Total liabilities	4,816			4,594			Total liabilities	3,082		3,071
Commitments and contingencies (see Note 7)
Deficit
Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at September 30, 2017 and December 31, 2016	1			1
Commitments and contingencies (see Note 9)							Commitments and contingencies (see Note 9)
Equity							Equity
Common stock —$0.01 par value; 100 shares authorized, issued and outstanding							Common stock —$0.01 par value; 100 shares authorized, issued and outstanding	0		0
Paid-in capital	526			526			Paid-in capital	1,168		1,165
Treasury stock, at cost—88,049,059 shares	(296		)	(296		)

Accumulated other comprehensive loss	(14		)	(39		)	Accumulated other comprehensive loss	(49)		(1)
Accumulated deficit	(2,876		)	(2,730		)	Accumulated deficit	(292)		(89)
Total Hexion Inc. shareholder’s deficit	(2,659		)	(2,538		)
Noncontrolling interest	(1		)	(1		)
Total deficit	(2,660		)	(2,539		)
Total liabilities and deficit	$	2,156		$	2,055

Total equity							Total equity	827		1,075
Total liabilities and equity							Total liabilities and equity	$	3,909	$	4,146

See Notes to Condensed Consolidated Financial Statements

Table of Content s

HEXION INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

Three Months Ended September 30, Nine Months Ended September 30,
(In millions) 2017
2016 2017 2016
Net sales $ 914

$ 819

$ 2,696

$ 2,680
Cost of sales 797

701

2,312

2,357
Gross profit 117

118

384

323
Selling, general and administrative expense 75

69

227

235
Gain on dispositions —

—

—

(240 )
Asset impairments (see Note 5) 13
—
13
—
Business realignment costs (income) 10

(3 )
27

42
Other operating expense, net 1

7

4

6
Operating income 18

45

113

280
Interest expense, net 82

76

247

235
(Gain) loss on extinguishment of debt —

(3 )
3

(47 )
Other non-operating (income) expense, net (3 )
2

(4 )
1
(Loss) income before income tax and earnings from unconsolidated entities (61 )
(30 )
(133 )
91
Income tax expense 9

16

16

40
(Loss) income before (losses) earnings from unconsolidated entities (70 )
(46 )
(149 )
51
(Losses) earnings from unconsolidated entities, net of taxes —

(1 )
3

8
Net (loss) income $ (70 )
$ (47 )
$ (146 )
$ 59


	Successor				Predecessor		Successor				Predecessor
(In millions)	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019

Net sales	$	634	$	693	$	0	$	1,855	$	693	$	1,481
Cost of sales (exclusive of depreciation and amortization shown below)	500		586		0		1,514		586		1,211
Selling, general and administrative expense	56		61		0		164		61		128
Depreciation and amortization	47		48		0		143		48		43

Asset impairments	0		0		0		16		0		0
Business realignment costs	19		12		0		57		12		14
Other operating expense, net	4		4		0		15		4		17
Operating income (loss)	8		(18)		0		(54)		(18)		68
Interest expense, net	25		28		0		76		28		89

Other non-operating (income) expense, net	(8)		4		0		(12)		4		(11)
Reorganization items, net	0		0		(3,126)		0		0		(2,970)
(Loss) income from continuing operations before income tax and earnings from unconsolidated entities	(9)		(50)		3,126		(118)		(50)		2,960
Income tax expense (benefit)	17		(5)		191		8		(5)		201
(Loss) income from continuing operations before earnings from unconsolidated entities	(26)		(45)		2,935		(126)		(45)		2,759
Earnings from unconsolidated entities, net of taxes	0		1		0		2		1		1
(Loss) income from continuing operations, net of taxes	(26)		(44)		2,935		(124)		(44)		2,760
(Loss) income from discontinued operations, net of taxes	(76)		1		119		(79)		1		135
Net (loss) income	$	(102)	$	(43)	$	3,054	$	(203)	$	(43)	$	2,895
Net income attributable to noncontrolling interest	0		0		0		0		0		(1)
Net (loss) income attributable to Hexion Inc.	$	(102)	$	(43)	$	3,054	$	(203)	$	(43)	$	2,894

See Notes to Condensed Consolidated Financial Statements

Table of Content s

HEXION INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Unaudited)


	Three Months Ended September 30,						Nine Months Ended September 30,							Successor				Predecessor		Successor				Predecessor
(In millions)	2017			2016			2017			2016			(In millions)	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
(In millions)
	$	(70	)	$	(47	)	$	(146	)	$	59		Net (loss) income	$	(102)	$	(43)	$	3,054	$	(203)	$	(43)	$	2,895
Other comprehensive income, net of tax:
Other comprehensive income (loss), net of tax:													Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	10			7			25			8			Foreign currency translation adjustments	7		(16)		0		(29)		(16)		(8)
Loss recognized from pension and postretirement benefits	—			—			—			(1		)
Other comprehensive income	10			7			25			7
Unrealized loss on cash flow hedge													Unrealized loss on cash flow hedge	(1)		0		0		(19)		0		0
Other comprehensive income (loss)													Other comprehensive income (loss)	6		(16)		0		(48)		(16)		(8)
Comprehensive (loss) income	$	(60	)	$	(40	)	$	(121	)	$	66		Comprehensive (loss) income	$	(96)	$	(59)	$	3,054	$	(251)	$	(59)	$	2,887
Comprehensive income attributable to noncontrolling interest													Comprehensive income attributable to noncontrolling interest	0		0		0		0		0		(1)
Comprehensive (loss) income attributable to Hexion Inc.													Comprehensive (loss) income attributable to Hexion Inc.	$	(96)	$	(59)	$	3,054	$	(251)	$	(59)	$	2,886

See Notes to Condensed Consolidated Financial Statements

Table of Content s

HEXION INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

Nine Months Ended September 30,
(In millions) 2017
2016
Cash flows used in operating activities

Net (loss) income $ (146 ) $ 59
Adjustments to reconcile net (loss) income to net cash used in operating activities:

Depreciation and amortization 85
101
Non-cash asset impairments and accelerated depreciation 27
127
Deferred tax (benefit) expense (1 ) 3
Gain on dispositions —
(240 )
Gain on sale of assets (1 ) —
Amortization of deferred financing fees 12
11
Loss (gain) on extinguishment of debt 3
(47 )
Unrealized foreign currency gains (5 ) (40 )
Other non-cash adjustments (4 ) 3
Net change in assets and liabilities:

Accounts receivable (89 ) (88 )
Inventories (29 ) (32 )
Accounts payable (32 ) (35 )
Income taxes payable 8
26
Other assets, current and non-current (4 ) (27 )
Other liabilities, current and long-term (29 ) 48
Net cash used in operating activities (205 ) (131 )
Cash flows (used in) provided by investing activities

Capital expenditures (86 ) (91 )
Capitalized interest (1 ) (1 )
Proceeds from dispositions, net —
281
Cash received on buyer’s note —
45
Proceeds from sale of assets, net 5
1
Change in restricted cash 1
(11 )
Investment in affiliate —
(1 )
Net cash (used in) provided by investing activities (81 ) 223
Cash flows provided by (used in) financing activities

Net short-term debt borrowings (repayments) 15
(13 )
Borrowings of long-term debt 1,291
461
Repayments of long-term debt (1,079 ) (643 )
Long-term debt and credit facility financing fees paid (25 ) —
Net cash provided by (used in) financing activities 202
(195 )
Effect of exchange rates on cash and cash equivalents 5
1
Change in cash and cash equivalents (79 ) (102 )
Cash and cash equivalents (unrestricted) at beginning of period 179
228
Cash and cash equivalents (unrestricted) at end of period $ 100
$ 126
Supplemental disclosures of cash flow information

Cash paid for:

Interest, net $ 205
$ 210
Income taxes, net 10
20
Non-cash investing activity:
Acceptance of buyer’s note $ —
$ 75


	Successor				Predecessor
(In millions)	Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
Cash flows (used in) provided by operating activities
Net (loss) income	$	(203)	$	(43)	$	2,895
Less: (Loss) income from discontinued operations, net of tax	(79)		1		135
(Loss) income from continuing operations	(124)		(44)		2,760
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization	143		48		43
Non-cash asset impairments	16		0		0
Non-cash reorganization items, net	—		0		(3,156)
Deferred tax expense (benefit)	5		(8)		140
Loss on sale of assets	7		0		3


Unrealized foreign currency (gains) losses	(1)		6		(7)
Non-cash stock based compensation expense	13		4		0
Financing fees included in net loss	—		—		136
Other non-cash adjustments	(1)		(2)		(1)
Net change in assets and liabilities:
Accounts receivable	(55)		12		(73)
Inventories	31		25		(20)
Accounts payable	(14)		(58)		(15)
Income taxes payable	(8)		2		15
Other assets, current and non-current	(1)		5		3
Other liabilities, current and non-current	(22)		17		9
Net cash (used in) provided by operating activities from continuing operations	(11)		7		(163)
Net cash (used in) provided by operating activities from discontinued operations	(1)		18		(10)
Net cash (used in) provided by operating activities	(12)		25		(173)
Cash flows used in investing activities
Capital expenditures	(78)		(18)		(41)


Proceeds from sale of assets, net	2		0		1




Net cash used in investing activities from continuing operations	(76)		(18)		(40)
Net cash used in investing activities from discontinued operations	(13)		(4)		(2)
Net cash used in investing activities	(89)		(22)		(42)
Cash flows provided by (used in) financing activities
Net short-term debt repayments	(25)		(6)		(4)
Borrowings of long-term debt	209		91		2,313
Repayments of long-term debt	(167)		(100)		(2,261)

Return of capital to parent (see Note 6)	(10)		0		0
Proceeds from rights offering	—		—		300

Financing fees paid	0		(2)		(136)
Net cash provided by (used in) financing activities	7		(17)		212
Effect of exchange rates on cash and cash equivalents, including restricted cash	(2)		(3)		0
Change in cash and cash equivalents, including restricted cash	(96)		(17)		(3)
Cash, cash equivalents and restricted cash at beginning of period	254		125		128
Cash, cash equivalents and restricted cash at end of period	$	158	$	108	$	125
Supplemental disclosures of cash flow information
Cash paid for:
Interest, net	$	88	$	3	$	71
Income taxes, net	12		4		10
Reorganization items, net	0		0		188
Non-cash financing activities	13		—		—

See Notes to Condensed Consolidated Financial Statements

Table of Content s

HEXION INC.

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF ~~DEFICIT~~EQUITY (DEFICIT) (Unaudited)


(In millions)	Common Stock		Paid-in Capital		Treasury Stock		Loan Receivable from Parent		Accumulated Other Comprehensive Loss		Accumulated Deficit		Total Hexion Inc. (Deficit) Equity		Noncontrolling Interest		Total Shareholder’s (Deficit) Equity
Predecessor
Balance at December 31, 2018	$	1	$	526	$	(296)	$	0	$	(18)	$	(3,125)	$	(2,912)	$	(2)	$	(2,914)
Net loss	0		0		0		0		0		(160)		(160)		1		(159)
Other comprehensive loss	0		0		0		0		(8)		0		(8)		0		(8)
Balance at June 30, 2019	$	1	$	526	$	(296)	$	0	$	(26)	$	(3,285)	$	(3,080)	$	(1)	$	(3,081)
Elimination of Predecessor equity	(1)		(526)		296		0		0		231		0		0		0
Elimination of Predecessor accumulated other comprehensive loss	0		0		0		0		26		0		26		0		26
Net income	0		0		0		0		0		3,054		3,054		0		3,054
Balance at July 1, 2019	$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	(1)	$	(1)
Issuance of Successor Company common stock	0		1,157		0		0		0		0		1,157		0		1,157
Successor
Balance at July 2, 2019	$	0	$	1,157	$	0	$	0	$	0	$	0	$	1,157	$	(1)	$	1,156
Net loss	0		0		0		0		0		(43)		(43)		0		(43)
Stock-based compensation expense	0		5		0		0		0		0		5		0		5
Other comprehensive loss	0		0		0		0		(16)		0		(16)		0		(16)
Balance at September 30, 2019	$	0	$	1,162	$	0	$	0	$	(16)	$	(43)	$	1,103	$	(1)	$	1,102

Balance at June 30, 2020	$	0	$	1,164	$	0	$	0	$	(55)	$	(190)	$	919	$	0	$	919
Net loss	0		0		0		0		0		(102)		(102)		0		(102)
Stock-based compensation expense	0		4		0		0		0		0		4		0		4
Other comprehensive income	0		0		0		0		6		0		6		0		6


Balance at September 30, 2020	$	0	$	1,168	$	0	$	0	$	(49)	$	(292)	$	827	$	0	$	827

Balance at December 31, 2019	$	0	$	1,165	$	0	$	0	$	(1)	$	(89)	$	1,075	$	0	$	1,075
Net loss	0		0		0		0		0		(203)		(203)		0		(203)
Stock-based compensation expense	0		13		0		0		0		0		13		0		13
Other comprehensive loss	0		0		0		0		(48)		0		(48)		0		(48)
Return of capital to parent (see Note 6)	0		(10)		0		0		0		0		(10)		0		(10)
Distribution of affiliate loan (see Note 6)	0		0		0		(10)		0		0		(10)		0		(10)
Settlement of affiliate loan (see Note 6)	0		0		0		10		0		0		10		0		10
Balance at September 30, 2020	$	0	$	1,168	$	0	$	0	$	(49)	$	(292)	$	827	$	0	$	827

(In millions)
Common
Stock

Paid-in
Capital

Treasury
Stock

Accumulated
Other
Comprehensive
Loss

Accumulated
Deficit
Total Hexion Inc. Deficit Noncontrolling Interest Total
Balance at December 31, 2016 $ 1
$ 526
$ (296 ) $ (39 ) $ (2,730 ) $ (2,538 ) $ (1 ) $ (2,539 )
Net loss —
—
—
—
(146 ) (146 ) —
(146 )
Other comprehensive income —
—
—
25
—
25
—
25
Balance at September 30, 2017 $ 1
$ 526
$ (296 ) $ (14 ) $ (2,876 ) $ (2,659 ) $ (1 ) $ (2,660 )

See Notes to Condensed Consolidated Financial Statements

Table of Content s

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In millions, except share data)

1. Background and Basis of Presentation

Based in Columbus, Ohio, Hexion Inc. (“Hexion” or the “Company”) serves global adhesive, coatings, composites 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. The Company’s business is organized based on the products offered and the markets served. In January 2020, the Company changed its reporting segments to align around its growth platforms. At September 30, ~~2017~~,2020, the Company had ~~two~~3 reportable segments: ~~Epoxy, Phenolic~~Adhesives; Coatings and ~~Coating Resins~~Composites; and ~~Forest Products Resins.~~

~~The Company’s direct parent is Hexion LLC, a holding company~~Corporate and wholly owned subsidiary of Hexion Holdings LLC (“Hexion Holdings”), the ultimate parent entity of Hexion. Hexion Holdings is controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, LLC and its subsidiaries, “Apollo”). Apollo may also be referred to as the Company’s owner.Other.

The unaudited Condensed Consolidated Financial Statements include the accounts of the Company and its majority-owned subsidiaries in which minority shareholders hold no substantive participating ~~rights and variable interest entities in which the Company is the primary beneficiary.~~rights. Intercompany accounts and transactions are eliminated in consolidation. In the opinion of management, all adjustments consisting of normal, recurring adjustments considered necessary for a fair statement have been included. Results for the interim periods are not necessarily indicative of results for the entire year.

Year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”).

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), certain information and disclosures normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. These unaudited Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and the accompanying notes included in the Company’s most recent Annual Report on Form 10-K.

Sale of Phenolic Specialty Resins Business

On September 27, 2020, the Company entered into a definitive agreement (the “Purchase Agreement”) for the sale of its Phenolic Specialty Resins ("PSR"), Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business”) to Black Diamond Capital Management, LLC and Investindustrial (the “Buyers”) for a purchase price of approximately $425. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future contingent proceeds based on the performance of the Held for Sale Business. For more information, see Note 4 “Discontinued Operations”.

As of September 30, 2020, the Company reclassified the assets and liabilities of the Held for Sale Business as held for sale on the unaudited Condensed Consolidated Balance Sheets and reported the results of the 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.

Additionally, the Company has included $4, $11, $4 and $10 in both “Net sales” and “Cost of sales” within the Company’s continuing operations for the Successor three and nine months ended September 30, 2020, the Successor period July 2, 2019 through September 30, 2019 and the Predecessor period January 1, 2019 through July 1, 2019, respectively, which represents sales from the Company’s continuing operations to the Held for Sale Business that were previously eliminated in consolidation. These reclassifications had no impact on “Net (loss) income” in the unaudited Condensed Consolidated Statements of Operations for any of the periods presented.

Emergence from Chapter 11 and Fresh Start Accounting

On April 1, 2019, the Company, Hexion Holdings LLC, Hexion LLC and certain of the Company’s subsidiaries (collectively, the “Debtors”) filed voluntary petitions (the “Bankruptcy Petitions”) for reorganization under Chapter 11 (“Chapter 11”) of the U.S. Bankruptcy Code (the “Bankruptcy Code”) in the United States Bankruptcy Court for the District of Delaware, (the “Bankruptcy Court”). The Chapter 11 proceedings were jointly administered under the caption In re Hexion TopCo, LLC, No. 19-10684 (the “Chapter 11 Cases”). The Debtors continued to operate their businesses as “debtors-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court.

On June 25, 2019, the Court entered an order (the “Confirmation Order”) confirming the Second Amended Joint Chapter 11 Plan of Reorganization of Hexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the “Plan”). On the morning of July 1, 2019 (the "Effective Date"), in accordance with the terms of the Plan and the Confirmation Order, the Plan became effective and the Debtors emerged from bankruptcy (the “Emergence”).

As a result of the Company’s reorganization and emergence from Chapter 11 bankruptcy on the Effective Date, the Company’s direct parent is Hexion Intermediate Holding 2, Inc. (“Hexion Intermediate”), a holding company and wholly owned subsidiary of Hexion Intermediate Holding 1, Inc., a holding company and wholly owned subsidiary of Hexion Holdings Corporation, the ultimate parent of Hexion (“Hexion Holdings” or “Parent”). Prior to its reorganization, the Company’s parent was Hexion LLC, a holding company and wholly owned subsidiary of Hexion Holdings LLC (now known as Hexion TopCo, LLC or “TopCo”), the previous ultimate parent entity of Hexion, which was controlled by investment funds managed by affiliates of Apollo Management Holdings, L.P. (together with Apollo Global Management, Inc. and its subsidiaries, “Apollo”). On the Effective Date, the Company’s existing common stock were cancelled and 100 new shares of common stock were issued at a par value of $0.01 to the Company’s new direct parent Hexion Intermediate in accordance with the Plan.

Table of Content s

On the Effective Date, the Company applied fresh start accounting to its financial statements, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Condensed Consolidated Financial Statements after the Effective Date are not comparable with the Condensed Consolidated Financial Statements prior to that date. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the Company after 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.

2. Summary of Significant Accounting Policies

Use of Estimates—The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and also requires the disclosure of contingent assets and liabilities at the date of the financial statements. In addition, it requires management to make estimates and assumptions that affect the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Revenue Recognition—The Company follows the principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. Revenue, net of estimated allowances and returns, is recognized when the Company has completed its performance obligations under a contract and control of the product is transferred to the customer. Substantially all revenue is recognized at the time shipment is made or upon delivery as risk and title to the product transfer to the customer. Sales, value add, and other taxes that are collected concurrently with revenue-producing activities are excluded from revenue. Contract terms for certain transactions, including sales made on a consignment basis, result in the transfer of control of the finished product to the customer prior to the point at which the Company has the right to invoice for the product. In these cases,timing of revenue recognition will differ from the timing of invoicing to customers and will result in the Company recording a contract asset. A contract asset balance of $6 is recorded within “Other current assets” at both September 30, 2020 and December 31, 2019 in the unaudited Condensed Consolidated Balance Sheet. Refer to Note 12 for additional discussion of the Company’s net sales by reportable segment disaggregated by geographic region.

Cash and Cash Equivalents— The Company considers all highly liquid investments that are purchased with an original maturity of three months or less to be cash equivalents. The Company’s restricted cash balance of $3 and $4 at September 30, 2020 and December 31, 2019, respectively, represents deposits to secure certain bank guarantees issued to third parties to guarantee potential obligations of the Company primarily related to the completion of tax audits and environmental liabilities. These balances will remain restricted as long as the underlying exposures exist and are included in the unaudited Condensed Consolidated Balance Sheets as a component of “Cash and cash equivalents.”

Allowance for Doubtful Accounts— Under adoption of ASU 2016-13, the Company has updated its credit loss methodology to consider a broader range of reasonable and supportable information to determine its credit loss estimates. The Company utilizes a historical aging method disaggregated by portfolio segment of geographic region, and then the Company makes any necessary adjustments for current conditions and forecasts about future economic conditions for calculating its allowance for doubtful accounts. The Company evaluates each pooled receivables’ geographic region by differing regional industrial and economic conditions, overall end market conditions and groups of customers with similar risk profiles related to timing and uncertainty of future collections. If particular accounts receivable balances no longer display risk characteristics that are similar to other pooled receivables, the Company performs individual assessments of expected credit losses for those specific receivables. Receivables are charged against the allowance for doubtful accounts when it is probable that the receivable will not be collected.

During the three and nine months ended September 30, 2020, the Company increased its allowance for doubtful accounts provision for expected credit losses by less than $1, to reflect current business conditions, forecasts of future economic conditions and the impacts related to the global business and market disruptions of the coronavirus disease 2019 (“COVID-19”) pandemic in accordance with ASU 2016-13 (see Note 3 for more information). The Company’s current expectations and assumptions regarding its business, the economy and other future events and conditions are based on currently available financial, economic and competitive data and current business plans as of September 30, 2020. Actual results could vary materially depending on risks and uncertainties that may affect the Company’s operations, markets, services, prices and other factors.

The Company recorded an allowance for doubtful accounts of $3 at both September 30, 2020 and December 31, 2019, to reduce accounts receivable to their estimated net realizable value. Accounts receivable balances are written-off against the allowance if a final determination of uncollectibility is made. There were no write-offs or recoveries for the Successor three and nine months ended September 30, 2020.

Goodwill— Goodwill is reviewed annually for impairment of value or more frequently when potential impairment triggering events are present. The Company’s annual impairment testing date is October 1. The Company continuously monitors events which could trigger an interim impairment analysis, such as changing business conditions and environmental factors, which included the impact of the COVID-19 pandemic for the three and nine months ended September 30, 2020 and the signing of the Purchase Agreement for the Held for Sale Business in September 2020. The Company determined there was no triggering event requiring an interim impairment analysis at September 30, 2020. However, the continued duration and severity of COVID-19 may result in future impairment charges as a prolonged pandemic could have an additional impact on the results of the Company’s operations.

Reclassifications— Certain amounts in the unaudited Condensed Consolidated Financial Statements for prior periods have been reclassified to conform with the current presentation. These reclassifications were to record the assets and liabilities of the Held for Sale Business and the results of operations as discontinued operations. See Note 4 for more information.

Table of Content s

Subsequent ~~Events~~—Events—The Company has evaluated events and transactions subsequent to September 30, ~~2017~~2020 through the date of issuance of its unaudited Condensed Consolidated Financial Statements.

Recently Issued Accounting Standards

~~In May 2014, the Financial~~Newly Adopted Accounting Standards ~~Board (“FASB”) issued Accounting Standards Board Update No. 2014-09:~~ ~~Revenue from Contracts with Customers (Topic 606)~~ (“ASU 2014-09”). ASU 2014-09 supersedes the existing revenue recognition guidance and most industry-specific guidance applicable to revenue recognition. According to the new guidance, an entity will apply a principles-based five step model to recognize revenue upon the transfer of promised goods or services to customers and in an amount that reflects the consideration for which the entity expects to be entitled in exchange for those goods or services. The effective date for ASU 2014-09 is for annual and interim periods beginning on or after December 15, 2017, and early adoption will be permitted for annual and interim periods beginning on or after December 15, 2016. Entities will have the option of using either a full retrospective approach or a modified approach to adopt the guidance in ASU 2014-09. The Company plans to adopt ASU 2014-09 utilizing a modified retrospective approach, which will result in a cumulative adjustment to equity on the adoption date of January 1, 2018. The Company currently anticipates that implementation of this standard will result only in timing differences for certain revenue streams, which are not expected to have a material impact on its financial statements.

In ~~February~~June 2016, the FASB issued ~~Accounting Standards Board Update No. 2016-02:~~ ~~Leases~~ASU 2016-13:Financial Instruments - Credit Losses (Topic ~~842)~~820): Measurement of Credit Losses on Financial Instruments, (“ASU ~~2016-02”~~2016-13”). ~~ASU 2016-02 supersedes~~The amendments in this update replace the ~~existing lease guidance~~incurred loss impairment methodology in ~~Topic 840. According to the new guidance, all leases,~~current U.S. GAAP with ~~limited scope exceptions, will be recorded on the balance sheet in the form~~a methodology that reflects expected credit losses and requires consideration of a ~~liability~~broader range of reasonable and supportable information to ~~make lease payments (lease liability) and a right-of-use asset representing the right to use the underlying asset for the lease term.~~inform credit loss estimates. New disclosures are also required with this standard. The ~~guidance~~standard is effective for annual and interim periods beginning ~~on or~~ after December 15, ~~2018,~~2019. This standard impacts the Company’s accounts receivables and ~~early adoption is permitted. Entities will be required to adopt~~contract assets. The Company adopted ASU ~~2016-02~~2016-13 at January 1, 2020, using a modified retrospective ~~approach, whereby leases will be recognized~~adoption method. Under this method of adoption, there is no impact to the comparative Consolidated Statement of Operations and ~~measured at~~ the Consolidated Balance Sheets. There was an immaterial impact of adopting ASU 2016-13 on the date of adoption.

In August 2018, the FASB issued ASU 2018-15: Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract (“ASU 2018-15”). ASU 2018-15 align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard was effective for annual and interim periods beginning after December 15, 2019. The Company adopted ASU 2018-15 prospectively on January 1, 2020 and the adoption had an immaterial impact on its condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04: Reference Rate Reform (Topic 848): Facilitation of the ~~earliest~~Effects of Reference Rate Reform on Financial Reporting (“ASU 2020-04”). ASU 2020-04 will provide optional expedients and exceptions for a limited period ~~presented.~~of time to ease the potential burden in accounting for contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this ASU are effective for all entities as of March 12, 2020 through December 31, 2022. The Company has adopted ASU 2020-04 and the initial adoption of this ASU did not have an impact on our condensed consolidated financial statements.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU 2019-12: Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”). ASU 2019-12 will simplify the accounting for income taxes by removing certain exceptions to the general principles in income tax accounting and improve consistent application of and simplify GAAP for other areas of income tax accounting by clarifying and amending existing guidance. The new guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the potential impact ASU 2019-12 will have on its condensed consolidated financial statements.

In August 2018, the FASB issued ASU 2018-14: Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”). ASU 2018-14 modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans. The standard is effective for fiscal years ending after December 15, 2020. The Company is currently assessing the potential impact of ASU ~~2016-02~~2018-14 on its financial statements.

3. COVID-19 Impacts

In ~~August 2016,~~March 2020, the ~~FASB issued Accounting Standards Board Update No. 2016-15:~~ ~~Statement~~World Health Organization categorized COVID-19 as a global pandemic. Around the world, local governments’ responses to COVID-19 continue to evolve, which has led to stay-at-home orders, social distancing guidelines and other preventative measures that have disrupted various industries in the global economy and the markets in which our products are manufactured, distributed and sold.

During this pandemic, the Company has implemented additional guidelines to further protect the health and safety of ~~Cash Flows (Topic 230)~~ ~~(“ASU 2016-15”)~~its employees as ~~part~~the Company continues to operate with its suppliers and customers. The Company has maintained a focus on the safety of its employees while minimizing potential disruptions caused by COVID-19. For example, the Company is following all legislatively-mandated travel directives in the various countries where it operates, and the Company has also put additional travel restrictions in place for its associates designed to reduce the risk from COVID-19. Additionally, the Company is utilizing extended work from home options to protect its office associates, while adjusting its meeting protocols and processes at its manufacturing sites.

The Company’s businesses have been designated by many governments as essential businesses and the Company’s operations have continued through September 30, 2020. While the Company has continued to operate during the pandemic, it did incur adverse financial impacts to its sales and profitability results during the three and nine months ended September 30, 2020 from COVID-19, primarily related to reduced volumes associated with the pandemic. The pandemic has impacted global economic conditions and lowered demand in many of the ~~FASB simplification initiative. ASU 2016-15 provides guidance~~end use markets in which the Company operates such as automotive, aerospace, industrial products, oil and gas, construction and housing. The ultimate impact that COVID-19 will have on ~~treatment~~the Company’s 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 impact.

Table of Content s

The Coronavirus Aid, Relief, and Economic Security (the “CARES”) Act was enacted on March 27, 2020 in the ~~statement of cash flows for eight specific cash flow topics, with~~U.S. The CARES Act includes several significant provisions, such as delaying certain payroll tax payments, mandatory transition tax payments under the ~~objective of reducing existing diversity in practice. Of~~Tax Cuts and Jobs Act, and estimated income tax payments. The Company does not currently expect the ~~eight cash flow topics addressed in the new guidance, the topics expected~~CARES Act to have ana material impact on its financial results, including on its annual estimated effective tax rate but the Company ~~include debt prepayment or debt extinguishment costs, proceeds from~~delayed approximately $15 of certain income tax and non-income tax payments to the ~~settlement~~third quarter of ~~insurance claims, treatment~~2020 and deferred an additional $5 of ~~restricted cash~~certain tax payments to future years. The Company will continue to monitor and ~~distributions received from equity method investees. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within~~assess the CARES Act and similar legislation in other jurisdictions where the Company operates that ~~reporting period,~~may impact the Company’s business and ~~early adoption is permitted.~~financial results.

Subsequent to September 30, 2020, the United States, and the global regions where the Company operates, continue to be affected by COVID-19. The Company is ~~currently assessing~~closely monitoring the ~~potential~~COVID-19 pandemic on all aspects of its businesses and geographies, including the impact ~~of ASU 2016-15~~ on its ~~financial statements.~~facilities, employees, customers, suppliers, vendors, business partners and distribution.

~~In November 2016,~~

4. Discontinued Operations

On September 27, 2020, the ~~FASB issued Accounting Standards Board Update No. 2016-18:~~ ~~Statement~~Company entered into a Purchase Agreement for the sale of ~~Cash Flows (Topic 230) Restricted Cash~~ ~~(“ASU 2016-18”~~PSR, Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business” or the “Business”) ~~as part~~to Black Diamond Capital Management, LLC and Investindustrial (the “Buyers”) for a purchase price of approximately $425. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future contingent proceeds based on the performance of the ~~FASB simplification initiative. ASU 2016-18 requires~~Held for Sale Business. The final purchase price is subject to customary post-closing adjustments. The Held for Sale Business was formerly included in the Company’s Adhesives reportable segment.

Assets included in the transaction are 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 ~~amounts generally described as restricted cash~~manufactures forest products resins in Russia.

The Held for Sale Business produces phenolic specialty resins and ~~restricted cash equivalents should be included with cash~~engineered thermoset molding compounds used in applications that require extreme heat resistance and cash equivalents when reconciling the beginning-of-period and end-of period total amounts shown on the statement of cash flows. ASU 2016-18 also requires supplemental disclosure regarding the nature of restrictions on a company’s cash and cash equivalents,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 ~~purpose~~Louisville and ~~terms~~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 ~~restriction, expected duration~~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 Business generated annual sales of approximately $600 in 2019, and was reported within the ~~restriction and the amount of cash~~Adhesives reportable segment. The sale is subject to ~~restriction. The guidance~~customary closing conditions, including European Works Council consultation, and is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted. Based on restricted cash balances at December 31, 2016 and September 30, 2017, beginning and ending cash balances in the Condensed Consolidated Statements of Cash Flows would include $17 and $18, respectively, of restricted cash upon adoption of this standard.

~~In January 2017, the FASB issued Accounting Standards Board Update No. 2017-01:~~ ~~Clarifying the Definition of a Business (Topic 805)~~ ~~(“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance~~expected to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption is permitted. The Company is currently assessing the potential impact of ASU 2017-01 on its financial statements.

~~In March 2017, the FASB issued Accounting Standards Board Update No. 2017-07:~~ ~~Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~ (“ASU 2017-07”). ASU 2017-07 requires that an employer report the service cost component of its net periodic pension and postretirement benefit costs (“net benefit cost”) in the same line item or items as other compensation costs arising from services rendered by employees during the period. Additionally, ASU 2017-07 only allows the service cost component of net benefit cost to be eligible for capitalization into inventory. All other components of net benefit cost, which primarily include interest cost, expected return on assets and the annual mark-to-market liability remeasurement, are required to be presented in the income statement separately from the service cost component and outside of income from operations. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within that reporting period, and early adoption was only permittedclose in the first quarter of ~~2017.~~2021.

Until the closing date, the Company has agreed to operate the Held for Sale Business in the ordinary course. The Company ~~is currently assessing~~has agreed to provide certain transitional services to the ~~potential impact~~Buyers for a limited period of ~~ASU 2017-07 on its financial statements.~~time following the closing.

~~Recently Adopted Accounting Standards~~

~~In July 2015,~~As of September 30, 2020, the ~~FASB issued Accounting Standards Board Update No. 2015-11:~~ ~~Simplifying~~Company reclassified the ~~Measurement of Inventory (Topic 330)~~ ~~(“ASU 2015-11”) as part~~assets and liabilities of the ~~FASB simplification initiative. ASU 2015-11 replaces the existing concept of market value of inventory (where market was defined~~Held for Sale Business as ~~replacement cost, with a ceiling of net realizable value and floor of net realizable value less a normal profit margin) with the single measurement of net realizable value. The guidance is effective~~held for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company adopted ASU 2015-11 as of January 1, 2017 and adoption of this standard had no impactsale on the ~~Company’s financial statements.~~

~~In March 2016,~~unaudited Condensed Consolidated Balance Sheets and reported the ~~FASB issued Accounting Standards Board Update No. 2016-07:~~ ~~Simplifying the Transition to the Equity Method of Accounting(Topic 323)~~ ~~(“ASU 2016-07”) as part~~results of the ~~FASB simplification initiative. ASU 2016-07 eliminates the requirement that when an existing investment qualifies for use of the equity method, an investor adjust the investment, results of~~ operations and retained earnings retroactively as if the equity method has been in effect in all previous periods that the investment had been held. Under the new guidance, the equity method investor is only required to adopt the equity method as of the date the investment qualifies for the equity method, with no retrospective adjustment required. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company adopted ASU 2016-07 as of January 1, 2017three and ~~adoption of this standard had no impact on the Company’s financial statements.~~

~~In March 2016, the FASB issued Accounting Standards Board Update No. 2016-09:~~ ~~Improvements to Employee Share-Based Payment Accounting (Topic 718)~~ (“ASU 2016-09”) as part of the FASB simplification initiative. ASU 2016-09 simplifies various aspects of share-based payment accounting, including the income tax consequences, classification of equity awards as either equity or liabilities and classification on the statement of cash flows. The guidance is effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period. The Company adopted ASU 2016-09 as of January 1, 2017 and adoption of this standard had no impact on the Company’s financial statements.

~~In January 2017, the FASB issued Accounting Standards Board Update No. 2017-04:~~ ~~Simplifying the Test for Goodwill Impairment (Topic 350)~~ (“ASU 2017-04”) as part of the FASB simplification initiative. To simplify the subsequent measurement of goodwill, ASU 2017-04 eliminated Step 2 from the goodwill impairment test. Instead, under the amendments in ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of the reporting unit with its carrying amount, which is Step 1 of the goodwill impairment test. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value, not to exceed the total amount of goodwill allocated to that reporting unit. The guidance is effective for goodwill impairment tests performed after December 15, 2019 and early adoption is permitted. The Company early adopted ASU 2017-04 during the third quarter 2017. See Note 5 for more information.

~~3. Restructuring & Business Realignment~~

~~2017 Restructuring Activities~~

In November 2017, the Company initiated new restructuring actions with the intent to optimize its cost structure. The Company expects these restructuring actions to generate approximately $40 of incremental cost savings over the next 12 to 18 months. As of the filing date of this Quarterly Report on Form 10-Q, the total one-time cash costs expected to be incurred for these restructuring activities are estimated between $30 and $40, consisting primarily of workforce reduction costs.

~~Oilfield~~

During the third quarter of 2017, the Company indefinitely idled an oilfield manufacturing facility within its Epoxy, Phenolic and Coating Resins segment, and production was ceased at this facility. As a result, the estimated useful lives of certain long-lived assets related to this facility were shortened, and consequently, during the threenine months ended September 30, ~~2017, the Company incurred $14~~2020 as “Income (loss) from discontinued operations, net of ~~accelerated depreciation related to these assets, which is included in “Cost of sales” in~~tax” on the unaudited Condensed Consolidated Statements of Operations. Amounts for prior periods have similarly been retrospectively reclassified for all periods presented.

~~Norco~~

InThe Held for Sale Business had $14 of goodwill at both September 30, 2020 and December 31, 2019 and $61 and $63 of other intangible assets at September 30, 2020 and December 31, 2019, respectively. Goodwill was allocated based on the ~~first quarter~~relative fair value of ~~2016,~~ the ~~Company announced a planned rationalization at its Norco, LA manufacturing facility~~European-based Forest Products Resins businesses, included in the Held for Sale Business, which is part of the Company’s Forest Product Resins reporting unit. Other intangible assets were specifically identified based on customer relationships within ~~its Epoxy, Phenolic and Coating~~the Company’s Forest Products Resins segment, and production was ceased at this facility during the second quarter of 2016. As a result of this facility rationalization, the Company recorded one-time costs in 2016 related to the early termination of certain contracts for utilities, site services, raw materials and other items. The Company also recorded a conditional asset retirement obligation (“ARO”) in 2016 related to certain contractually obligated future demolition, decontamination and repair costsreporting unit that are associated with ~~this facility rationalization. The Company does not expect to incur any additional contract termination or ARO charges related to this facility rationalization.~~

~~The table below summarizes~~ the changes in the liabilities recorded related to contract termination costs and ARO from December 31, 2016 to September 30, 2017, all of which are included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets.

Contract Termination Costs Asset Retirement Obligation Total
Accrued liability at December 31, 2016 $ 18
$ 13
$ 31
Activity ⁽¹⁾
(15 ) (13 ) (28 )
Accrued liability at September 30, 2017 $ 3
$ —
$ 3

~~(1)~~ These amounts include $23 of cash payments during the nine months ended September 30, 2017 and $5 of these amounts are included in “Accounts payable” in the unaudited Condensed Consolidated Balance Sheets as of September 30, 2017.

Held for Sale Business.

As a result of entering into the ~~announcement~~Purchase Agreement, the Company recognized a pre-tax charge of $75 within discontinued operations, representing the difference between the fair value of the ~~Norco facility rationalization,~~Held for Sale Business, less costs to sell, and the ~~estimated useful lives~~carrying value of ~~certain long-lived~~net assets ~~related to this facility were shortened, and consequently, during the nine months ended~~held for sale as of September 30, ~~2016,~~2020. Fair value represents the expected net cash proceeds, excluding any future contingent proceeds, from the sale of the Held for Sale Business. The Company has 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 ~~incurred $76~~has earned the proceeds. The contingent proceeds are based on performance targets of ~~accelerated depreciation related~~the Held for Sale Business over each of the next three years, 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.

Table of Content s

The following table reconciles the carrying amounts of major classes of assets and liabilities of discontinued operations to ~~these~~total assets ~~which~~and liabilities of discontinued operations that are classified as held for sale in the Company’s unaudited Condensed Consolidated Balance Sheets:


	September 30, 2020		December 31, 2019
Carrying amounts of major classes of assets held for sale:

Accounts receivable	$	59	$	49
Finished and in-process goods	17		21
Raw materials and supplies	17		18
Other current assets	10		11
Total current assets	103		99
Investment in unconsolidated entities	5		3
Other long-term assets	7		11
Property, plant and equipment, net	293		297
Operating lease assets	13		12
Goodwill	14		14
Other intangible assets, net	61		63
Discontinued operations impairment	(75)		0
Total long-term assets	318		400
Total assets held for sale	$	421	$	499

Carrying amounts of major classes of liabilities held for sale:
Accounts payable	$	48	$	52
Income taxes payable	2		0
Accrued payroll	5		5
Current portion of operating lease liabilities	2		2
Other current liabilities	10		10
Total current liabilities	67		69
Long-term pension and post employment benefit obligations	30		29
Deferred income taxes	16		15
Operating lease liabilities	5		4
Other long-term liabilities	8		8
Total long-term liabilities	59		56
Total liabilities held for sale	$	126	$	125

Table of Content s

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


	Successor				Predecessor		Successor				Predecessor
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019

Major line items constituting pretax income of discontinued operations:
Net sales	$	120	$	149	$	0	$	360	$	149	$	309
Cost of sales (exclusive of depreciation and amortization)	100		130		0		301		130		263
Selling, general and administrative expense	11		8		0		33		8		17
Depreciation and amortization	8		7		0		26		7		9

Asset impairments	75		0		0		75		0		0
Business realignment costs	0		1		0		1		1		1
Other operating expense (income), net	0		1		0		0		1		(1)
Operating (loss) income	(74)		2		—		(76)		2		20
Reorganization items, net	0		0		(135)		0		0		(135)
Other non-operating expense, net	1		0		0		1		0		0
(Loss) income from discontinued operations before income tax, earnings from unconsolidated entities	(75)		2		135		(77)		2		155
Income tax expense	2		1		16		3		1		21
(Loss) income from discontinued operations, net of tax	$	(77)	$	1	$	119	$	(80)	$	1	$	134
Earnings from unconsolidated entities, net of tax	1		0		0		1		0		1
Net (loss) income attributable to discontinued operations	$	(76)	$	1	$	119	$	(79)	$	1	$	135

Equity Method Investments

The Company's 50% ownership interest in the Russia JV, accounted for using the equity method of accounting, is included in ~~“Cost of sales”~~the Held for Sale Business. Summarized financial data for the Russia JV are shown in the ~~unaudited Condensed Consolidated Statements of Operations. These assets were fully depreciated in~~following tables:


	September 30, 2020		December 31, 2019
Current assets	$	7	$	9
Non-current assets	1		1
Current liabilities	2		11
Non-current liabilities	7		12


	Successor				Predecessor		Successor				Predecessor
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019

Net sales	$	8	$	10	$	0	$	25	$	10	$	18
Gross profit	3		2		0		9		2		4
Pre-tax income	1		0		0		3		0		2
Net income	0		0		0		2		0		2

5. Asset Impairments

During the ~~second~~first quarter of ~~2016. In addition, at June 30, 2016~~2020, the Company indefinitely idled certain assets within its Adhesives segment. These represented triggering events resulting in impairment evaluations of the fixed assets within both the oilfield and phenolic specialty resins asset groups. As a result, asset impairments totaling $16 were recorded a conditional ARO of $30 related to certain contractually obligated future demolition, decontamination and repair costs associated with this facility rationalization. During the nine months ended September 30, 2016, the Company recorded an additional $30 of accelerated depreciation related to this ARO, which is also included in ~~“Cost of sales”~~“Asset impairments” in the unaudited Condensed Consolidated Statements of Operations ~~rendering this item fully depreciated as of June 30, 2016. During~~during the three months ended September 30, 2016, this ARO liability was reduced by $11 as a result of revised cost estimates, primarily due to a reduction in the scope of expected future demolition. This $11 reduction in costs is included in “Business realignment costs (income)” in the unaudited Condensed Consolidated Statements of Operations for both the three andSuccessor nine months ended September 30, ~~2016.~~

~~Lastly, during~~2020. See Note 4 for discussion of the three months and nine months ended September 30, 2017, the Company incurred additional costs of less than $1 and $3, respectively, related to other ongoing site closure expenses related to this facility rationalization, which are included in “Business realignment costs (income)”discontinued operations impairment charge recorded in the ~~unaudited Condensed Consolidated Statements~~third quarter of ~~Operations. During the nine months ended September 30, 2016, the Company incurred costs~~2020.

4.6. Related Party Transactions

~~Administrative Service,~~ Transactions with Apollo

As of the Company’s emergence from bankruptcy on July 1, 2019, Apollo is no longer a related party to the Company. Sales to various Apollo affiliates were $1 for the Predecessor period January 1, 2019 through July 1, 2019. There were no purchases during the Predecessor period January 1, 2019 through July 1, 2019.

Management ~~and~~ Consulting ~~Arrangement~~Agreement

The Company ~~is subject~~was party to a Management Consulting Agreement with Apollo (the “Management Consulting Agreement”) ~~that renews on an annual basis, unless notice~~pursuant to ~~the contrary is given by either party. Under the Management Consulting Agreement,~~which the Company ~~receives~~received certain structuring and advisory services from Apollo and its affiliates. ~~The Management Consulting Agreement provides indemnification to~~ Apollo ~~its affiliates and their directors, officers and representatives for potential losses arising from these services. Apollo is~~was entitled to an annual fee equal to the greater of $3 or 2% of the Company’s Adjusted EBITDA. In conjunction with the Company’s Chapter 11 proceedings and the Support Agreement filed on April 1, 2019, Apollo ~~elected~~agreed to waive ~~charges of any portion of the~~its annual management fee ~~due in excess of $3~~ for 2019. In connection with the ~~calendar year 2017.~~

~~During the three months ended September 30, 2017 and 2016 and during the nine months ended September 30, 2017 and 2016, the Company recognized expense under~~Company’s emergence from Chapter 11, the Management Consulting Agreement was terminated pursuant to the Confirmation Order, as of ~~$1 and $2, respectively. This amount is included in “Other operating expense, net” in~~ the ~~unaudited Condensed Consolidated Statements of Operations.~~Effective Date.

Transactions with MPM

As of May 15, 2019, Momentive Performance Materials (“MPM”) is no longer under the common control of Apollo and no longer a related party to the Company. There were no products sold to MPM during the Predecessor period January 1, 2019 through July 1, 2019. During the Predecessor period January 1, 2019 through July 1, 2019, the Company earned less than $1 from MPM as compensation for acting as distributor of products and had purchases of $10.

Shared Services Agreement

~~On October 1, 2010, the~~The Company ~~entered into~~previously held a shared services agreement with ~~Momentive Performance Materials Inc. (‘MPM”) (which, from October 1, 2010 through October 24, 2014, was a subsidiary of Hexion Holdings), as amended in October 2014~~MPM (the “Shared Services Agreement”). Under this agreement, the Company ~~provides~~provided to MPM, and MPM ~~provides~~provided to the Company, certain services, including, but not limited to, executive and senior management, administrative support, human resources, information technology support, accounting, finance, legal and procurement services. The Shared Services Agreement establishes certain criteria upon which the costs of such services are allocated between the Company and MPM. The Shared Services Agreement was renewed for one year starting October 2017 and is subject to termination by either the Company orOn March 14, 2019, MPM without cause, on not less than 30 days’ written notice, and expires in October 2018 (subject to one-year renewals every year thereafter; absent contrary notice from either party). The Company periodically reviews the scope of services provided under this agreement and has recently begun efforts to reduce the scope of services provided by the Company, in particular with respect to human resources, information technology and accounting and finance.

~~Pursuant to~~terminated the Shared Services Agreement, ~~during~~which triggered a transition period for the ~~nine months ended~~parties to work together to facilitate an orderly transition of services. The transition of services was completed on September ~~30, 2017 and 2016,~~1, 2020. During the Predecessor period January 1, 2019 through July 1, 2019 the Company incurred approximately ~~$41 and $50, respectively,~~$15 of net costs for shared services and MPM incurred approximately ~~$31 and $38, respectively,~~$14 of net costs for shared services. Included in the net costs incurred during the ~~nine months ended September 30, 2017 and 2016,~~Predecessor period January 1, 2019 through July 1, 2019 were net billings from ~~the Company~~Hexion to MPM of ~~$21~~$11.

Other Transactions and $23, respectively, to bring the percentage of total net incurred costs for shared services under the Shared Services Agreement to the applicable agreed upon allocation percentage. The Company had accounts receivable from MPM of $2 and $5 as of September 30, 2017 and December 31, 2016, respectively, and no accounts payable to MPM.Arrangements

~~Sales and Purchases of Products with MPM~~

~~The Company also sells products to, and purchases products from, MPM. During the three months ended September 30, 2017 and 2016,~~In March 2020, the Company ~~sold less than $1 of products~~entered into a $10 short term affiliate loan with its Parent at a 0% interest rate to ~~MPM and purchased $6 and $7, respectively. During the nine months ended September 30, 2017 and 2016~~, fund Parent share repurchases. In June 2020, the Company ~~sold less than $1~~made a $10 non-cash distribution to its Parent treated as a return of ~~products~~capital to ~~MPM and purchased $18 and $22, respectively. During~~settle this affiliate loan. This return of capital reduced “Paid-in capital” in the ~~three and nine months ended September 30, 2017 and 2016~~, ~~the Company earned less than $1 from MPM as compensation for acting as distributor of products. The Company had no accounts receivable from MPM~~unaudited Condensed Consolidated Balance Sheet at September 30, ~~2017 and accounts receivable of less than $1 at December 31, 2016.~~ A~~s of both September 30, 2017 and December 31, 2016, the Company had $2 of accounts payable to MPM.~~2020.

~~Purchases and Sales of Products and Services with Apollo Affiliates Other than MPM~~

The Company sells products to various Apollo affiliates other than MPM. These sales were $1 and less than $1 for the three months ended September 30, 2017 and 2016, respectively, and $3 and $6 for the nine months ended September 30, 2017 and 2016, respectively. Accounts receivable from these affiliates were less than $1 at both September 30, 2017 and December 31, 2016. The Company also purchases raw materials and services from various Apollo affiliates other than MPM. There were no purchases for the three and nine months ended September 30, 2017 and purchases of less than $1 for the three and nine months ended September 30, 2016, respectively. The Company had no accounts payable to these affiliates at September 30, 2017 and accounts payable of less than $1 at December 31, 2016.

~~Other Transactions and Arrangements~~

The Company sells products and provides services to, and purchases products from, its joint ventures which are recorded under the equity method of accounting. ~~These~~Refer to the below table for a summary of the sales and purchases with the Company and its joint ventures which are recorded under the equity method of accounting:


	Successor				Successor				Predecessor
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
Sales to joint ventures (1)(2)	$	1	$	0	$	2	$	0	$	2
Purchases from joint ventures (1)	<1		1		1		1		2

(1) There were ~~$1 and $4~~no sales to joint ventures or purchases from joint ventures for the ~~three months ended September 30, 2017~~Predecessor period July 1, 2019.

(2) Sales to joint ventures is primarily comprised of sales to the Russia JV included in the Held for Sale Business. Sales to the Company’s other joint ventures were less than $1 in all Successor and ~~2016, respectively, and $9 and $38 for the nine months ended September 30, 2017 and 2016, respectively.~~Predecessor periods presented.


	September 30, 2020		December 31, 2019
Accounts receivable from joint ventures(1)	$	1	$	1
Accounts payable to joint ventures	0		<1

(1) Accounts receivable from ~~these~~ joint ventures ~~were $5 and $7 at~~is mostly comprised of receivables from the Russia JV included in the Held for Sale Business. Accounts receivable from the Company’s other joint ventures was less than $1 for both September 30, ~~2017~~2020 and December 31, 2016, respectively. These purchases were $3 and $4 for the three months ended September 30, 2017 and 2016, respectively, and $10 and $14 for the nine months ended September 30, 2017 and 2016, respectively. The Company had accounts payable2019.

Table of Content s

In addition to ~~these joint ventures of less than $1 and $1 at September 30, 2017 and December 31, 2016, respectively.~~

The Company had a loan receivable of $6 and royalties receivable of $2 as of both September 30, 2017 and December 31, 2016 from its unconsolidated forest products joint venture in Russia. Note that these royalties receivable are also included in the accounts receivable from joint ventures disclosed ~~above.~~above, the Company had a loan receivable of $5and $7as of September 30, 2020 and December 31, 2019, respectively, from the Russia JV. These loan receivables have been included in “Long-term assets held for sale” within the unaudited Condensed Consolidated Balance Sheets.

5.7. Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement provisions establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. This guidance describes three levels of inputs that may be used to measure fair value:

•Level 1: Inputs are quoted prices (unadjusted) for identical assets or liabilities in active markets.

•Level 2: Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reported date.

•Level 3: Unobservable inputs that are supported by little or no market activity and are developed based on the best information available in the circumstances. For example, inputs derived through extrapolation or interpolation that cannot be corroborated by observable market data.

Derivative Financial Instruments

The Company is exposed to certain risks related to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk, foreign currency exchange risk and commodity price risk. The Company does not hold or issue derivative financial instruments for trading purposes.

Recurring Fair Value Measurements

As of September 30, ~~2017~~,2020, the Company had derivative ~~liabilities~~ assetsrelated to foreign exchange, electricity and natural gas ~~and foreign exchange~~ contracts of ~~less than~~ $1, which were measured using ~~level~~Level 2 inputs, and consisted of derivative instruments transacted primarily in over-the-counter markets. There were no transfers between Level 1, Level 2 or Level 3 measurements during the Successor nine months ended September 30, ~~2017~~2020, or ~~2016.~~the Successor period July 2, 2019 through September 30, 2019, and the Predecessor period from January 1, 2019 through July 1, 2019.

The Company calculates the fair value of its Level 2 derivative liabilities using standard pricing models with market-based inputs, adjusted for nonperformance risk. When its financial instruments are in a liability position, the Company evaluates its credit risk as a component of fair value. At both September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, no adjustment was made by the Company to reduce its derivative position for nonperformance risk.

When its financial instruments are in an asset position, the Company is exposed to credit loss in the event of nonperformance by other parties to these contracts and evaluates their credit risk as a component of fair value.

~~Non-recurring Fair Value Measurements~~Interest Rate Swap

~~Goodwill~~

~~In 2017,~~The Company will from time to time use interest rate swaps to alter interest rate exposures between floating and fixed rates on certain long-term debt. Under interest rate swaps, the Company ~~lowered its forecast~~agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated using an agreed-upon notional principal amount. The counter-parties to the interest rate swap agreements are financial institutions with investment grade ratings.

In October 2019, the Company executed an interest rate swap syndication agreement where by Hexion receives a variable 3-month LIBOR, and pays fixed interest rate swaps, beginning January 1, 2020 through January 1, 2025 (the “Hedge”) for a total notional amount of ~~estimated earnings and~~$300. The purpose of this arrangement is to hedge the variability caused by quarterly changes in cash ~~flows for its oilfield business from those previously projected, and indefinitely idled a manufacturing facility within its oilfield business. This was~~flow due to ~~the slower than previously assumed recovery~~associated changes in ~~the oil and gas market. As of September 30, 2017, the estimated fair value~~LIBOR for $300 of the Company’s ~~oilfield reporting unit was less than~~variable rate Senior Secured Term Loan denominated in USD ($716 outstanding at September 30, 2020). The Company has evaluated this transaction and designated this derivative instrument as a cash flow hedge under Accounting Standard Codification, No. 815, “Derivatives and hedging,” (“ASC 815”). For the ~~carrying value of~~Hedge, the ~~net assets of the reporting unit. In estimating~~Company records changes in the fair value of the ~~oilfield reporting unit,~~derivative in other comprehensive income (“OCI”) and will subsequently reclassify gains and losses from these changes in fair value from OCI to the unaudited Condensed Consolidated Statement of Operations in the same period that the hedged transaction affects net (loss) income and in the same unaudited Condensed Consolidated Statement of Operations category as the hedged item, “Interest expense, net”.

The following tables summarize the Company’s derivative financial instrument designated as a hedging instrument:


		September 30, 2020				December 31, 2019
	Balance Sheet Location	Notional Amount		Fair Value Liability		Notional Amount		Fair Value Asset
Derivatives designated as hedging instruments
Interest Rate Swap	Other current (liabilities)/assets	$	300	$	(16)	$	300	$	3
Total derivatives designated as hedging instruments				$	(16)			$	3

Table of Content s


	Amount of Loss Recognized in OCI on Derivatives
	Successor				Predecessor		Successor				Predecessor
Derivatives designated as hedging instruments	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
Interest Rate Swaps
Interest Rate Swap	$	(1)	$	0	$	0	$	(19)	$	0	$	0
Total	$	(1)	$	0	$	0	$	(19)	$	0	$	0

In both the Successor three and nine months ended September 30, 2020, the Company ~~relied solely~~reclassified a loss of $1, respectively, from OCI to “Interest expense, net” on ~~a discounted cash flow model income approach. This was due~~the Condensed Consolidated Statement of Operations related to the ~~Company’s belief~~settlement of a portion of the Hedge.

Interest Rate Cap

In 2019, the Company executed an interest rate cap derivative instrument for a premium amount of less than $1. This instrument is a derivative under ASC 815 that does not qualify for hedge accounting and as a result, changes in fair value are recognized within earnings throughout the ~~reporting unit’s EBITDA, a key input under~~term of the ~~market approach, was not representative~~instrument. For the Successor three and ~~consistent with~~nine months ended September 30, 2020, the ~~reporting unit’s historical performance and long-term outlook and, therefore, was not consistent with assumptions that a market participant would use~~Company recognized an unrealized loss of less than $1for the change in ~~determining the~~ fair value of the reporting unit. To measure the amount of the goodwill impairment, the Company allocated the estimated fair value of the reporting unit to the reporting unit’s assets and liabilities. As a result of this allocation, the Company estimated that the implied fair value of the oilfield reporting unit’s goodwill was $0. As such, the entire oilfield reporting unit’s goodwill balance of $13 was impaired during the third quarter of 2017, and the Company recognized a goodwill impairment charge of $13 in its Epoxy, Phenolic and Coating Resins segment,instrument, which is included in ~~“Asset impairments”~~“Other operating expense, net” in the unaudited Condensed Consolidated ~~Statements~~Statement of Operations. Significant unobservable inputs in the discounted cash flow analysis included projected long-term future cash flows, projected growth rates and discount rates associated with this reporting unit. Future projected long-term cash flows and growth rates were derived from models based upon forecasts prepared by the Company’s management. These projected cash flows were discounted using a rate of 13.5%.

Non-derivative Financial Instruments

The following table summarizes the carrying amount and fair value of the Company’s non-derivative financial instruments:


																Carrying Amount			Fair Value
	Carrying Amount			Fair Value														Level 1			Level 2			Level 3			Total
			Level 1			Level 2			Level 3			Total
September 30, 2017
September 30, 2020															September 30, 2020
Debt	$	3,777		$	—		$	3,205		$	31		$	3,236	Debt	$	1,833		$	0		$	1,791		$	54		$	1,845
December 31, 2016
December 31, 2019															December 31, 2019
Debt	$	3,542		$	—		$	3,134		$	9		$	3,143	Debt	$	1,785		$	0		$	1,751		$	64		$	1,815

Fair values of debt classified as Level 2 are determined based on other similar financial instruments, or based upon interest rates that are currently available to the Company for the issuance of debt with similar terms and maturities. Level 3 amounts represent ~~capital~~finance leases and sale leaseback financing arrangements whose fair value is determined through the use of present value and specific contract terms. The carrying amount and fair value of the Company’s debt is exclusive of unamortized deferred financing fees. The carrying amounts of cash and cash equivalents, ~~short term investments,~~ accounts receivable, accounts payable and other accrued liabilities are classified as Level 1 and are considered reasonable estimates of their fair values due to the short-term maturity of these financial instruments.

6.8. Debt Obligations

Debt outstanding at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 is as follows:


	September 30, 2020				December 31, 2019
	Long-Term		Due Within One Year		Long-Term		Due Within One Year
Senior Secured Credit Facilities:
ABL Facility	$	67	$	0	$	0	$	0
Senior Secured Term Loan - USD due 2026 (includes $6 and $7, respectively, of unamortized debt discount)	703		7		708		7
Senior Secured Term Loan - EUR due 2026 (includes $4 of unamortized debt discount)	494		—		473		—
Senior Notes:
7.875% Senior Notes due 2027	450		—		450		—
Other Borrowings:
Australia Facility due 2021	0		28		27		4
Brazilian bank loans	3		15		7		34
Lease obligations (1)	39		15		50		14
Other	0		12		0		11

Total	$	1,756	$	77	$	1,715	$	70

(1)Lease obligations include finance leases and sale leaseback financing arrangements.

September 30, 2017 December 31, 2016
Long-Term
Due Within
One Year
Long-Term
Due Within
One Year
ABL Facility $ 124
$ —
$ —
$ —
Senior Secured Notes:
6.625% First-Priority Senior Secured Notes due 2020 (includes $2 and $3 of unamortized debt premium at September 30, 2017 and December 31, 2016, respectively) 1,552
—
1,553
—
10.00% First-Priority Senior Secured Notes due 2020 315
—
315
—
10.375% First-Priority Senior Secured Notes due 2022 560
—
—
—
8.875% Senior Secured Notes due 2018 (includes $1 of unamortized debt discount at December 31, 2016) —
—
706
—
13.75% Senior Secured Notes due 2022 225
—
—
—
9.00% Second-Priority Senior Secured Notes due 2020 574
—
574
—
Debentures:
9.2% debentures due 2021 74
—
74
—
7.875% debentures due 2023 189
—
189
—
Other Borrowings:
Australia Facility due 2017 —
55
—
51
Brazilian bank loans 11
29
14
26
Lease obligations 27
4
7
2
Other 5
33
3
28
Unamortized debt issuance costs (44 ) —
(38 ) —
Total $ 3,612
$ 121
$ 3,397
$ 107

~~2017 Refinancing Transactions~~

In February 2017, the Company issued $485 aggregate principal amount of 10.375% First-Priority Senior Secured Notes due 2022 (the “New First Lien Notes”) and $225 aggregate principal amount of 13.75% Senior Secured Notes due 2022 (the “New Senior Secured Notes”). Upon the closing of these offerings, the Company used the net proceeds from these offerings, together with cash on its balance sheet, to redeem all of the Company’s outstanding 8.875% Senior Secured Notes due 2018 (the “Old Senior Secured Notes”), which occurred in March 2017. In connection with the extinguishment of the Old Senior Secured Notes, the Company wrote off $3 of unamortized deferred debt issuance costs and discounts, which are included in “(Gain) loss on extinguishment of debt” in the unaudited Condensed Consolidated Statements of Operations.

~~In May 2017, the Company issued an additional $75 aggregate principal amount~~Table of ~~New First Lien Notes at an issue price of 100.5%. These notes~~ ~~mature on February 1, 2022 and have the same terms as the New First Lien Notes issued in February 2017. The Company~~ ~~used the net proceeds from these notes for general corporate purposes.~~ Content s

The Company also amended and restated its ABL Facility in December 2016 with modifications to, among other things, permit the refinancing of the Old Senior Secured Notes. In connection with the issuance of the new notes in February 2017, certain lenders under the ABL Facility provided extended revolving credit facility commitments in an aggregate principal amount of $350 with a maturity date of December 5, 2021 (subject to certain early maturity triggers), the existing commitments were terminated and the size of the ABL Facility was reduced from $400 to $350.

~~These transactions are collectively referred to as the “2017 Refinancing Transactions.”~~

7.9. Commitments and Contingencies

Environmental Matters

The Company’s operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials. The Company is subject to extensive environmental regulation at the federal, state and local levels as well as foreign laws and regulations, and is therefore exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

~~Environmental Institution of Paraná IAP—~~On August 10, 2005, the Environmental Institute of Paraná (IAP), an environmental agency in the State of Paraná, provided Hexion Quimica Industria, the Company’s Brazilian subsidiary, with notice of an environmental assessment in the amount of 12 Brazilian reals. The assessment related to alleged environmental damages to the Paranagua Bay caused in November 2004 from an explosion on a shipping vessel carrying methanol purchased by the Company. The investigations performed by the public authorities have not identified any actions of the Company that contributed to or caused the accident. The Company responded to the assessment by filing a request to have it cancelled and by obtaining an injunction precluding execution of the assessment pending adjudication of the issue. In November 2010, the Court denied the Company’s request to cancel the assessment and lifted the injunction that had been issued. The Company responded to the ruling by filing an appeal in the State of Paraná Court of Appeals. In March 2012, the Company was informed that the Court of Appeals had denied the Company’s appeal, and on June 4, 2012 the Company filed appeals to the Superior Court of Justice and the Supreme Court of Brazil. In September 2016, the Superior Court of Justice decided that strict liability does not apply to administrative fines issued by environmental agencies and reversed the decision of the State of Paraná Court of Appeals. The Superior Court of Justice remanded the case back to the Court of Appeals to determine if the IAP met its burden of proving negligence by the Company. In September 2017, the State of Paraná Court of Appeals decided that IAP did not prove that the Company was negligent and granted the Company’s request to annul the environmental assessment. IAP filed a motion for clarification regarding the Court of Appeals’ analysis of the case and the Company filed a motion for clarification regarding attorney fees. After the pending motions are resolved, IAP will have 15 business days to file an appeal with the Superior Court of Justice. The Company does not believe that a loss is probable. ~~At September 30, 2017, the amount of the assessment, including tax, penalties, monetary correction and~~ ~~interest, is 55 Brazilian reals, or approximately $17.~~

The following table summarizes all probable environmental remediation, indemnification and restoration liabilities, including related legal expenses, at September 30, ~~2017~~2020 and December 31, ~~2016:~~2019:


	Liability				Range of Reasonably Possible Costs at September 30, 2020
Site Description	September 30, 2020(1)		December 31, 2019(1)		Low		High
Geismar, LA	$	12	$	12	$	9	$	22
Superfund and offsite landfills – allocated share:
Less than 1%	3		3		2		6
Equal to or greater than 1%	6		6		5		14
Currently-owned	9		8		4		14
Formerly-owned:
Remediation	19		21		16		37
Monitoring only	0		1		0		1
Total	$	49	$	51	$	36	$	94

Liability Range of Reasonably Possible Costs at September 30, 2017
Site Description September 30, 2017 December 31, 2016 Low High
Geismar, LA $ 14
$ 14
$ 9
$ 22
Superfund and offsite landfills – allocated share:
Less than 1% 2
2
1
4
Equal to or greater than 1% 7
6
5
14
Currently-owned 4
4
3
9
Formerly-owned:
Remediation 27
30
25
42
Monitoring only —
1
—
1
Total $ 54
$ 57
$ 43
$ 92
(1) The table includes approximately $2 of environmental remediation liabilities related to the Held for Sale Business at both September 30, 2020 and December 31, 2019. These associated liabilities have been included in “Long-term liabilities associated with assets held for sale” within the unaudited Condensed Consolidated Balance Sheets.

These amounts include estimates for unasserted claims that the Company believes are probable of loss and reasonably estimable. The estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based. To establish the upper end of a range, assumptions less favorable to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ materially from these estimates. At September 30, ~~2017~~2020 and December 31, ~~2016, $14~~2019, $15 and ~~$13, respectively,~~$18 of these liabilities have been included in “Other current liabilities” ~~in the unaudited Condensed Consolidated Balance Sheets,~~ with the remaining amount included in “Other long-term ~~liabilities.”~~liabilities” within the unaudited Condensed Consolidated Balance Sheets.

Following is a discussion of the Company’s environmental liabilities and the related assumptions at September 30, ~~2017:~~2020:

Geismar, LA Site—The Company formerly owned a basic chemicals and polyvinyl chloride business that was taken public as Borden Chemicals and Plastics Operating Limited Partnership (“BCPOLP”) in 1987. The Company retained a 1% interest, the general partner interest and the liability for certain environmental matters after BCPOLP’s formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the District of Delaware among the Company, BCPOLP, the United States Environmental Protection Agency and the Louisiana Department of Environmental Quality, the Company agreed to perform certain tasks related to BCPOLP’s obligations for soil and groundwater contamination at BCPOLP’s Geismar, Louisiana site. The Company bears the sole responsibility for these obligations because there are no other potentially responsible parties (“PRP”) or third parties from whom the Company could seek reimbursement.

A groundwater pump and treat system to remove contaminants is operational, and natural attenuation studies are proceeding. If closure procedures and remediation systems prove to be inadequate, or if additional contamination is discovered, costs that would approach the higher end of the range of possible outcomes could result.

Due to the long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, a portion of this liability was recorded at its net present value, assuming a 3% discount rate and a time period of 2220 years. The range of possible outcomes is discounted in a similar manner. The undiscounted liability, which is expected to be paid over the next 2220 years, is approximately ~~$20.~~$16. Over the next five years, the Company expects to make ratable payments totaling $6.

Superfund Sites and Offsite Landfills—The Company is currently involved in environmental remediation activities at a number of sites for which it has been notified that it is, or may be, a PRP under the United States Comprehensive Environmental Response, Compensation and Liability Act or similar state “superfund” laws. The Company anticipates approximately 50% of the estimated liability for these sites will be paid within the next five years, with the remainder over the next twenty-five years. The Company generally does not bear a significant level of responsibility for these sites, and as a result, has little control over the costs and timing of cash flows.

The Company’s ultimate liability will depend on many factors including its share of waste volume, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of insurance coverage. The range of possible outcomes takes into account the maturity of each project, resulting in a more narrow range as the

Table of Content s

project progresses. To estimate both its current reserves for environmental remediation at these sites and the possible range of additional costs, the Company has not assumed that it will bear the entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and severally liable. The Company has limited information to assess the viability of other PRPs and their probable contribution on a per site basis. The Company’s insurance provides very limited, if any, coverage for these environmental matters.

Sites Under Current Ownership—The Company is conducting environmental remediation at a number of locations that it currently owns, of which ten sites are no longer in operation. As the Company is performing a portion of the remediation on a voluntary basis, it has some control over the costs to be incurred and the timing of cash flows. The ~~Company expects to pay approximately $4 of these liabilities within the next five years, with the remainder over the next ten years. The~~ factors influencing the ultimate outcome include the methods of remediation elected, the conclusions and assessment of site studies remaining to be completed, and the time period required to complete the work. No other parties are responsible for remediation at these sites.

Formerly-Owned Sites—The Company is conducting, or has been identified as a PRP in connection with, environmental remediation at a number of locations that it formerly owned and/or operated. Remediation costs at these former sites, such as those associated with ~~our~~the Company’s former phosphate mining and processing operations, could be material. The Company has accrued those costs for formerly-owned sites which are currently probable and reasonably estimable. One such site is the Coronet Industries, Inc. Superfund Alternative Site in Plant City, Florida. The ~~Company entered into a settlement agreement effective February 1, 2016 with Coronet Industries and another former site owner. Pursuant to the agreement, the Company agreed to pay $10 in fulfillment~~current owner of the site alleged that it incurred environmental costs at the site for which it has a contribution claim against the Company, and that additional future costs are likely to be incurred. The Company signed a settlement agreement in 2016 with the current site owner and a past site owner, pursuant to which the Company paid $10 for past remediation costs ~~payable in three annual installments, of which one installment remains to be paid in 2018. Additionally, the Company~~and accepted a 40% allocable share of specified future remediation costs at this site. The Company estimates its allocable share of future remediation costs to be approximately ~~$15.~~$9. The final costs to the Company will depend on ~~the method~~natural variations in remediation costs, including unforeseen circumstances, agency requests, new contaminants of ~~remediation chosen, the amount of time necessary to accomplish remediation~~concern and the ongoing financial viability of the other PRPs. ~~Currently, the Company has insufficient information to estimate the range of reasonably possible costs related to this site.~~

Monitoring Only Sites—The Company is responsible for a number of sites that require monitoring where no additional remediation is expected. The Company has established reserves for costs related to these sites. Payment of these liabilities is anticipated to occur over the next ten or more years. The ultimate cost to the Company will be influenced by fluctuations in projected monitoring periods or by findings that are different than anticipated.

Indemnifications—In connection with the acquisition of certain of the Company’s operating businesses, the Company has been indemnified by the sellers against certain liabilities of the acquired businesses, including liabilities relating to both known and unknown environmental contamination arising prior to the date of the purchase. The indemnifications may be subject to certain exceptions and limitations, deductibles and indemnity caps. While it is reasonably possible that some costs could be incurred, except for those sites identified above, the Company has inadequate information to allow it to estimate a potential range of liability, if any.

Non-Environmental Legal Matters

The ~~Company~~Company’s continuing operations is involved in various legal proceedings in the ordinary course of business and had reserves of $4$1 and $2$1 at September 30, ~~2017~~2020 and December 31, ~~2016,~~2019, respectively, for all non-environmental legal defense costs incurred and settlement costs that it believes are probable and estimable. At September 30, ~~2017~~2020 and December 31, ~~2016, $3~~2019, $1 and $1,respectively, has been included in “Other current liabilities” in the unaudited Condensed Consolidated Balance Sheets, with the remaining amount included in “Other long-term liabilities.”

Other Legal Matters—The Company is also involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings, including actions that allege harm caused by products the Company has allegedly made or used, containing silica, vinyl chloride monomer and asbestos. The Company believes it has adequate reserves and that it is not reasonably possible that a loss exceeding amounts already reserved would be material. Furthermore, the Company has insurance to cover claims of these types.

Other Commitments and Contingencies

The Company has contractual agreements with third parties to purchase feedstocks, tolling arrangements or other services. The terms of these different agreements can vary and may be extended at the Company’s request and are cancellable by either party as provided for in each agreement. While the agreements vary by scope and terms, early cancellation of contractual agreements could result in one-time contract termination costs.

Table of Content s

10. Pension and Postretirement Benefit Plans

The Company’s service cost component of net benefit cost is included in “Operating income” and all other components of net benefit cost are included in “Other non-operating income, net” within the Company’s unaudited Condensed Consolidated Statements of Operations. The Company recognized less than $1 of net non-pension postretirement benefit cost for both the Successor three and nine months ended September 30, 2020, the Successor period ended July 2, 2019 through September 30, 2019 and for the Predecessor July 1, 2019, January 1, 2019 through July 1, 2019.

Following are the components of net pension ~~and postretirement (benefit) expense~~benefit cost recognized by the Company for the Successor three and nine months ended September 30, ~~2017~~2020, July 2, 2019 through September 30, 2019 and ~~2016~~:for the Predecessor July 1, 2019, January 1, 2019 through July 1, 2019:


	Pension Benefits
	Successor								Predecessor
	Three Months Ended September 30, 2020				July 2, 2019 through September 30, 2019				July 1, 2019
	U.S. Plans		Non-U.S. Plans		U.S. Plans		Non-U.S. Plans		U.S. Plans		Non-U.S. Plans
Service cost	$	1	$	4	$	1	$	3	$	0	$	0
Interest cost on projected benefit obligation	1		2		1		1		0		0
Expected return on assets	(3)		(4)		(3)		(2)		0		0
Net (benefit) expense(1)	$	(1)	$	2	$	(1)	$	2	$	0	$	0

	Pension Benefits
	Successor								Predecessor
	Nine Months Ended September 30, 2020				July 2, 2019 through September 30, 2019				January 1, 2019 through July 1, 2019
	U.S. Plans		Non-U.S. Plans		U.S. Plans		Non-U.S. Plans		U.S. Plans		Non-U.S. Plans
Service cost	$	2	$	13	$	1	$	3	$	2	$	7
Interest cost on projected benefit obligation	4		5		1		1		4		4
Expected return on assets	(9)		(10)		(3)		(2)		(6)		(6)
Net (benefit) expense(1)	$	(3)	$	8	$	(1)	$	2	$	0	$	5

(1) Includes less than $1 of net pension expense for non-U.S. plans related to the Held for Sale Business during the three and nine months ended September 30, 2020 and Successor period July 2, 2019 through September 30, 2019 and the Predecessor period January 1, 2019 through July 1, 2019, respectively. These associated costs have been included in “(Loss) income from discontinued operations, net of taxes” within the unaudited Condensed Consolidated Statements of Operations.

11. Stock Based Compensation

The Company grants stock-based compensation to employees, directors, and other key service providers under the Hexion Holdings Corporation 2019 Omnibus Incentive Plan (the “2019 Incentive Plan”). Under the 2019 Incentive Plan, the Company may grant stock options, restricted stock units, performance stock units and other equity-based awards to be awarded from time to time as the Board of Directors of Hexion Holdings (the “Board”) determines. The restricted and performance stock units are deemed to be equivalent to one share of common stock of Hexion Holdings. The awards contain restrictions on transferability and other typical terms and conditions.

In the first quarter of 2020, Hexion Holdings granted 821,758 Restricted Stock Units (“RSUs”) to certain employees and non-employee directors that time vest over three years with a weighted average grant date fair value of $15.80 per share. Additionally, Hexion Holdings granted 823,619 Performance Stock Units (“PSUs”) to certain employees that vest based on performance conditions with a weighted average grant date fair value of $15.80. Compensation cost will be recognized over the service period of the PSUs once the satisfaction of the applicable performance condition is deemed probable. As of September 30, 2020, the Company’s performance conditions underlying the PSU's were not considered probable of occurring and thus no PSU expense has been recorded.

The Company recognized $4 and $13 of stock-based compensation costs for the Successor three and nine months ended September 30, 2020, respectively and $5 for the Successor period July 2, 2019 through September 30, 2019. There were no stock-based compensation cost recognized during the Predecessor period January 1, 2019 through July 1, 2019. The amounts are included in “Selling, general and administrative expense” in the Condensed Consolidated Statements of Operations.

The Company’s Parent had 57,756,630 shares of common stock outstanding as of September 30, 2020.

Pension Benefits Non-Pension Postretirement Benefits
Three Months Ended September 30, Three Months Ended September 30,
2017 2016 2017 2016

U.S.
Plans

Non-U.S.
Plans

U.S.
Plans

Non-U.S.
Plans

U.S.
Plans

Non-U.S.
Plans

U.S.
Plans

Non-U.S.
Plans
Service cost $ 1
$ 4
$ 1
$ 4
$ —
$ —
$ —
$ —
Interest cost on projected benefit obligation 2
3
2
3
—
—
—
—
Expected return on assets (3 ) (3 ) (4 ) (3 ) —
—
—
—
Net expense (benefit) $ —
$ 4
$ (1 ) $ 4
$ —
$ —
$ —
$ —

Pension Benefits Non-Pension Postretirement Benefits
Nine Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016

U.S.
Plans

Non-U.S.
Plans

U.S.
Plans

Non-U.S.
Plans

U.S.
Plans

Non-U.S.
Plans

U.S.
Plans

Non-U.S.
Plans
Service cost $ 2
$ 12
$ 3
$ 11
$ —
$ —
$ —
$ —
Interest cost on projected benefit obligation 6
7
6
8
—
1
—
1
Expected return on assets (10 ) (8 ) (11 ) (8 ) —
—
—
—
Amortization of prior service benefit —
—
—
—
—
—
(1 ) —
Net (benefit) expense $ (2 ) $ 11
$ (2 ) $ 11
$ —
$ 1
$ (1 ) $ 1

Table of Content s

9.12. Segment Information

~~The Company’s business segments are based on the products that the Company offers and the markets that it serves. At~~ ~~September 30, 2017, the Company had two reportable segments: Epoxy, Phenolic and Coating Resins and Forest Products Resins. A summary~~Realignment of ~~the major products~~Reportable Segments in 2020

As part of the Company’s continuing efforts to drive growth and greater operating efficiencies, in January 2020, the Company changed its reporting segments to align around its two growth platforms: (i) Adhesives and (ii) Coatings and Composites. At September 30, 2020, the Company’s continuing operations has three reportable segments, ~~follows:~~which consist of the following businesses:

•Adhesives: these businesses focus on the global adhesives market. They include the Company’s global wood adhesives business, which now also includes the oilfield technologies group, including: forest products resin assets in North America, Latin America, Australia and New Zealand; and global formaldehyde.

~~Epoxy, Phenolic~~•Coatings and ~~Coating Resins:~~ ~~epoxy~~Composites: these businesses focus on the global coatings and composites market. They include the Company’s base and specialty ~~resins, phenolic encapsulated substrates, versatic acids and derivatives, basic~~ epoxy resins and ~~intermediates~~Versatic™ Acids and ~~phenolic specialty resins~~Derivatives businesses.

•Corporate and ~~molding compounds~~

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.

The Company has recast its Net Sales and Segment EBITDA (as defined below) for the Successor period July 2, 2019 through September 30, 2019 and for the Predecessor periods July 1, 2019 and January 1, 2019 through July 1, 2019 to reflect the new reportable segments.

~~Forest Products Resins:~~ ~~forest products resins and formaldehyde applications~~

Reportable Segments

Following are net sales and Segment EBITDA ~~(earnings before interest, income taxes, depreciation and amortization)~~for continuing operations by reportable segment. Segment EBITDA is defined as EBITDA (earnings before interest, income taxes, depreciation and amortization) adjusted for certain non-cash items and other income and expenses. Segment EBITDA is the primary performance measure used by the Company’s senior management, the chief operating decision-maker and the ~~board~~Board of ~~directors~~Directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. Corporate and Other is 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 ~~and legacy company costs~~ not allocated to continuing segments.

Net Sales ⁽¹⁾:

Following is continuing operations revenue by reportable segment. Product sales within each reportable segment share economically similar risks. These risks include general economic and industrial conditions, competitive pricing pressures and the Company’s ability to pass on fluctuations in raw material prices to its customers. A substantial number of the Company’s raw material inputs are petroleum-based and their prices fluctuate with the price of oil. Due to differing regional industrial and economic conditions, the geographic distribution of revenue may impact the amount, timing and uncertainty of revenue and cash flows from contracts with customers.

Table of Content s

Three Months Ended September 30, Nine Months Ended September 30.
2017
2016 2017 2016
Epoxy, Phenolic and Coating Resins $ 528

$ 476
$ 1,537
$ 1,664
Forest Products Resins 386

343
1,159
1,016
Total $ 914

$ 819
$ 2,696
$ 2,680
Following is net sales by reportable segment disaggregated by geographic region:


	Successor												Predecessor
	Three Months Ended September 30, 2020						July 2, 2019 through September 30, 2019						7/1/2019
	Adhesives		Coatings and Composites		Total		Adhesives		Coatings and Composites		Total		Adhesives		Coatings and Composites		Total
North America	$	221	$	122	$	343	$	269	$	138	$	407	$	—	$	—	$	—
Europe	5		132		137		6		124		130		—		—		—
Asia Pacific	34		87		121		39		70		109		—		—		—
Latin America	33		0		33		47		0		47		—		—		—
Total	$	293	$	341	$	634	$	361	$	332	$	693	$	—	$	—	$	—


	Successor												Predecessor
	Nine Months Ended September 30, 2020						July 2, 2019 through September 30, 2019						January 1, 2019 through July 1, 2019
	Adhesives		Coatings and Composites		Total		Adhesives		Coatings and Composites		Total		Adhesives		Coatings and Composites		Total
North America	$	670	$	379	$	1,049	$	269	$	138	$	407	$	562	$	286	$	848
Europe	14		393		407		6		124		130		15		305		320
Asia Pacific	96		209		305		39		70		109		81		129		210
Latin America	94		0		94		47		0		47		103		0		103
Total	$	874	$	981	$	1,855	$	361	$	332	$	693	$	761	$	720	$	1,481

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

Table of Content s

Reconciliation of Net ~~(Loss) Income~~Loss to Segment EBITDA:


	Successor				Predecessor		Successor				Predecessor
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
Reconciliation:
Net (loss) income attributable to Hexion Inc.	$	(102)	$	(43)	$	3,054	$	(203)	$	(43)	$	2,894
Add: Net income attributable to noncontrolling interest	0		0		0		0		0		1
Less: Net (loss) income from discontinued operations	(76)		1		119		(79)		1		135
Net (loss) income from continuing operations	$	(26)	$	(44)	$	2,935	$	(124)	$	(44)	$	2,760
Income tax expense (benefit)	17		(5)		191		8		(5)		201
Interest expense, net	25		28		0		76		28		89
Depreciation and amortization (1)	47		48		0		143		48		43

EBITDA	63		27		3,126		103		27		3,093
Adjustments to arrive at Segment EBITDA:
Asset impairments	$	0	$	0	$	0	$	16	$	0	$	0
Business realignment costs (2)	19		12		0		57		12		14


Transaction costs (3)	1		5		0		4		5		26
Realized and unrealized foreign currency (gains) losses	(3)		9		0		2		9		(7)


Reorganization items, net (4)	0		0		(3,099)		0		0		(2,943)
Non-cash impact of inventory step-up (5)	0		27		(27)		0		27		(27)
Other non-cash items (6)	6		1		0		29		1		9
Other (7)	5		5		18		9		5		36
Total adjustments	28		59		(3,108)		117		59		(2,892)
Segment EBITDA	$	91	$	86	$	18	$	220	$	86	$	201

Segment EBITDA (8):
Adhesives	$	58	$	59	$	18	$	156	$	59	$	135
Coatings and Composites	50		44		0		115		44		96
Corporate and Other	(17)		(17)		0		(51)		(17)		(30)
Total	$	91	$	86	$	18	$	220	$	86	$	201

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Reconciliation:
Net (loss) income $ (70 ) $ (47 ) $ (146 ) $ 59
Income tax expense 9
16
16
40
Interest expense, net 82
76
247
235
Depreciation and amortization 29
30
85
101
Accelerated depreciation 14
21
14
127
EBITDA $ 64
$ 96
$ 216
$ 562
Items not included in Segment EBITDA:

Asset impairments $ 13
$ —
$ 13
$ —
Business realignment costs (income) 10
(3 ) 27
42
Gain on dispositions —
—
—
(240 )
Realized and unrealized foreign currency (gains) losses (5 ) 6
(7 ) (3 )
(Gain) loss on extinguishment of debt —
(3 ) 3
(47 )
Other 14
16
39
50
Total adjustments 32
16
75
(198 )
Segment EBITDA $ 96
$ 112
$ 291
$ 364

Segment EBITDA:

Epoxy, Phenolic and Coating Resins $ 45
$ 64
$ 143
$ 230
Forest Products Resins 66
65
195
184
Corporate and Other (15 ) (17 ) (47 ) (50 )
Total $ 96
$ 112
$ 291
$ 364

~~Items Not Included in Segment EBITDA~~

~~Not~~(1)For the nine months ended September 30, 2020, accelerated depreciation of $2 has been included in ~~Segment EBITDA are certain non-cash items~~“Depreciation and ~~other income~~amortization.”

(2)Business realignment costs for the Successor and ~~expenses.~~ Predecessor periods below included:


	Successor				Predecessor		Successor				Predecessor
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
Severance costs	$	4	$	4	$	—	$	15	$	4	$	8
In-process facility rationalizations	5		3		—		13		3		3
Business services implementation	6		—		—		17		—		—
Legacy environmental reserves	4		4		—		8		4		1
Other	—		1		—		4		1		2

(3)For the Successor three and nine months ended September 30, ~~2017 and 2016, these items primarily include expenses from retention programs and~~2020, transaction costs included certain professional fees related to strategic projects. ~~Business realignment costs for~~For the ~~three and nine months ended~~Successor period from July 2, 2019 through September 30, ~~2017~~2019 and the Predecessor period from January 1, 2019 through July 1, 2019, transaction costs primarily ~~include costs related to~~included $4 and $23, respectively, of certain ~~in-process facility rationalizations~~professional fees and ~~cost reduction programs. Business realignment costs for the three and nine months ended September 30, 2016 primarily include costs~~other expenses related to the ~~planned facility rationalizations within~~Company’s Chapter 11 proceedings.

(4)Represents incremental costs incurred directly as a result of the ~~Epoxy, Phenolic~~Company’s Chapter 11 proceedings after the date of filing, gains on settlement of liabilities under the Plan and ~~Coating Resins segment and costs~~the net impact of fresh start accounting adjustments. The amounts excludes the “Non-cash impact of inventory step-up” discussed below.

(5)Represents $27 of non-cash expense related to ~~certain in-process cost reduction programs.~~the step up of finished goods inventory on July 1 as part of fresh start accounting that was expensed in the successor period upon the sale of the inventory.

Table of Content s

(6)Other non-cash items for the Successor and Predecessor periods presented below included:

~~10.~~


	Successor				Predecessor		Successor				Predecessor
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
Fixed asset write-offs	$	—	$	—	$	—	$	6	$	—	$	3
Stock-based compensation costs	4		5		—		13		5		—
Long-term retention programs	1		—		—		7		—		5
One-time capitalized variance impact of inventory fresh start step-up	—		(4)		—		—		(4)		—
Other	1		—		—		3		—		1

(7)Other for Successor and Predecessor periods presented below included:


	Successor				Predecessor		Successor				Predecessor
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019
Legacy expenses	$	2	$	4	$	—	$	7	$	4	$	3
IT outage (recoveries) costs, net	—		(1)		—		(4)		(1)		9
Management fees and other	3		2		—		6		2		6
Accelerated deferred revenue	—		—		18		—		—		18

Table of Content s

13. Changes in Accumulated Other Comprehensive Loss

Following is a summary of changes in “Accumulated other comprehensive loss” for the Successor three and nine months ended September 30, ~~2017~~2020. The Successor period July 2, 2019 through September 30, 2019 and ~~2016~~:the Predecessor period January 1, 2019 through July 1, 2019:


	Defined Benefit Pension and Postretirement Plans		Foreign Currency Translation Adjustments		Cash Flow Hedge		Total
Predecessor
Balance at December 31, 2018	$	(1)	$	(17)	$	0	$	(18)
Change in value	0		(8)		0		(8)
Eliminiation of Predecessor Company accumulated other comprehensive loss	1		25		0		26
Balance at July 1, 2019	$	0	$	0	$	0	$	0





Successor
Balance at July 2, 2019	$	0	$	0	$	0	$	0
Change in value	0		(16)		0		(16)
Balance at September 30, 2019	$	0	$	(16)	$	0	$	(16)

Balance at June 30, 2020	$	0	$	(39)	$	(16)	$	(55)
Change in value	0		7		(1)		6
Balance at September 30, 2020	$	0	$	(32)	$	(17)	$	(49)

Balance at December 31, 2019	$	0	$	(3)	$	2	$	(1)
Change in value	0		(29)		(19)		(48)
Balance at September 30, 2020	$	0	$	(32)	$	(17)	$	(49)

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Defined Benefit Pension and Postretirement Plans Foreign Currency Translation Adjustments Total Defined Benefit Pension and Postretirement Plans Foreign Currency Translation Adjustments Total
Beginning balance $ 3
$ (27 ) $ (24 ) $ 3
$ (18 ) $ (15 )
Other comprehensive income before reclassifications, net of tax —
10
10
—
7
7
Ending balance $ 3
$ (17 ) $ (14 ) $ 3
$ (11 ) $ (8 )

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Defined Benefit Pension and Postretirement Plans Foreign Currency Translation Adjustments Total Defined Benefit Pension and Postretirement Plans Foreign Currency Translation Adjustments Total
Beginning balance $ 3
$ (42 ) $ (39 ) $ 4
$ (19 ) $ (15 )
Other comprehensive income (loss) before reclassifications, net of tax —
25
25
(1 ) 8
7
Ending balance $ 3
$ (17 ) $ (14 ) $ 3
$ (11 ) $ (8 )

~~11.~~14. Income Taxes

The income tax expense (benefit) for the Successor three months ended September 30, 2020, July 2, 2019 through September 30, 2019, and for the Predecessor period July 1, 2019 was $17, $(5) and $191 respectively. The income tax expense (benefit) for the Successor nine months ended September 30, 2020, July 2, 2019 through September 30, 2019, and for the Predecessor period January 1, 2019 through July 1, 2019 was $8, $(5), $201 respectively. The income tax (benefit) expense is comprised of tax expense on income and tax benefit on losses from certain foreign operations. In 2020 and 2019, losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to the maintenance of a full valuation allowance.

The effective tax rate ~~was (15)% and (53)%~~ for the Successor three months ended September 30, ~~2017~~2020, July 2, 2019 through September 30, 2019, and ~~2016,~~for the Predecessor period July 1, 2019 was (189)%, 10% and 6%, respectively. The effective tax rate ~~was (12)% and 44%~~ for the Successor nine months ended September 30, ~~2017~~2020, July 2, 2019 through September 30, 2019, and ~~2016,~~for the Predecessor period January 1, 2019 through July 1, 2019 was (7)%, 10% and 7%, respectively. The change in the effective tax rate was primarily attributable to the amount and distribution of income and losses among the various jurisdictions in which ~~we operate.~~the Company operates. The effective tax rates were also impacted by operating gains and losses generated in jurisdictions where no tax expense or benefit was recognized due to the maintenance of a full valuation allowance.

For the three and nine months ended September 30, 2017 and 2016, income tax expense relates primarily to income from certain foreign operations. In 2017, losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to the maintenance of a full valuation allowance. In 2016, the income tax expense related to the gain on dispositions was substantially reduced by net operating loss utilization which was offset by a decrease to the respective valuation allowances.

~~12. Guarantor/Non-Guarantor Subsidiary Financial Information~~

The Company’s 6.625% First-Priority Senior Secured Notes due 2020, 10.00% First-Priority Senior Secured Notes due 2020, 10.375% First-Priority Senior Secured Notes due 2022, 13.75% Senior Secured Notes due 2022 and 9.00% Second-Priority Senior Secured Notes due 2020 are guaranteed by certain of its U.S. subsidiaries.

The following information contains the condensed consolidating financial information for Hexion Inc. (the parent), the combined subsidiary guarantors (Hexion Investments Inc.; Lawter International, Inc.; HSC Capital Corporation (dissolved in April 2017); Hexion International Inc.; Hexion CI Holding Company (China) LLC; NL COOP Holdings LLC and Oilfield Technology Group, Inc. (dissolved in September 2017)) and the combined non-guarantor subsidiaries, which includes all of the Company’s foreign subsidiaries.

All of the subsidiary guarantors are 100% owned by Hexion Inc. All guarantees are full and unconditional, and are joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its domestic subsidiaries by dividend or loan. While the Company’s Australian, New Zealand, Brazilian and China subsidiaries contain certain restrictions related to the payment of dividends and intercompany loans due to the terms of their credit facilities, there are no material restrictions on the Company’s ability to obtain cash from the remaining non-guarantor subsidiaries.

These financial statements are prepared on the same basis as the consolidated financial statements of the Company except that investments in subsidiaries are accounted for using the equity method for purposes of the consolidating presentation. The principal elimination entries relate to investments in subsidiaries and intercompany balances and transactions.

This information includes allocations of corporate overhead to the combined non-guarantor subsidiaries based on net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates.

~~HEXION INC.~~

~~SEPTEMBER 30, 2017~~

~~CONDENSED CONSOLIDATING BALANCE SHEET (Unaudited)~~

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $0 and $18, respectively) $ 6
$ —
$ 112
$ —
$ 118
Accounts receivable, net 131
2
367
—
500
Intercompany accounts receivable 104
—
22
(126 ) —
Intercompany loans receivable - current portion 9
—
—
(9 ) —
Inventories:

Finished and in-process goods 87
—
153
—
240
Raw materials and supplies 35
—
57
—
92
Other current assets 16
—
33
—
49
Total current assets 388
2
744
(135 ) 999
Investment in unconsolidated entities 146
13
20
(159 ) 20
Deferred income taxes 1
—
11
—
12
Other assets, net 16
6
27
—
49
Intercompany loans receivable 1,110
—
208
(1,318 ) —
Property and equipment, net 416
—
502
—
918
Goodwill 52
—
61
—
113
Other intangible assets, net 35
—
10
—
45
Total assets $ 2,164
$ 21
$ 1,583
$ (1,612 ) $ 2,156
Liabilities and Deficit
Current liabilities:
Accounts payable $ 109
$ —
$ 238
$ —
$ 347
Intercompany accounts payable 22
—
104
(126 ) —
Debt payable within one year 10
—
111
—
121
Intercompany loans payable within one year —
—
9
(9 ) —
Interest payable 99
—
2
—
101
Income taxes payable 8
—
5
—
13
Accrued payroll and incentive compensation 10
—
37
—
47
Other current liabilities 69
—
57
—
126
Total current liabilities 327
—
563
(135 ) 755
Long-term liabilities:
Long-term debt 3,528
—
84
—
3,612
Intercompany loans payable 208
—
1,110
(1,318 ) —
Accumulated losses of unconsolidated subsidiaries in excess of investment 614
159
—
(773 ) —
Long-term pension and post employment benefit obligations 39
—
224
—
263
Deferred income taxes 2
—
11
—
13
Other long-term liabilities 105
—
68
—
173
Total liabilities 4,823
159
2,060
(2,226 ) 4,816
Total Hexion Inc. shareholder’s deficit (2,659 ) (138 ) (476 ) 614
(2,659 )
Noncontrolling interest —
—
(1 ) —
(1 )
Total deficit (2,659 ) (138 ) (477 ) 614
(2,660 )
Total liabilities and deficit $ 2,164
$ 21
$ 1,583
$ (1,612 ) $ 2,156

~~HEXION INC.~~

~~DECEMBER 31, 2016~~

~~CONDENSED CONSOLIDATING BALANCE SHEET~~

Table of Content s

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $0 and $17, respectively) $ 28
$ —
$ 168
$ —
$ 196
Accounts receivable, net 119
1
270
—
390
Intercompany accounts receivable 106
—
60
(166 ) —
Intercompany loans receivable - current portion —
—
175
(175 ) —
Inventories:

Finished and in-process goods 82
—
117
—
199
Raw materials and supplies 31
—
57
—
88
Other current assets 26
—
19
—
45
Total current assets 392
1
866
(341 ) 918
Investment in unconsolidated entities 93
13
18
(106 ) 18
Deferred income taxes —
—
10
—
10
Other long-term assets 17
6
20
—
43
Intercompany loans receivable 1,050
—
180
(1,230 ) —
Property and equipment, net 448
—
445
—
893
Goodwill 65
—
56
—
121
Other intangible assets, net 41
—
11
—
52
Total assets $ 2,106
$ 20
$ 1,606
$ (1,677 ) $ 2,055
Liabilities and Deficit
Current liabilities:
Accounts payable $ 142
$ —
$ 226
$ —
$ 368
Intercompany accounts payable 60
—
106
(166 ) —
Debt payable within one year 6
—
101
—
107
Intercompany loans payable within one year 175
—
—
(175 ) —
Interest payable 69
—
1
—
70
Income taxes payable 6
—
7
—
13
Accrued payroll and incentive compensation 28
—
27
—
55
Other current liabilities 110
—
49
—
159
Total current liabilities 596
—
517
(341 ) 772
Long term liabilities:
Long-term debt 3,378
—
19
—
3,397
Intercompany loans payable 180
—
1,050
(1,230 ) —
Accumulated losses of unconsolidated subsidiaries in excess of investment 339
106
—
(445 ) —
Long-term pension and post employment benefit obligations 42
—
204
—
246
Deferred income taxes 4
—
9
—
13
Other long-term liabilities 105
—
61
—
166
Total liabilities 4,644
106
1,860
(2,016 ) 4,594
Total Hexion Inc. shareholder’s deficit (2,538 ) (86 ) (253 ) 339
(2,538 )
Noncontrolling interest —
—
(1 ) —
(1 )
Total deficit (2,538 ) (86 ) (254 ) 339
(2,539 )
Total liabilities and deficit $ 2,106
$ 20
$ 1,606
$ (1,677 ) $ 2,055
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in millions)

~~HEXION INC.~~

~~THREE MONTHS ENDED SEPTEMBER 30, 2017~~

~~CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)~~

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Net sales $ 400
$ —
$ 558
$ (44 ) $ 914
Cost of sales 360
—
481
(44 ) 797
Gross profit 40
—
77
—
117
Selling, general and administrative expense 28
—
47
—
75
Asset impairments 13
—
—
—
13
Business realignment costs 6
—
4
—
10
Other operating expense (income), net 3
—
(2 ) —
1
Operating (loss) income (10 ) —
28
—
18
Interest expense, net 78
—
4
—
82
Intercompany interest (income) expense, net (20 ) —
20
—
—
Other non-operating (income) expense, net (24 ) —
21
—
(3 )
Loss before tax and (losses) earnings from unconsolidated entities (44 )
—
(17 ) —
(61 )
Income tax expense 3
—
6
—
9
Loss before (losses) earnings from unconsolidated entities (47 ) —
(23 ) —
(70 )
(Losses) earnings from unconsolidated entities, net of taxes (23 ) (18 ) 1
40
—
Net loss $ (70 ) $ (18 ) $ (22 ) $ 40
$ (70 )
Comprehensive loss $ (60 ) $ (18 ) $ (22 ) $ 40
$ (60 )

~~HEXION INC.~~

~~THREE MONTHS ENDED SEPTEMBER 30, 2016~~

~~CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)~~

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Net sales $ 356
$ —
$ 507
$ (44 ) $ 819
Cost of sales 325
—
420
(44 ) 701
Gross profit 31
—
87
—
118
Selling, general and administrative expense 30
—
39
—
69
Business realignment (income) costs (7 ) —
4
—
(3 )
Other operating expense (income), net 10
6
(9 ) —
7
Operating (loss) income (2 ) (6 ) 53
—
45
Interest expense, net 74
—
2
—
76
Intercompany interest (income) expense, net (18 ) —
18
—
—
Gain on extinguishment of debt (3 ) —
—
—
(3 )
Other non-operating (income) expense, net (5 ) —
7
—
2
(Loss) income before income tax and earnings (losses) from unconsolidated entities (50 ) (6 ) 26
—
(30 )
Income tax expense 9
—
7
—
16
(Loss) income before earnings (losses) from unconsolidated entities (59 ) (6 ) 19
—
(46 )
Earnings (losses) from unconsolidated entities, net of taxes 12
(1 ) —
(12 ) (1 )
Net (loss) income $ (47 ) $ (7 ) $ 19
$ (12 ) $ (47 )
Comprehensive (loss) income $ (40 ) $ (7 ) $ 26
$ (19 ) $ (40 )

~~HEXION INC.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017~~

~~CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)~~

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Net sales $ 1,195
$ —
$ 1,651
$ (150 ) $ 2,696
Cost of sales 1,037
—
1,425
(150 ) 2,312
Gross profit 158
—
226
—
384
Selling, general and administrative expense 91
—
136
—
227
Asset impairments 13
—
—
—
13
Business realignment costs 16
—
11
—
27
Other operating expense, net —
—
4
—
4
Operating income 38
—
75
—
113
Interest expense, net 236
—
11
—
247
Intercompany interest (income) expense, net (55 ) —
55
—
—
Loss on extinguishment of debt 3
—
—
—
3
Other non-operating (income) expense, net (78 ) —
74
—
(4 )
Loss before tax and (losses) earnings from unconsolidated entities (68 ) —
(65 ) —
(133 )
Income tax (benefit) expense (1 ) —
17
—
16
Loss before (losses) earnings from unconsolidated entities (67 ) —
(82 ) —
(149 )
(Losses) earnings from unconsolidated entities, net of taxes (79 ) (52 ) 3
131
3
Net loss $ (146 ) $ (52 ) $ (79 ) $ 131
$ (146 )
Comprehensive loss $ (121 ) $ (52 ) $ (71 ) $ 123
$ (121 )

~~HEXION INC.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2016~~

~~CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS (Unaudited)~~

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Net sales $ 1,119
$ —
$ 1,701
$ (140 ) $ 2,680
Cost of sales 1,080
—
1,417
(140 ) 2,357
Gross profit 39
—
284
—
323
Selling, general and administrative expense 109
—
126
—
235
Gain on dispositions (188 ) —
(52 ) —
(240 )
Business realignment costs 31
—
11
—
42
Other operating expense (income), net 14
6
(14 ) —
6
Operating income (loss) 73
(6 ) 213
—
280
Interest expense, net 227
—
8
—
235
Intercompany interest (income) expense, net (55 ) —
55
—
—
Gain on extinguishment of debt (47 ) —
—
—
(47 )
Other non-operating (income) expense, net (16 ) —
17
—
1
(Loss) income before income tax and earnings from unconsolidated entities (36 ) (6 ) 133
—
91
Income tax expense 5
—
35
—
40
(Loss) income before earnings from unconsolidated entities (41 ) (6 ) 98
—
51
Earnings from unconsolidated entities, net of taxes 100
45
2
(139 ) 8
Net income $ 59
$ 39
$ 100
$ (139 ) $ 59
Comprehensive income $ 66
$ 39
$ 100
$ (139 ) $ 66

~~HEXION INC.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2017~~

~~CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)~~

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Cash flows (used in) provided by operating activities $ (245 ) $ —
$ 41
$ (1 ) $ (205 )
Cash flows provided by (used in) investing activities
Capital expenditures (33 ) —
(53 ) —
(86 )
Capitalized interest —
—
(1 ) —
(1 )
Proceeds from sale of assets, net 5
—
—
—
5
Change in restricted cash —
—
1
—
1
Return of capital from subsidiary from sales of accounts receivable 117
(a) —
—
(117 ) —
89
—
(53 ) (117 ) (81 )
Cash flows provided by (used in) financing activities
Net short-term debt borrowings 4
—
11
—
15
Borrowings of long-term debt 1,007
—
284
—
1,291
Repayments of long-term debt (850 ) —
(229 ) —
(1,079 )
Net intercompany loan borrowings (repayments) (7 ) —
7
—
—
Long-term debt and credit facility financing fees paid (20 ) —
(5 ) —
(25 )
Common stock dividends paid —
—
(1 ) 1
—
Return of capital to parent from sales of accounts receivable —
—
(117 ) (a) 117
—
134
—
(50 ) 118
202
Effect of exchange rates on cash and cash equivalents —
—
5
—
5
Change in cash and cash equivalents (22 ) —
(57 ) —
(79 )
Cash and cash equivalents (unrestricted) at beginning of period 28
—
151
—
179
Cash and cash equivalents (unrestricted) at end of period $ 6
$ —
$ 94
$ —
$ 100

~~(a)~~

During the nine months ended September 30, 2017, Hexion Inc. contributed receivables of $117 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the nine months ended September 30, 2017, the non-guarantor subsidiary sold the contributed receivables to certain banks under various supplier financing agreements. The cash proceeds were returned to Hexion Inc. by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined non-guarantor subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and Hexion Inc., respectively.

~~HEXION INC.~~

~~NINE MONTHS ENDED SEPTEMBER 30, 2016~~

~~CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Unaudited)~~

Hexion
Inc.

Combined
Subsidiary
Guarantors

Combined
Non-Guarantor
Subsidiaries
Eliminations Consolidated
Cash flows (used in) provided by operating activities $ (198 ) $ 4
$ 67
$ (4 ) $ (131 )
Cash flows provided by (used in) investing activities
Capital expenditures (47 ) —
(44 ) —
(91 )
Capitalized interest (1 ) —
—
—
(1 )
Proceeds from dispositions, net 146
—
135
—
281
Cash received on buyer’s note 45
—
—
—
45
Proceeds from sale of assets, net —
—
1
—
1
Change in restricted cash —
—
(11 ) —
(11 )
Capital contribution to subsidiary (13 ) (9 ) —
22
—
Investment in unconsolidated affiliates, net (1 ) —
—
—
(1 )
Return of capital from subsidiary from sales of accounts receivable 70
(a) —
—
(70 ) —
199
(9 ) 81
(48 ) 223
Cash flows (used in) provided by financing activities
Net short-term debt borrowings (repayments) 2
—
(15 ) —
(13 )
Borrowings of long-term debt 280
—
181
—
461
Repayments of long-term debt (467 ) —
(176 ) —
(643 )
Net intercompany loan borrowings (repayments) 171
—
(171 ) —
—
Capital contributions —
9
13
(22 ) —
Common stock dividends paid —
(4 ) —
4
—
Return of capital to parent from sales of accounts receivable —
—
(70 ) (a) 70
—
(14 ) 5
(238 ) 52
(195 )
Effect of exchange rates on cash and cash equivalents —
—
1
—
1
Decrease in cash and cash equivalents (13 ) —
(89 ) —
(102 )
Cash and cash equivalents (unrestricted) at beginning of period 62
—
166
—
228
Cash and cash equivalents (unrestricted) at end of period $ 49
$ —
$ 77
$ —
$ 126

~~(a)~~

During the nine months ended September 30, 2016, Hexion Inc. contributed receivables of $70 to a non-guarantor subsidiary as capital contributions, resulting in a non-cash transaction. During the nine months ended September 30, 2016, the non-guarantor subsidiary sold the contributed receivables to certain banks under various supplier financing agreements. The cash proceeds were returned to Hexion Inc. by the non-guarantor subsidiary as a return of capital. The sale of receivables has been included within cash flows from operating activities on the Combined non-guarantor subsidiaries. The return of the cash proceeds from the sale of receivables has been included as a financing outflow and an investing inflow on the Combined Non-Guarantor Subsidiaries and Hexion Inc., respectively.


~~Item 2.~~	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations (dollar amounts in millions)~~

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 third quarter of ~~2017”~~2020” refers to the three months ended September 30, ~~2017 ,~~2020 and “the third quarter of ~~2016”~~2019” refers to the three months ended September 30, ~~2016,~~2019, “the first nine months of ~~2017”~~2020” refers to the nine months ended September 30, ~~2017~~2020 and “the first nine months of ~~2016”~~2019” refers to the nine months ended September 30, ~~2016.~~2019.

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 ~~Securities and Exchange Commission (the “SEC”).~~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, ~~including transactions with our affiliate, Momentive Performance Materials Inc.,~~ 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, 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

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 continue to evolve, which has led to stay-at-home orders, social distancing guidelines and other preventative measures that have disrupted various industries in the global economy and the markets in which our products are manufactured, distributed and sold.

During this pandemic, we have implemented additional guidelines to further protect the health and safety of our employees as we continue to operate with our suppliers and customers. We have committed to maintaining a paramount focus on the safety of our employees while minimizing potential disruptions caused by COVID-19. For example we are following all legislatively-mandated travel directives in the various countries where we operate, and we have also put additional travel restrictions in place for our associates designed to reduce the risk from COVID-19. Additionally, we are utilizing extended work from home options to protect our office associates, while adjusting our meeting protocols and processes at our manufacturing sites.

Our businesses have been designated by many governments as essential businesses and our operations have continued through September 30, 2020. While we have continued to operate during the pandemic, we did incur adverse financial impacts to our sales and profitability results during the three and nine months ended September 30, 2020 from COVID-19, primarily related to reduced volumes associated with the pandemic. The pandemic has impacted global economic conditions and lowered demand in many of the end use markets in which the Company operates such as automotive, aerospace, industrial products, oil and gas, construction and housing. The ultimate impact that COVID-19 will have 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 impact.

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 ~~virtually all~~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.

Table of Content s

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, wind energy turbine installations and active oil and gas drilling rigs.~~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 ~~4,200~~3,100 customers in approximately ~~100~~85 countries. Our global customers include large companies in their respective industries, such as ~~3M,~~ Akzo Nobel, BASF, ~~Bayer, Dow,~~Norbord, Louisiana Pacific, Monsanto, Owens Corning, PPG Industries, ~~Valspar~~Sherwin Williams and Weyerhaeuser.

~~Reportable Segments~~Sale of Phenolic Specialty Resins Business

~~Our business segments are~~On September 27, 2020, we entered into a definitive agreement (the “Purchase Agreement”) for the sale of our Phenolic Specialty Resins ("PSR"), Hexamine and European-based Forest Products Resins businesses (together with PSR, the “Held for Sale Business”) to Black Diamond Capital Management, LLC and Investindustrial (the “Buyers”) for a purchase price of approximately $425. The consideration consists of $335 in cash and certain assumed liabilities with the remainder in future contingent proceeds based on the ~~products that we offer and~~performance of the ~~markets that we serve. At~~ Held for Sale Business.

As of September 30, ~~2017~~,2020, we ~~had two reportable segments: Epoxy, Phenolic~~reclassified the assets and ~~Coating Resins~~liabilities of our Held for Sale Business as held for sale on the unaudited Condensed Consolidated Balance Sheets and ~~Forest Products Resins. A summary~~reported the results of the ~~major products~~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.

Unless otherwise noted, the tables and discussion below represent the Company’s continuing operations and excludes the Held for Sale Business.

Realignment of Reportable Segments in 2020

As part of our continuing efforts to drive growth and greater operating efficiencies, in January 2020, we changed our reporting segments to align around our two growth platforms: Adhesives; and Coatings and Composites. At September 30, 2020, we have three reportable segments, ~~follows:~~which consist of the following businesses:

~~Epoxy, Phenolic~~•Coatings and ~~Coating Resins:~~ ~~epoxy~~Composites: these businesses focus on the global coatings and composites market. They include our base and specialty ~~resins, phenolic encapsulated substrates, versatic acids and derivatives, basic~~ epoxy resins and ~~intermediates, phenolic specialty resins~~Versatic™ Acids and ~~molding compounds, polyester resins, acrylic resins~~Derivatives businesses.

•Corporate and ~~vinylic resins~~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.

In this quarterly report on form 10-Q, we have recast our Net Sales and Segment EBITDA by reportable segment, for the comparable Successor period July 2, 2019 through September 30, 2019 and for the Predecessor periods July 1, 2019 and January 1, 2019 through July 1, 2019 to reflect the new reportable segments.

Fresh Start Accounting

As a result of the Company’s reorganization and emergence from Chapter 11 on the Effective Date, we applied fresh start accounting to our financial statements, which resulted in a new basis of accounting and we became a new entity for financial reporting purposes. As a result of the application of fresh start accounting and the effects of the implementation of the Plan, the Condensed Consolidated Financial Statements after the Effective Date are not comparable with the Condensed Consolidated Financial Statements prior to that date. References to “Successor” or “Successor Company” relate to the financial position and results of operations of the Company after 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.

Table of Content s

Financial Results Summary

~~Forest Products Resins:~~ ~~forest products resins~~ Our financial results for the period from January 1, 2019 through July 1, 2019 are referred to as those of the “Predecessor” period. Our financial results for the period from July 2, 2019 through September 30, 2019 are referred to as those of the “Successor” period. Our results of operations as reported in our Condensed Consolidated Financial Statements for these periods are prepared in accordance with U.S. GAAP, which requires that we report on our results for the period from January 1, 2019 through July 1, 2019 and ~~formaldehyde applications~~

the period from July 2, 2019 through September 30, 2019 separately.

~~2017~~ We do not believe that reviewing the results of these periods in isolation would be useful in identifying any trends in or reaching any conclusions regarding our overall operating performance. Management believes that the key performance metrics such as Net sales, Operating income and Segment EBITDA for the Successor period when combined with the Predecessor period provides more meaningful comparisons to other periods and are useful in identifying current business trends. Accordingly, in addition to presenting our results of operations as reported in our Condensed Consolidated Financial Statements in accordance with U.S. GAAP, the tables and discussions below also present the combined results for the three months and nine months ended September 30, 2019.

The combined results (referenced as “Non-GAAP Combined” or “Combined”) for the third quarter ended September 30, 2019 and first nine months ended September 30, 2019, which we refer to herein as results for the “Three Months Ended September 30, 2019” and “Nine Months Ended September 30, 2019” represent the sum of the reported amounts for the Predecessor period July 1, 2019 combined with the Successor period from July 2, 2019 through September 30, 2019 and the Predecessor period from January 1, 2019 through July 1, 2019 combined with the Successor period from July 2, 2019 through September 30, 2019, respectively. These Combined results are not considered to be prepared in accordance with U.S. GAAP and have not been prepared as pro forma results under applicable regulations. The Non-GAAP Combined operating results is presented for supplemental purposes only, may not reflect the actual results we would have achieved absent our emergence from bankruptcy, may not be indicative of future results and should not be viewed as a substitute for the financial results of the Predecessor period and Successor period presented in accordance with U.S. GAAP.

2020 Overview

Following are highlights from our results of continuing operations for the nine months ended September 30, ~~2017~~2020 and ~~2016:~~2019:


	Successor				Predecessor		Non-GAAP Combined
	Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019		$ Change		% Change
Statements of Operations:
Net sales	$	1,855	$	693	$	1,481	$	2,174	$	(319)	(15)	%
Operating (loss) income	(54)		(18)		68		$	50	(104)		(208)	%
(Loss) income before income tax	(118)		(50)		2,960		$	2,910	(3,028)		104	%
Net (loss) income from continuing operations	(124)		(44)		2,760		$	2,716	(2,840)		105	%
Segment EBITDA:
Adhesives	$	156	$	59	$	135	$	194	$	(38)	(20)	%
Coatings and Composites	115		44		96		$	140	(25)		(18)	%
Corporate and Other	(51)		(17)		(30)		$	(47)	(4)		(9)	%
Total	$	220	$	86	$	201	$	287	$	(67)	(23)	%

2017 2016 $ Change % Change
Statements of Operations:
Net sales $ 2,696
$ 2,680
$ 16
1 %
Gross profit 384
323
61
19 %
Operating income 113
280
(167 ) (60 )%
(Loss) income before income tax (133 ) 91
(224 ) 246 %
Net (loss) income (146 ) 59
(205 ) 347 %
Segment EBITDA:
Epoxy, Phenolic and Coating Resins $ 143
$ 230
$ (87 ) (38 )%
Forest Products Resins 195
184
11
6 %
Corporate and Other (47 ) (50 ) 3
6 %
Total $ 291
$ 364
$ (73 ) (20 )%

•Net Sales—~~Net sales in~~In the first nine months of ~~2017 were $2.7 billion, an increase of 1%~~2020, net sales decreased by $319, or 15%, compared ~~with~~to the first nine months of ~~2016. Excluding $185~~2019. COVID-19’s global impact on demand across various industries and markets was the main driver of the decrease in net sales. Volumes negatively impacted net sales by $133, which was primarily related to volume decreases in our North American resins and formaldehyde businesses due to weaker demand and in our base epoxy businesses due to overall weakness in the ~~first nine months of 2016 from our divested Performance Adhesives, Powder Coatings, Additives & Acrylic Coatings~~market, primarily in the automotive and ~~Monomers businesses (“PAC Business”), net sales increased by 8%. These increases were driven by pricing, which positively~~construction industries. Pricing negatively impacted sales by ~~$127~~$151 due ~~largely~~ to raw material ~~price increases~~decreases contractually passed through to customers across many of our businesses, partially offset by competitive pricing pressures in our epoxy specialty business. Overall, volumes positively impacted net sales by $73 driven by strong market demand in our North American formaldehyde business, as well as ~~the additional capacity from our new formaldehyde plants. Additionally, volumes increased in our North American forest products resins business due to modest growth in the U.S. housing~~unfavorable product mix and continued competitive market ~~and~~conditions in our base epoxy resins business as it continues to recover from cyclical trough conditions. These increases were partially offset by volume decreases in our epoxy specialty business driven by an ongoing destocking of wind blades in China. The impact of foreign exchangebusiness. Foreign currency translation ~~positively~~negatively impacted net sales by ~~$1 as~~$35 due to the ~~strengthening~~weakening of ~~the Brazilian real~~various foreign currencies against the U.S. dollar ~~was largely offset by the strengthening of the U.S. dollar against the euro and Chinese yuan~~ in the first nine months of ~~2017~~2020 compared to the first nine months of ~~2016.~~2019.

Table of Content s

•Net Loss—~~Net~~In the first nine months of 2020, net loss from continuing operations increased by $2,840 as compared to the first nine months of2019. This increase in net loss was mainly driven by a net gain of $2,970 of reorganization items incurred in the first nine months of ~~2017~~2019 as a result of the restructuring of our debt through our Chapter 11 proceedings. The increase was ~~$146,~~also driven by a reduction in operating income of $104, primarily related to an increase of $52 in depreciation and amortization expense related to the step up of our fixed and intangible assets as a result of the application of fresh-start accounting, $16 of asset impairments in our oilfield and phenolic specialty resins businesses in the first quarter 2020, a $31 increase in business realignment costs driven by higher severance expenses related to current cost reduction actions and a decrease in gross profit due primarily to the impacts of COVID-19 on volumes in our businesses. These were partially offset by a reduction in interest expense of $41 as a result of the restructuring of our debt through our Chapter 11 proceedings.

•Segment EBITDA—For the first nine months of 2020, Segment EBITDA was $220, a decrease of ~~$205 as~~23% compared with ~~net income of $59~~$287 in the first nine months of ~~2016.~~2019. This decrease was primarily ~~driven~~due to the impacts of COVID-19 on volumes in our businesses, most notably in our base epoxy resins and forest products resins businesses. We also experienced a temporary manufacturing outage at our Pernis site, which negatively impacted our 2020 Segment EBITDA by ~~the absence of gains on the disposition of~~approximately $8. Additionally, our ~~PAC Business~~Corporate and HA-International, LLC (“HAI”) joint venture interest of $240 and gains on debt buybacks of $47 that positively impacted the first nine months of 2016. These decreases to net loss were partially offset by increased gross margin and decreased business realignment costs. Higher gross margin is primarily driven by a reduction in accelerated depreciation of $113 related to our Norco, LA facility closure that occurred in 2016, partially offset by the absence of gross margin from our divested PAC Business in 2017 results. Lower business realignment costs are largely attributable to approximately $23 of costsOther charges in the first nine months of ~~2016 related~~2020 increased by $4 compared to ~~the Norco, LA facility closure that did not recur in 2017.~~

~~Segment EBITDA—For~~ the first nine months of ~~2017,~~2019 due primarily to the impact of termination of our Shared Services Agreement with MPM. These Segment EBITDA was $291, a decrease of 20% compared with $364 in the first nine months of 2016. Excluding Segment EBITDA of $30 in the first nine months of 2016 from our divested PAC Business and HAI joint venture, Segment EBITDA decreaseddecreases were partially offset by ~~13%. This decrease was primarily driven by volume decreases and margin compression~~favorability in our specialty epoxy business ~~discussed above, $13 of insurance recoveries received~~driven by strong global demand in the first nine months of 2016 in our versatic acids business that did not recur in 2017 and $6 of negative impact related to the hurricanes that occurred in the U.S. during the third quarter of 2017. These decreases were partially offset by volume increases in our North American formaldehyde business discussed above, as well as continued cost efficiencies associated with our new North American formaldehyde plants. Additionally, year over year improvements in our oilfield and base epoxy resins businesses positively impacted Segment EBITDA, as both of these businesses continue to recover from cyclical trough conditions.

wind energy.

•Restructuring and Cost Reduction ~~Programs—~~In November 2017, we initiated new cost reduction programs that will be finalized in the first half of 2018. We expect these programs to generate approximately $40 of annual savings once fully implemented. Activities—During the first nine months of ~~2017,~~2020, we ~~have~~ achieved ~~$20~~$19 in cost savings related to our ~~ongoing productivity and~~ cost reduction ~~programs. With~~activities. These activities include certain in-process facility rationalizations and the ~~addition~~creation of a business service group within the ~~new programs discussed above,~~Company to provide certain administrative functions for us going forward. Overall we have ~~a total of approximately $54~~$8 of in-process cost savings related to these activities, which we expect to ~~achieve in~~realize over the next 12 ~~to 18~~ months.

~~Growth Initiatives—~~Our new North American formaldehyde plants, the last of which was completed in the first quarter of 2016, have provided us with additional capacity to support expected long-term growth in this business and has helped drive improved results in 2017. In addition, we continue to focus on new product development and have taken steps to improve our analytical and product development services for our global grid, such as the recently completed expansion of our technology center in Edmonton. Further, we continue to invest in new coatings technologies and capacity in response to recent volatile organic compounds regulation in China.

~~2017 Refinancing Transactions—~~In February 2017, we issued $485 aggregate principal amount of New First Lien Notes and $225 aggregate principal amount of New Senior Secured Notes. We used the net proceeds from these notes, together with cash on our balance sheet, to redeem all of our outstanding Old Senior Secured Notes. In May 2017, we issued an additional $75 aggregate principal amount of New First Lien Notes. We also amended and restated our ABL Facility, which effectively extended the maturity date of the facility from March 2018 to December 2021 and reduced the existing commitments under the facility from $400 to $350.

Short-term Outlook

We ~~expect strong market demand combined with the incremental capacity created by our new formaldehyde plants in North America to~~ continue to ~~drive~~expect negative COVID-19 volume ~~increases~~impacts to challenge our business results in ~~our North American formaldehyde business for~~certain end markets throughout the remainder of ~~2017~~2020 and into ~~2018. Additionally,~~2021. While our businesses have been designated by many governments as essential businesses which has allowed our operations to continue during the pandemic, we saw weak economic conditions begin to develop in the latter half of March 2020 and through the second quarter, specifically within automotive and certain industrial markets. We saw sequential improvement in the third quarter in many of the industries in which our businesses operate, but overall volumes remain below historical levels. We expect these weaknesses and overall lower global economic demand caused by COVID-19 to negatively impact our sales and profitability results through the remainder of 2020 and into 2021. The ultimate impact that COVID-19 will have on our operating results will depend on the overall severity and duration of the COVID-19 pandemic and actions to contain the virus or treat its impact.

Within our Coatings and Composites segment, despite overall economic headwinds driven by COVID-19, we continue to expect ~~improved demand~~our epoxy specialty business to benefit from government supported investment in the China wind energy market through the remainder of the year, as well as a strong overall global wind energy market. We expect competitive market conditions in our base epoxy business to continue through the remainder of 2020 and into 2021.

Within our Adhesives segment, we anticipate improvement in Segment EBITDA within our North American forest products resins business ~~due to ongoing modest growth~~in the fourth quarter 2020 and into 2021 based on the latest expectations in U.S. housing ~~starts.~~

~~We expect demand in our epoxy specialty business to remain below historical levels during~~starts, remodeling and ongoing macroeconomic recovery from the ~~remainder of 2017 due to softness in the China wind energy market, although demand is expected to improve in the first half of 2018.~~COVID-19 pandemic. We also expect ~~this~~that continued economic recovery will positively impact our North American formaldehyde business in the fourth quarter of 2020 and into 2021.

We also anticipate that our businesses will continue to benefit from ~~significant improvements in market demand for waterborne coatings over~~ the ~~next few years, primarily in China. Additionally, we expect our phenolic resins business to benefit from cost reductions~~savings associated with our ~~ongoing grid optimization efforts in Germany. Further,~~restructuring and cost reduction initiatives. In addition, we ~~anticipate volumes in our versatic acid and derivatives business~~expect lower raw material costs to continue to ~~improve due to ongoing volume recovery~~positively impact results across many of our businesses. Further, we are in the process of implementing various efficiency initiatives, which include process improvement and ~~favorable market conditions. We also expect modest year over year improvement~~other productivity projects. Lastly, despite the prevailing economic headwinds, the benefits of our new capital structure and decreasing working capital will have a positive impact on free cash flow in ~~our oilfield business through 2017~~2020 and into 2018 due to increased drilling activity. Lastly, we expect our base epoxy business to continue to improve in the remainder of 2017 and into 2018 due to our restructuring initiatives and favorable market conditions.

~~We expect raw material prices to stabilize through the remainder of 2017 and into 2018, following large increases in the first nine months of 2017.~~2021.

Matters Impacting Comparability of Results

~~Dispositions of PAC Business~~Chapter 11 Bankruptcy and ~~HAI Joint Venture Interest~~Fresh Start Accounting Impacts

~~During the second quarter of 2016, we completed the sales of both our PAC Business and our 50% interest in the HAI joint venture.~~ As a result ~~when comparing 2017~~of the emerging from Chapter 11 and qualifying for the application of fresh-start accounting, at the Effective Date, our assets and liabilities were recorded at their estimated fair values which, in some cases, are significantly different than amounts included in our financial statements prior to ~~2016,~~the Effective Date. Accordingly, our 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. The total amount of reorganization and fresh start adjustments, as well as incremental costs incurred related to our Bankruptcy Petitions incurred while we were in bankruptcy resulted in a total gain of $2,970 for our continuing operations, which is classified within “Reorganization items, net” in the ~~first~~unaudited Condensed Consolidated Statements of Operations.

Table of Content s

In addition, we incurred costs related to our Chapter 11 proceedings both prior to filing for bankruptcy and post-emergence, which are not classified within “Reorganization items, net” as these costs were not incurred while in bankruptcy. These costs were $4 and $27 for the three and nine months ~~of 2017 exclude these divested businesses, while our results~~ended September 30, 2019, respectively, and are classified within “Selling, general and administrative expense” in the ~~first nine months~~unaudited Condensed Consolidated Statements of 2016 include net sales of $185 and Segment EBITDA of $30 related to these divested businesses. Additionally, in the first nine months of 2016 we recorded a gain of $240 on the disposition of these businesses.Operations.

Raw Material Prices

Raw materials comprise approximately ~~70%~~75% of our cost of ~~sales.~~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. ~~The average price of phenol, methanol, and urea increased by approximately 16%, 56%, and 2% respectively, in~~In the first nine months of ~~2017~~2020 compared to the first nine months of ~~2016.~~2019, the average price of phenol, urea and methanol decreased by approximately 10%, 9% and 21%, respectively. The impact of passing through raw material price changes to customers can result in significant variances in sales comparisons from year to year.

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.

Other Comprehensive ~~Income~~Loss

Our other comprehensive ~~income~~loss is ~~significantly~~primarily impacted by foreign currency ~~translation and, to a lesser extent, impacted by defined benefit pension and postretirement benefit adjustments.~~translation. 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 nine months of 2020. 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 ~~Chinese yuan~~ and Australian dollar.

In 2019, we entered into an interest rate swap agreement to hedge interest rate variability caused by quarterly changes in cash flow due to associated changes in LIBOR under our Senior Secured Term Loan. This swap is designated as a cash flow hedge and the change in fair value was recorded in “Accumulated other comprehensive loss”.

The impact of defined benefit pension and postretirement benefit adjustments is primarily driven by unrecognized prior service cost related to our defined benefit and other non-pension postretirement benefit plans (“OPEB”), as well as the subsequent amortization of these amounts from accumulated other comprehensive income in periods following the initial recording of such ~~items.~~amounts. Upon the application of fresh start accounting, on the Effective Date, all prior unrecognized service cost within accumulated other comprehensive income related to our defined benefit pension and OPEB plans were reset in accordance with ASC 852.

Table of Content s

Results of Operations

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS


	Successor						Predecessor		Non-GAAP Combined
	Three Months Ended September 30, 2020				July 2, 2019 through September 30, 2019		July 1, 2019		Three Months Ended September 30, 2019

	$		% of Net Sales		$		$		$		% of Net Sales
Net sales	$	634	100	%	$	693	$	—	$	693	100	%
Cost of sales (exclusive of depreciation and amortization shown below)	500		79	%	586		—		586		85	%
Selling, general and administrative expense	56		9	%	61		—		61		9	%
Depreciation and amortization	47		7	%	48		—		48		7	%


Business realignment costs	19		3	%	12		—		12		2	%
Other operating expense, net	4		1	%	4		—		4		1	%
Operating income (loss)	8		1	%	(18)		—		(18)		(3)	%
Interest expense, net	25		4	%	28		—		28		4	%

Other non-operating (income) expense, net	(8)		(1)	%	4		—		4		1	%
Reorganization items, net	—		—	%	—		(3,126)		(3,126)		(451)	%
Total non-operating expense (income)	17		3	%	32		(3,126)		(3,094)		(446)	%
(Loss) income from continuing operations before income tax and earnings from unconsolidated entities	(9)		(1)	%	(50)		3,126		3,076		444	%
Income tax expense (benefit)	17		3	%	(5)		191		186		27	%
(Loss) income from continuing operations before earnings from unconsolidated entities	(26)		(4)	%	(45)		2,935		2,890		417	%
Earnings from unconsolidated entities, net of taxes	—		—	%	1		—		1		—	%
(Loss) income from continuing operations, net of taxes	(26)		(4)	%	(44)		2,935		2,891		417	%
(Loss) income from discontinued operations, net of taxes	(76)		(12)	%	1		119		120		17	%
Net (loss) income	(102)		(16)	%	(43)		3,054		3,011		434	%


Other comprehensive income (loss)	$	6			$	(16)	$	—	$	(16)

Three Months Ended September 30,
2017 2016
$ % of Net Sales $ % of Net Sales
Net sales $ 914
100 % $ 819
100 %
Cost of sales 783
86 % 680
83 %
Accelerated depreciation 14
2 % 21
3 %
Gross profit 117
12 % 118
14 %
Selling, general and administrative expense 75
8 % 69
8 %
Asset impairments 13
1 % —
— %
Business realignment costs (income) 10
1 % (3 ) — %
Other operating expense, net 1
— % 7
1 %
Operating income 18
2 % 45
5 %
Interest expense, net 82
9 % 76
9 %
Gain on extinguishment of debt —
— % (3 ) — %
Other non-operating (income) expense, net (3 ) — % 2
— %
Total non-operating expense 79
9 % 75
9 %
Loss before income tax and earnings from unconsolidated entities (61 ) (7 )% (30 ) (4 )%
Income tax expense 9
1 % 16
2 %
Loss before earnings from unconsolidated entities (70 ) (8 )% (46 ) (6 )%
Losses from unconsolidated entities, net of taxes —
— % (1 ) — %
Net loss $ (70 ) (8 )% $ (47 ) (6 )%
Other comprehensive income $ 10
$ 7

Three Months Ended September 30, ~~2017~~2020 vs. Three Months Ended September 30, ~~2016~~2019

Net Sales

In the third quarter of ~~2017,~~2020, net sales ~~increased~~decreased by ~~$95,~~$59, or ~~12%~~9%, compared to the third quarter of~~2016. Volume increases had a positive impact on~~2019. Volumes positively impacted net sales ~~of $43, which was primarily~~by $13, due to ~~year over year~~ volume ~~growth~~increases in our specialty epoxy and base epoxy resins ~~oilfield~~ businesses as ~~well as continued strong~~the market ~~demand~~recovers, offset by decreases in our North American ~~formaldehyde and forest products~~ resins ~~businesses.~~business due to overall weakness in the market, primarily in the construction industry. Pricing ~~positively~~negatively impacted sales by ~~$37~~$68 due ~~largely~~ to raw material ~~price increases~~decreases contractually passed through to customers across many of our businesses, ~~partially offset by~~as well as unfavorable product mix and continued competitive ~~pressures~~market conditions in our base epoxy ~~specialty and oilfield businesses.~~resins business. Foreign currency translation ~~positively~~negatively impacted net sales by ~~$15~~$4 due to ~~an overall strengthening~~weakening of various foreign currencies against the U.S. dollar in the third quarter of ~~2017~~2020 compared to the third quarter of ~~2016.~~

~~Gross Profit~~

In the third quarter of 2017, gross profit decreased by $1 compared to the third quarter of 2016. Gross profit as a percentage of net sales decreased by 2% primarily due to margin compression driven by the competitive pricing pressures discussed above, as well as unfavorable raw material price inflation during the third quarter of 2017. This impact was partially offset by a decrease in accelerated depreciation in the third quarter of 2017 as compared to the third quarter of 2016.2019.

Operating Income

In the third quarter of ~~2017,~~2020, operating income ~~decreased~~(loss) increased by ~~$27 compared to~~$26 from operating loss of $18 in the third quarter of ~~2016,~~2019 to operating income of $8 in the third quarter of 2020. This was primarily driven ~~primarily~~ by an ~~increases~~increase in gross margin due to the continued recovery of many of our businesses during the year, partially offset by an increase in business realignment costs of ~~$13, asset impairments of $13, selling, general and administrative expense of $6 and the decrease in gross profit of $1 discussed above.~~$7. The increase in business realignment costs is ~~largely attributable to a one-time reduction in the asset retirement obligation (“ARO”) liability of $11 that occurred in the third quarter of 2016~~driven by higher severance expenses related to the Norco plant closure. In the third quarter of 2017, a goodwill impairment of $13 was recognized as a result of the estimated fair value of our oilfield reporting unit being less than the carrying value of its net assets. The increase in selling, general and administrative expense was due primarily to $4 of insurance recoveries in the third quarter of 2016 related to the supplier disruption in our European versatic acids business. These overall decreases to operating income were partially offset by a decrease in other operating expense of $6 driven by a decrease in realized and unrealized foreign currency transaction losses.current cost reduction actions.

Non-Operating Expense

In the third quarter of ~~2017,~~2020, total non-operating expense ~~increased~~decreased by $4$15 compared to the third quarter of ~~2016.~~2019 (excluding the $3,126 of Reorganzation items, net gain as a result of the restructuring of our debt through our Chapter 11 proceedings). This was ~~primarily~~ due to ~~an increase~~a decrease in interest expense of ~~$6 driven by higher average debt levels and lower gains on debt extinguishment of~~ $3 due to ~~gains~~lower interest rates on our variable rate debt ~~buybacks in the third quarter of 2016 that did not recur in 2017, partially offset by~~and an increase of $5$12 in other non-operating income ~~due to increased~~driven by higher realized and unrealized foreign currency ~~transaction~~ gains.

Table of Content s

Income Tax Expense

The income tax expense (benefit) for the Successor three months ended September 30, 2020, July 2, 2019 through September 30, 2019 and the Predecessor period July 1, 2019 was $17, $(5) and $191 respectively. The income tax expense (benefit) relates primarily to losses and income from certain foreign operations as well as the impacts of reorganization adjustments and fresh start accounting. In 2020 and 2019, losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to the maintenance of a full valuation allowance.

The effective tax rate ~~was (15)% and (53)%~~ for the ~~third quarter of 2017~~three months ended September 30, 2020, July 2, 2019 through September 30, 2019 and ~~2016,~~the Predecessor period July 1, 2019 was (189)%, 10% and 6%, respectively. The change in the effective tax rate was primarily attributable to the amount and distribution of income and losses among the various jurisdictions in which we operate. The effective tax rates were also impacted by operating gains and losses generated in jurisdictions where no tax expense or benefit was recognized due to the maintenance of a full valuation allowance.

Other Comprehensive Income

For the third quarter of ~~2017~~2020, foreign currency translation positively impacted other comprehensive income by $7, due primarily to the strengthening of the euro against the U.S. dollar in the third quarter of 2020, partially offset by an unrealized loss of $1 on an interest rate swap designated as a cash flow hedge recorded to other comprehensive income.

For the third quarter of 2019, foreign currency translation negatively impacted other comprehensive loss by $16, due to an overall weakening of various foreign currencies against the U.S. dollar in the third quarter of 2019.


	Successor						Predecessor		Non-GAAP Combined
	Nine Months Ended September 30, 2020				July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019
	$		% of Net Sales		$		$		$		% of Net Sales
Net sales	$	1,855	100	%	$	693	$	1,481	$	2,174	100	%
Cost of sales (exclusive of depreciation and amortization shown below)	1,514		82	%	586		1,211		1,797		83	%
Selling, general and administrative expense	164		9	%	61		128		189		9	%
Depreciation and amortization	143		8	%	48		43		91		4	%

Asset impairments	16		1	%	—		—		—		—	%
Business realignment costs	57		3	%	12		14		26		1	%
Other operating expense, net	15		1	%	4		17		21		1	%
Operating (loss) income	(54)		(3)	%	(18)		68		50		2	%
Interest expense, net	76		4	%	28		89		117		5	%
Other non-operating (income) expense, net	(12)		(1)	%	4		(11)		(7)		—	%
Reorganization items, net	—		—	%	—		(2,970)		(2,970)		(137)	%
Total non-operating expense (income)	64		3	%	32		(2,892)		(2,860)		(132)	%
(Loss) income from continuing operations before income tax and earnings from unconsolidated entities	(118)		(6)	%	(50)		2,960		2,910		134	%
Income tax (benefit) expense	8		—	%	(5)		201		196		9	%
(Loss) income from continuing operations before earnings from unconsolidated entities	(126)		(7)	%	(45)		2,759		2,714		125	%
Earnings from unconsolidated entities, net of taxes	2		—	%	1		1		2		—	%
(Loss) income from continuing operations, net of taxes	(124)		(7)	%	(44)		2,760		2,716		125	%
(Loss) income from discontinued operations, net of taxes	(79)		(4)	%	1		135		136		6	%
Net (loss) income	(203)		(11)	%	(43)		2,895		2,852		131	%
Net income attributable to noncontrolling interest	—		—	%	—		(1)		(1)		—	%
Net (loss) income attributable to Hexion Inc.	$	(203)	(11)	%	$	(43)	$	2,894	$	2,851	131	%
Other comprehensive loss	$	(48)			$	(16)	$	(8)	$	(24)

Table of Content s

Nine Months Ended September 30, 2020 vs. Nine Months Ended September 30, 2019

Net Sales

In the first nine months of 2020, net sales decreased by $319, or 15%, compared to the first nine months of2019. Volume decreases in the second quarter of 2020 driven by COVID-19’s global economic impact across various industries and ~~2016,~~markets was the main driver of the decrease in net sales. Volumes negatively impacted net sales by $133 which was primarily related to volume decreases in our North American resins and formaldehyde businesses due to weaker demand and in our base epoxy businesses due to overall weakness in the market, primarily in the automotive and construction industries. Pricing negatively impacted sales by $151 due to raw material price decreases contractually passed through to customers across many of our businesses, as well as unfavorable product mix and continued competitive market conditions in our base epoxy resins business. Foreign currency translation negatively impacted net sales by $35 due to the weakening of various foreign currencies against the U.S. dollar in the first nine months of 2020 compared to the first months of 2019.

Operating (Loss) Income

In the first nine months of 2020, operating (loss) income decreased by $104 from operating income of $50 in the first nine months of 2019 to an operating loss of $54 in the first nine months of 2020. This decrease was driven by an increase of $52 in depreciation and amortization expense related to the step up of our fixed and intangible assets as a result of the application of fresh-start accounting, a $31 increase in business realignment costs driven by higher severance expenses related to current cost reduction actions, an increase in asset impairments of $16 due to an impairment charge in our oilfield and phenolic specialty resins businesses in the first quarter of 2020 and a decrease in gross profit due primarily to the impacts of COVID-19 on volumes in our businesses. These reductions to operating income were partially offset by a reduction in selling, general and administrative expense driven by $27 of costs related to our Chapter 11 proceedings incurred in the first nine months 2019 both prior to filing for bankruptcy and post-emergence.

Non-Operating Expense

In the first nine months of 2020, total non-operating expense increased by $2,924 from a non-operating income of $2,860 in the first nine months of2019 to a non-operating loss of $64 due primarily to $2,970 of reorganization gains related to our Chapter 11 proceedings in the first nine months of 2019. This increase in non-operating expense was partially offset by an increase of $5 in other non-operating income driven by higher realized and unrealized foreign currency gains and a decrease in interest expense of $41 as a result of the restructuring of our debt through our Chapter 11 proceedings.

Income Tax Expense

The income tax expense ~~relates primarily to~~(benefit) for the Successor nine months ended September 30, 2020, July 2, 2019 through September 30, 2019, and for the Predecessor period January 1, 2019 through July 1, 2019 was $8, $(5), and $201, respectively. The income tax expense (benefit) is comprised of tax expense on income and tax benefit on losses from certain foreign operations. In ~~2017,~~2020 and 2019, losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to the maintenance of a full valuation allowance. ~~In 2016, the income tax expense related to the gain on dispositions was substantially reduced by net operating loss utilization which was offset by a decrease to the respective valuation allowances.~~

~~Other Comprehensive Income~~

For the third quarter of 2017, foreign currency translation positively impacted other comprehensive income by $10, primarily due to an overall strengthening of various foreign currencies against the U.S. dollar in the third quarter of 2017.

~~For the third quarter of 2016, other comprehensive income of $7 relates to the positive impact of foreign currency, primarily due to the strengthening of the euro against the U.S. dollar.~~

Nine Months Ended September 30,
2017 2016
$ % of Net Sales $ % of Net Sales
Net sales $ 2,696
100 % $ 2,680
100 %
Cost of sales 2,298
85 % 2,230
83 %
Accelerated depreciation 14
1 % 127
5 %
Gross profit 384
14 % 323
12 %
Selling, general and administrative expense 227
8 % 235
9 %
Gain on dispositions —
— % (240 ) (9 )%
Asset impairments 13
— % —
— %
Business realignment costs 27
1 % 42
2 %
Other operating expense, net 4
— % 6
— %
Operating income 113
5 % 280
10 %
Interest expense, net 247
9 % 235
9 %
Loss (gain) on extinguishment of debt 3
— % (47 ) (2 )%
Other non-operating (income) expense, net (4 ) — % 1
— %
Total non-operating expense 246
9 % 189
7 %
(Loss) income before income tax and earnings from unconsolidated entities (133 ) (4 )% 91
3 %
Income tax expense 16
1 % 40
1 %
(Loss) income before earnings from unconsolidated entities (149 ) (5 )% 51
2 %
Earnings from unconsolidated entities, net of taxes 3
— % 8
— %
Net (loss) income $ (146 ) (5 )% $ 59
2 %
Other comprehensive income $ 25
$ 7

~~Nine Months Ended September 30, 2017 vs. Nine Months Ended September 30, 2016~~

~~Net Sales~~

~~In the first nine months of 2017, net sales increased by $16, or 1%, compared to the first nine months of~~2016. Excluding $185 of net sales in the first nine months of 2016 from our PAC Business that did not recur in 2017, net sales increased by 8%. Pricing positively impacted sales by $127 due largely to raw material price increases passed through to customers across many of our businesses, partially offset by competitive pressures in our epoxy specialty business. Volume increases positively impacted net sales by $73 driven by strong market demand in our North American formaldehyde business combined with the additional capacity from our new formaldehyde plants. Additionally, volumes increased in our North American forest products resins business due to modest growth in the U.S. housing market. Volumes also increased in our base epoxy resins and oilfield businesses as these businesses continue to recover from cyclical trough conditions. These increases were partially offset by volume decreases in our epoxy specialty business driven by an ongoing destocking of wind blades in China. Lastly, the impact of foreign exchange translation positively impacted net sales by $1 as the strengthening of the Brazilian real against the U.S. dollar was largely offset by the strengthening of the U.S. dollar against the euro and Chinese yuan in the first nine months of 2017 compared to the first nine months of 2016.

~~Gross Profit~~

In the first nine months of 2017, gross profit increased by $61 compared to the first nine months of 2016, primarily due to the absence of $127 of accelerated depreciation recorded in the first nine months of 2016 related to the closure of our Norco, LA facility. Gross profit as a percentage of net sales increased by 2%, primarily due to the impact of the accelerated depreciation discussed above, which had a negative impact of 5% on 2016 gross profit. This impact was partially offset by margin compression driven by the competitive pricing pressures discussed above, as well as unfavorable raw material price inflation during the first nine months of 2017.

~~Operating Income~~

In the first nine months of 2017, operating income decreased by $167 compared to the first nine months of 2016, primarily due to the gain on dispositions of $240 related to the sale of our PAC Business and HAI joint venture interest in 2016 that did not recur in 2017 and an increase in asset impairments of $13. These decreases to operating income was partially offset by the increase in gross profit of $61 discussed above, as well as decreases in business realignment costs of $15 and in selling, general and administrative expense of $8. The decrease in business realignment costs is largely attributable to costs in the first nine months of 2016 related to the Norco, LA facility closure that did not recur in 2017. In the first nine months of 2017, a goodwill impairment of $13 was recognized as a result of the estimated fair value of our oilfield reporting unit being less than the carrying value of its net assets. The decrease in selling, general and administrative expense was due primarily to lower compensation and benefits expense driven by our recent cost savings and productivity actions, as well as the sale of our PAC Business in the second quarter of 2016, partially offset by $14 of insurance recoveries in the first nine months of 2016 related to the supplier disruption in our European versatic acids business.

~~Non-Operating Expense~~

In the first nine months of 2017, total non-operating expense increased by $57 compared to the first nine months of 2016. This was primarily due to lower gains on debt extinguishment of $50 due to gains on debt buybacks in the first nine months of 2016 that did not recur in 2017 and an increase in interest expense of $12 driven by higher average debt levels, partially offset by an increase of $5 in other non-operating income due to increased realized and unrealized foreign currency transaction gains.

~~Income Tax Expense~~

The effective tax rate ~~was (12)% and 44%~~ for the ~~first~~Successor nine months ~~of 2017~~ended September 30, 2020, July 2, 2019 through September 30, 2019, and ~~2016,~~for the Predecessor period January 1, 2019 through July 1, 2019 was (7)%, 10%, and 7%, respectively. The change in the effective tax rate was primarily attributable to the amount and distribution of income and losses among the various jurisdictions in which we operate. The effective tax rates were also impacted by operating gains and losses generated in jurisdictions where no tax expense or benefit was recognized due to the maintenance of a full valuation allowance.

Other Comprehensive Loss

For the first nine months of 2017 and 2016, income tax expense relates primarily to income from certain foreign operations. In 2017, losses in the United States and certain foreign jurisdictions had no impact on income tax expense as no tax benefit was recognized due to the maintenance of a full valuation allowance. In 2016, the income tax expense related to the gain on dispositions was substantially reduced by net operating loss utilization which was offset by a decrease to the respective valuation allowances.

~~Other Comprehensive Income~~

~~For the first nine months of 2017,~~2020, foreign currency translation ~~positively~~negatively impacted other comprehensive ~~income~~loss by ~~$25, primarily~~$29, due to an overall ~~strengthening~~weakening of various foreign currencies against the U.S. dollar in the ~~third quarter of 2017.~~

~~For the~~ first nine months of ~~2016,~~2020 and an unrealized loss of $19 on an interest rate swap designated as a cash flow hedge recorded to other comprehensive ~~income~~loss.

For the first nine months of ~~$7 relates to $8 positive impact of~~2019, foreign currency ~~primarily~~translation negatively impacted other comprehensive loss by $24, due to ~~the strengthening~~an overall weakening of ~~the euro, Brazilian real and Canadian dollar~~various foreign currencies against the U.S. dollar ~~partially offset by $1~~in the first nine months of ~~amortization of prior service costs related to defined benefit pension and postretirement benefits.~~2019.

Results of Operations by Segment

Following are net sales and Segment EBITDA (earnings before interest, income taxes, depreciation and amortization) by reportable segment. Segment EBITDA is defined as EBITDA adjusted for certain non-cash items and other income and expenses. Segment EBITDA is the primary performance measure used by our senior management, the chief operating decision-maker and the ~~board~~Board of ~~directors~~Directors to evaluate operating results and allocate capital resources among segments. Segment EBITDA is also the profitability measure used to set management and executive incentive compensation goals. 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.

Table of Content s


	Three Months Ended September 30,						Nine Months Ended September 30,							Successor				Predecessor		Non-GAAP Combined
	2017			2016			2017			2016				Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Three Months Ended September 30, 2019
Net Sales ⁽¹⁾:													Net Sales (1):
Epoxy, Phenolic and Coating Resins	$	528		$	476		$	1,537		$	1,664
Forest Products Resins	386			343			1,159			1,016
Adhesives													Adhesives	$	293	$	361	$	—	$	361
Coatings and Composites													Coatings and Composites	341		$	332	—		332
Total	$	914		$	819		$	2,696		$	2,680		Total	$	634	$	693	$	—	$	693

Segment EBITDA:													Segment EBITDA:
Epoxy, Phenolic and Coating Resins	$	45		$	64		$	143		$	230
Forest Products Resins	66			65			195			184
Adhesives													Adhesives	$	58	$	59	$	18	$	77
Coatings and Composites													Coatings and Composites	50		44		—		44
Corporate and Other	(15		)	(17		)	(47		)	(50		)	Corporate and Other	(17)		(17)		—		(17)
Total	$	96		$	112		$	291		$	364		Total	$	91	$	86	$	18	$	104


	Successor		Successor		Predecessor		Non-GAAP Combined
	Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019
Net Sales (1):
Adhesives	$	874	$	361	$	761	$	1,122
Coatings and Composites	981		332		720		1,052
Total	$	1,855	$	693	$	1,481	$	2,174

Segment EBITDA:
Adhesives	$	156	$	59	$	135	$	194
Coatings and Composites	115		44		96		140
Corporate and Other	(51)		(17)		(30)		(47)
Total	$	220	$	86	$	201	$	287

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

Three Months Ended September 30, ~~2017~~2020 vs. Three Months Ended September 30, ~~2016~~2019 Segment Results

Following is an analysis of the percentage change in net sales by segment from the three months ended September 30, ~~2016~~2019 to the three months ended September 30, ~~2017:~~2020:


	Volume		Price/Mix		Currency Translation		Total
Adhesives	(8)	%	(8)	%	(3)	%	(19)	%
Coatings and Composites	13	%	(12)	%	2	%	3	%

Volume Price/Mix
Currency
Translation
Total
Epoxy, Phenolic and Coating Resins 7 % 2 % 2 % 11 %
Forest Products Resins 3 % 9 % 1 % 13 %
Adhesives

~~Epoxy, Phenolic and Coating Resins~~

Net sales in the third quarter of ~~2017 increased~~2020 decreased by ~~$52,~~$68, or ~~11%~~19%, when compared to the third quarter of ~~2016. Volume positively~~2019. Volumes negatively impacted net sales by ~~$32,~~$29, primarily ~~due to volume growth in~~driven by COVID-19’s global economic impact on our ~~base epoxy resins~~North American and ~~oilfield businesses. The impact of foreign exchange translation positively~~impacted net sales by $11, due primarily to the strengthening of the euro against the U.S. dollar, partially offset by the strengthening of the U.S. dollar against the Chinese yuan in the third quarter of 2017 compared to the third quarter of 2016.~~Lastly, pricing positively~~impacted net sales by $9 due primarily to raw material price increases passed through to customers across many of our businesses, partially offset by competitive pressures in our epoxy specialty and oilfield businesses.

Segment EBITDA in the third quarter of 2017 decreased by $19 to $45 compared to the third quarter of 2016. The decrease was primarily due to margin compression and volume decreases in our epoxy specialty business, $6 of negative impact related to the hurricanes that occurred in the U.S. during the third quarter of 2017 and $4 of insurance recoveries received in the third quarter of 2016 in our versatic acids business that did not recur in 2017. These decreases were partially offset by year over year improvements in our oilfield and base epoxyLatin American forest products resins businesses ~~as both continue to recover from cyclical trough conditions.~~

~~Forest Products Resins~~

~~Net sales in the third quarter of 2017 increased by $43, or 13%, when compared to the third quarter of 2016.~~and our North American formaldehyde business. Pricing ~~positively~~negatively impacted net sales by $28, which was primarily due to raw material price ~~increases~~decreases contractually passed through to customers across many of our businesses. ~~Volumes positively~~Foreign currency translation negatively impacted net sales by $11 and were primarily driven by strong market demand in our North American formaldehyde business combined with the additional capacity from our new formaldehyde plants. Additionally, volumes increased in our North American forest products resins businessmainly due to ~~modest growth in~~ the ~~U.S. housing market. Foreign exchange translation positively impacted net sales by $4 due to an overall~~ strengthening of the U.S dollar against various foreign currencies ~~against the U.S. dollar~~ in the third quarter of ~~2017~~2020 compared to the third quarter of ~~2016.~~2019.

Segment EBITDA in the third quarter of ~~2017 increased~~2020 decreased by ~~$1,~~$19, to ~~$66,~~$58, compared to the third quarter of ~~2016.~~2019. This decrease was was primarily driven by $18 of previously recorded deferred contract revenue that was accelerated as a result of the application of fresh start accounting in 2019, as well as the COVID-19 impacts on volumes in our forest products resins and formaldehyde businesses as discussed above.

Coatings and Composites

Net sales in the third quarter of 2020 increased by $9, or 3%, when compared to the third quarter of 2019. Volume increases in the third quarter of 2020 were driven by strong recovery in many of our businesses from COVID-19’s initial impact on the global economy. Volumes positively impacted net sales by $42, which was primarily related to volume increases in our specialty epoxy business driven by continued strong global demand in wind energy. Pricing negatively impacted net sales by $40, due to raw material decreases contractually

Table of Content s

passed through to customers across many of our businesses, as well as unfavorable product mix and continued competitive market conditions in our base epoxy resins business. Lastly, foreign currency translation positively impacted net sales by $7, due primarily to the weakening of the U.S. dollar against the euro and Chinese yuan third quarter of 2020 compared to the third quarter of 2019.

Segment EBITDA in the third quarter of 2020 increased by $6 to $50, compared to the third quarter of 2019. The increase was primarily due to ~~the volume increases~~favorability in our ~~North American formaldehyde discussed above, as well as continued cost efficiencies associated with~~specialty epoxy business driven by strong global demand in wind energy and strong market conditions in our ~~new North American formaldehyde plants.~~

versatic acids business related to architectural coatings and recovering automotive demand.

Corporate and Other

Corporate and Other is primarily corporate, general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions and unallocated foreign exchange gains and ~~losses and legacy company costs not allocated to continuing segments.~~losses. Corporate and Other charges in the third quarter of ~~2017 decreased by $2~~2020 remained flat compared to the third quarter of ~~2016 due primarily to~~2019 as lower compensation costs, travel expenses and savings associated with our ongoing cost ~~savings actions and lower incentive compensation accruals.~~reduction efforts were partially offset by the impact of termination of our Shared Services Agreement with MPM.

Nine Months Ended September 30, ~~2017~~2020 vs. Nine Months Ended September 30, ~~2016~~2019 Segment Results

Following is an analysis of the percentage change in net sales by segment from the nine months ended September 30, ~~2016~~2019 to the nine months ended September 30, ~~2017:~~2020:


	Volume		Price/Mix		Currency Translation		Total
Adhesives	(13)	%	(6)	%	(3)	%	(22)	%
Coatings and Composites	1	%	(8)	%	—	%	(7)	%

Volume Price/Mix
Currency
Translation
Impact of Dispositions Total
Epoxy, Phenolic and Coating Resins 2 % 2 % (1 )% (11 )% (8 )%
Forest Products Resins 4 % 9 % 1 % — % 14 %
Adhesives

~~Epoxy, Phenolic and Coating Resins~~

Net sales in the first nine months of ~~2017~~2020 decreased by ~~$127,~~$248, or 8%22%, when compared to the first nine months of ~~2016. The majority~~2019. Volume decreases in the first nine months of 2020 driven by COVID-19’s global economic impact across various industries and markets was the main driver for the decrease ~~is due to the disposition of our PAC Business~~ in ~~the second quarter of 2016, which~~net sales. Volumes negatively impacted net sales by ~~$185.~~$146, primarily related to volume reductions in our North American resins, Latin American resins and North American Formaldehyde businesses driven by overall weakness in the market, primarily in the construction industry. Pricing ~~positively~~negatively impacted net sales by ~~$39~~$70, primarily due ~~primarily~~ to raw material price ~~increases~~decreases contractually passed through to customers across many of our businesses. Lastly, foreign currency translation negatively impacted net sales by $32, due largely to the weakening of various foreign currencies against the U.S. dollar in the first nine months of 2020 compared to the first nine months of 2019.

Segment EBITDA in the first nine months of 2020 decreased by $38 to $156, when compared to the first nine months of 2019. This decrease was primarily driven by COVID-19 impacts on volumes in our forest products resins and formaldehyde businesses, as discussed above, as well as $18 of previously recorded deferred contract revenue that was accelerated as a result of the application of fresh start accounting in 2019.

Coatings and Composites

Net sales in the first nine months of 2020 decreased by $71, or 7%, when compared to the first nine months of 2019. Pricing negatively impacted net sales by $81 due to raw material decreases contractually passed through to customers across many of our businesses, ~~partially offset by~~as well as unfavorable product mix and continued competitive ~~pressures~~market conditions in our base epoxy resins and specialty ~~business.~~epoxy resins businesses. Volumes positively impacted net sales by ~~$28,~~$13, which was primarily due to volume ~~growth in our base epoxy resins and oilfield businesses, market driven volume~~ increases in our ~~phenolic resins~~specialty epoxy business ~~in North America and China and continued volume recovery in our European versatic acids business, partially offset by volume decreases in our epoxy specialty business largely~~ driven by ~~an ongoing destocking of~~continued strong global demand in wind ~~blades in China. Lastly, these~~energy. These increases were partially offset by ~~foreign exchange~~decreases in our base epoxy business driven by the impact of COVID-19 on overall market demand, primarily in the automotive and construction industries. Foreign currency translation ~~which~~ negativelyimpacted net sales by ~~$9,~~$3, due primarily to the ~~strengthening~~weakening of various foreign currencies against the U.S. dollar ~~against the euro and Chinese yuan~~ in the first ~~nine months~~half of ~~2017~~2020 compared to the first ~~nine months~~half of ~~2016.~~2019.

Segment EBITDA in the first nine months of ~~2017~~2020 decreased by ~~$87~~$25 to ~~$143~~$115 compared to the first nine months of ~~2016.~~2019. The ~~impact of the disposition of our PAC Business and HAI joint venture interest in the second quarter of 2016 contributed $30 to this decrease. The remaining~~ decrease was primarily due to ~~margin compression~~COVID-19 impacts and ~~volume decreases~~continued competitive market conditions in our base epoxy ~~specialty~~resins business, as well as a temporary manufacturing outage at our Pernis site, which negatively impacted our current year Segment EBITDA impact of $13 related to insurance recoveries received in the first nine months of 2016 in our versatic acids business that did not recur in 2017 and $6 of negative impact related to the hurricanes that occurred in the U.S. during the third quarter of 2017.by approximately $8. These Segment EBITDA decreases were partially offset by ~~improvements~~favorability in our ~~oilfield and base~~specialty epoxy ~~resins businesses, as both continue to recover from cyclical trough conditions.~~

~~Forest Products Resins~~

Net sales in the first nine months of 2017 increased by $143, or 14%, when compared to the first nine months of 2016. Pricing positively impacted net sales by $88, which was primarily due to raw material price increases passed through to customers across many of our businesses. Volumes positively impacted net sales by $45, and were primarilybusiness driven by strong ~~market~~global demand in ~~our North American formaldehyde business combined with the additional capacity from our new formaldehyde plants. Additionally, volumes increased~~wind energy and strong market conditions in our North American forest products resins business due to modest growth in the U.S. housing market. The impact of foreign exchange translation positively impacted net sales by $10, due largely to the strengthening of the Brazilian real against the U.S. dollar, partially offset by strengthening of the U.S. dollar against the euro in the first nine months of 2017 compared to the first nine months of 2016.

Segment EBITDA in the first nine months of 2017 increased by $11, to $195, compared to the first nine months of 2016. This increase was primarily due to the volume increases in our North American formaldehyde business discussed above, as well as continued cost efficiencies associated with our new North American formaldehyde plants.versatic acids business.

Corporate and Other

Corporate and Other is primarily corporate, general and administrative expenses that are not allocated to the other segments, such as shared service and administrative functions and unallocated foreign exchange gains and ~~losses and legacy company costs not allocated to continuing segments.~~losses. Corporate and Other charges in the first nine months of ~~2017 decreased~~2020 increased by $3$4 compared to the first nine months of ~~2016~~2019 due primarily to the impact of termination of our Shared Services Agreement with MPM, partially offset by savings associated with our ongoing cost ~~savings actions~~reduction efforts and lower ~~incentive~~ compensation ~~accruals.~~costs in 2020.

Table of Content s

Reconciliation of Net ~~(Loss) Income~~Loss to Segment EBITDA:


	Successor				Predecessor		Non-GAAP Combined
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Three Months Ended September 30, 2019
Reconciliation:
Net (loss) income attributable to Hexion Inc.	$	(102)	$	(43)	$	3,054	$	3,011

Less: Net (loss) income from discontinued operations	(76)		1		119		120
Net (loss) income from continuing operations	$	(26)	$	(44)	$	2,935	$	2,891
Income tax expense (benefit)	17		(5)		191		186
Interest expense, net	25		28		—		28
Depreciation and amortization	47		48		—		48

EBITDA	63		27		3,126		3,153
Adjustments to arrive at Segment EBITDA:

Business realignment costs (1)	$	19	$	12	$	—	$	12


Transaction costs (2)	1		5		—		5
Realized and unrealized foreign currency (gains) losses	(3)		9		—		9


Reorganization items, net (3)	—		—		(3,099)		(3,099)
Non-cash impact of inventory step-up (4)	—		27		(27)		—
Other non-cash items (5)	6		1		—		1
Other (6)	5		5		18		23
Total adjustments	28		59		(3,108)		(3,049)
Segment EBITDA	$	91	$	86	$	18	$	104

Segment EBITDA:
Adhesives	$	58	$	59	$	18	$	77
Coatings and Composites	50		44		—		44
Corporate and Other	(17)		(17)		—		(17)
Total	$	91	$	86	$	18	$	104

Three Months Ended September 30, Nine Months Ended September 30,
2017 2016 2017 2016
Reconciliation:
Net (loss) income $ (70 ) $ (47 ) $ (146 ) $ 59
Income tax expense 9
16
16
40
Interest expense, net 82
76
247
235
Depreciation and amortization 29
30
85
101
Accelerated depreciation 14
21
14
127
EBITDA $ 64
$ 96
$ 216
$ 562
Items not included in Segment EBITDA:
Business realignment costs (income) $ 10
$ (3 ) $ 27
$ 42
Gain on dispositions —
—
—
(240 )
Asset impairments 13
—
13
—
Realized and unrealized foreign currency (gains) losses (5 ) 6
(7 ) (3 )
(Gain) loss on extinguishment of debt —
(3 ) 3
(47 )
Other 14
16
39
50
Total adjustments 32
16
75
(198 )
Segment EBITDA $ 96
$ 112
$ 291
$ 364

Segment EBITDA:
Epoxy, Phenolic and Coating Resins $ 45
$ 64
$ 143
$ 230
Forest Products Resins 66
65
195
184
Corporate and Other (15 ) (17 ) (47 ) (50 )
Total $ 96
$ 112
$ 291
$ 364

(1)Business realignment costs for the Successor and Predecessor periods below included:

~~Items Not Included in Segment EBITDA~~


	Successor				Predecessor		Non-GAAP Combined
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Three Months Ended September 30, 2019
Severance costs	$	4	$	4	$	—	$	4
In-process facility rationalizations	5		3		—		3
Business services implementation	6		—		—		—
Legacy environmental reserves	4		4		—		4
Other	—		1		—		1

~~Not included in Segment EBITDA are certain non-cash items and other income and expenses.~~

(2)For the Successor three ~~and nine~~ months ended September 30, ~~2017 and 2016, these items primarily include expenses from retention programs and~~2020, transaction costs included certain professional fees related to strategic projects.

(3)Represents incremental costs incurred directly as a result of the Company’s Chapter 11 proceedings after the date of filing, gains on the settlement of liabilities under the Plan and the net impact of fresh start accounting adjustments. Excludes the ”Non-cash impact of inventory step-up” discussed below.

(4)Represents $27 of non-cash expense related to the step up of finished goods inventory on July 1 as part of fresh start accounting that was expensed in the successor period upon the sale of the inventory.

(5)Other non-cash items for the Successor and Predecessor periods presented below included:


	Successor				Predecessor		Non-GAAP Combined
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Three Months Ended September 30, 2019
Fixed asset write-offs	$	—	$	—	$	—	$	—
Stock-based compensation costs	4		5		—		5
Long-term retention programs	1		—		—		—
One-time capitalized variance impact of inventory fresh start step-up	—		(4)		—		(4)
Other	1		—		—		—

Table of Content s

(6)Other for Successor and Predecessor periods presented below included:


	Successor				Predecessor		Non-GAAP Combined
	Three Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		July 1, 2019		Three Months Ended September 30, 2019
Legacy expenses	$	2	$	4	$	—	$	4
IT outage (recoveries) costs, net	—		(1)		—		(1)
Management fees and other	3		2		—		2
Accelerated deferred revenue	—		—		18		18

Table of Content s


	Successor				Predecessor		Non-GAAP Combined
	Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019
Reconciliation:
Net (loss) income attributable to Hexion Inc.	$	(203)	$	(43)	$	2,894	$	2,851
Add: Net income attributable to noncontrolling interest	—		—		1		1
Less: Net (loss) income from discontinued operations	(79)		1		135		136
Net (loss) income from continuing operations	$	(124)	$	(44)	$	2,760	$	2,716
Income tax expense (benefit)	8		(5)		201		196
Interest expense, net	76		28		89		117
Depreciation and amortization (1)	143		48		43		91

EBITDA	103		27		3,093		3,120
Adjustments to arrive at Segment EBITDA:
Asset impairments	$	16	$	—	$	—	$	—
Business realignment costs (2)	57		12		14		26


Transaction costs (3)	4		5		26		31
Realized and unrealized foreign currency losses (gains)	2		9		(7)		2


Reorganization items, net (4)	—		—		(2,943)		(2,943)
Non-cash impact of inventory step-up (5)	—		27		(27)		—
Other non-cash items (6)	29		1		9		10
Other (7)	9		5		36		41
Total adjustments	117		59		(2,892)		(2,833)
Segment EBITDA	$	220	$	86	$	201	$	287

Segment EBITDA:
Adhesives	$	156	$	59	$	135	$	194
Coatings and Composites	115		44		96		140
Corporate and Other	(51)		(17)		(30)		(47)
Total	$	220	$	86	$	201	$	287

(1)For the nine months ended September 30, 2020, accelerated depreciation of $2 has been included in “Depreciation and amortization.”

(2)Business realignment costs for the ~~three~~Successor and Predecessor periods below included:


	Successor				Predecessor		Non-GAAP Combined
	Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019
Severance costs	$	15	$	4	$	8	$	12
In-process facility rationalizations	13		3		3		6
Business services implementation	17		—		—		—
Legacy environmental reserves	8		4		1		5
Other	4		1		2		3

(3)For the Successor nine months ended September 30, ~~2017 primarily include~~2020, transaction costs included certain professional fees related to ~~certain in-process facility rationalizations and cost reduction programs. Business realignment costs for~~strategic projects. For the ~~three and nine months ended~~Successor period from July 2, 2019 through September 30, ~~2016~~2019 and the Predecessor period from January 1, 2019 through July 1, 2019, transaction costs primarily ~~include costs~~included $4 and $23, respectively, of certain professional fees and other expenses related to the ~~planned facility rationalizations within~~Company’s Chapter 11 proceedings.

(4)Represents incremental costs incurred directly as a result of the ~~Epoxy, Phenolic~~Company’s Chapter 11 proceedings after the date of filing, gains on the settlement of liabilities under the Plan and ~~Coating Resins segment and costs~~the net impact of fresh start accounting adjustments. Excludes the ”Non-cash impact of inventory step-up” discussed below.

Table of Content s

(6)Other non-cash items for the Successor and Predecessor periods presented below included:


	Successor				Predecessor		Non-GAAP Combined
	Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019
Fixed asset write-offs	$	6	$	—	$	3	$	3
Stock-based compensation costs	13		5		—		5
Long-term retention programs	7		—		5		5
One-time capitalized variance impact of inventory fresh start step-up	—		(4)		—		(4)
Other	3		—		1		1

(7)Other for Successor and Predecessor periods presented below included:


	Successor				Predecessor		Non-GAAP Combined
	Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019
Legacy expenses	$	7	$	4	$	3	$	7
IT outage costs (recoveries), net	(4)		(1)		9		8
Management fees and other	6		2		6		8
Accelerated deferred revenue	—		—		18		18

Table of Content s

Liquidity and Capital Resources

We2020 Outlook

Following our emergence from our Chapter 11 proceedings, we believe we are ~~a highly leveraged company. Our primary sources of~~favorably positioned to fund our ongoing liquidity ~~are~~requirements for the foreseeable future through cash ~~flows~~ generated from operations, as well as available borrowings under our ABL Facility. The impact of the Plan on our capital structure resulted in a reduction of more than $200 in our annual debt service obligations and the additional liquidity from the Rights Offerings has provided operational and financial flexibility and allowed us to be well positioned to make strategic capital investments, leverage our leadership positions with both our customers and suppliers, optimize our portfolio and drive new growth programs.

As the impact of the COVID-19 pandemic on the global economy and our operations evolves, we will continue to assess our liquidity needs. We have taken a number of actions to mitigate the unfavorable liquidity impacts of the pandemic, including:

•Reducing our overall anticipated 2020 capital expenditures (including discontinued operations) to between $110 and $120;

•Continuing to focus on optimizing working capital, while rebuilding inventory as demand recovers;

•Reducing selling, general and administrative expense wherever possible, including travel and other discretionary spending items, as well as moving to a managed services model;

•Deferring $5 of certain tax payments to future years in conjunction with the CARES Act and tax relief measures in other jurisdictions where we operate.

Our short-term cash needs are expected to include funding operations as currently planned and we believe that we will be able to meet our liquidity needs over the next 12 months based on our current projections of cash flow from operations and borrowing availability under ~~the ABL Facility. Our primary liquidity requirements are interest, working capital and capital expenditures.~~

financing arrangements.

At September 30, ~~2017,~~2020, we had ~~$3,733~~$1,833 of outstanding debt and ~~$310~~$452 in liquidity consisting of the following:

•$~~100~~155 of unrestricted cash and cash equivalents (of which ~~$94~~$90 is maintained in foreign jurisdictions);

•$~~188~~230 of borrowings available under our ABL Facility ($350 borrowing base less ~~$124~~$67 of outstanding borrowings and ~~$38~~$53 of outstanding letters of credit); and

•$2267 of time drafts and borrowings available under credit facilities at certain international subsidiaries

During the third quarter 2020, we entered into a Purchase Agreement to sell our Phenolic Specialty Resins, Hexamine and European-based Forest Products Resins businesses. We expect to complete the transaction in the first quarter of 2021. We plan to use the proceeds from the transaction to reinvest in our businesses and to help reduce the absolute amount of our debt. We continue to explore options to optimize our portfolio.

Our net working capital (defined as accounts receivable and inventories less accounts payable) from continuing operations at September 30, ~~2017~~2020 and December 31, ~~2016~~2019 was ~~$485~~ $359and ~~$309,~~$320, respectively. A summary of the components of our net working capital as of September 30, ~~2017~~2020 and December 31, ~~2016~~2019 is as follows:


	September 30, 2020		% of LTM Net Sales		December 31, 2019		% of LTM Net Sales
Accounts receivable	$	363	15	%	$	316	11	%
Inventories	261		10	%	293		10	%
Accounts payable	(265)		(11)	%	(289)		(10)	%
Net working capital (1)	$	359	14	%	$	320	11	%

September 30, 2017 % of LTM Net Sales December 31, 2016
% of LTM Net Sales ⁽¹⁾
Accounts receivable $ 500
14 % $ 390

12 %
Inventories 332
10 % 287

9 %
Accounts payable (347 ) (10 )% (368 )
(11 )%
Net working capital $ 485
14 % $ 309
10 %


~~(1)~~	~~The percentage of LTM Net Sales at December 31, 2016 exclude net sales related to our PAC Business, which was sold on June 30, 2016.~~

(1)Management believes that this non-GAAP measure is useful supplemental information. This non-GAAP measure should be considered by the reader in addition to but not instead of, the financial statements prepared in accordance with GAAP.

The increase in net working capital of ~~$176~~$39 from December 31, ~~2016~~2019 was ~~primarily due to increases~~driven by an increase in accounts receivable of ~~$110~~$47 and a decrease in accounts payable of $24, partially offset by a decrease in inventory of ~~$45. Both of these increases were primarily the result of increased~~$32. The increase in accounts receivable was driven by higher volumes in the third quarter of ~~2017~~2020 as compared to the fourth quarter of ~~2016 due to market conditions and seasonality, as well as raw material price inflation. These increases to net working capital were partially offset by a~~2019, the decrease in accounts payable ~~of $21,~~was largely related to raw material price ~~inflation and the timing of vendor payments. To minimize the impact of seasonal changes~~decreases in net working capital on cash flows, we continue to review inventory safety stock levels, focus on accelerating receivable collections by offering incentives to customers to encourage early payment or through the sale of receivables at a discount and negotiate with vendors or enter into inventory financing arrangements to extend payment terms.

We periodically borrow from the ABL Facility to support our short-term liquidity requirements, particularly when net working capital requirements increase in response to the seasonality of our volumes. As of September 30, 2017, there were $124 of outstanding borrowings under the ABL Facility.

~~2017 Refinancing Transactions~~

In February 2017, we issued $485 aggregate principal amount of New First Lien Notes and $225 aggregate principal amount of New Senior Secured Notes. Upon the closing of these offerings, we used the net proceeds from these offerings, together with cash on our balance sheet, to redeem all of our outstanding 8.875% Senior Secured Notes due 2018 (the “Old Senior Secured Notes”), which occurred in March 2017.

~~In May 2017, we issued an additional $75 aggregate principal amount of New First Lien Notes at an issue price of 100.5%. These notes~~ ~~mature on February 1, 2022 and have substantially the same terms as the New First Lien Notes issued in February 2017.~~ ~~We used the net proceeds from these notes for general corporate purposes.~~

In December 2016, we amended and restated the ABL Facility, with modifications to, among other things, permit the refinancing of the Old Senior Secured Notes. In connection with the issuance of the new notes in February 2017, certain lenders under the ABL Facility provided extended revolving facility commitments in an aggregate principal amount of $350 with a maturity date of December 5, 2021 (subject to early maturity triggers), the existing commitments were terminated and the size of the ABL Facility was reduced from $400 to $350.

~~Short-Term Outlook~~

~~The following factors will impact cash flows for the remainder of 2017:~~

~~Interest and Income Taxes:~~ We expect cash outflows in 2017 related to interest payments on our debt of approximately $300, with the largest components being paid in the second and fourth quarters, and income tax payments between $15 and $25.

~~Capital Spending:~~ Capital spending in 2017 is expected to be between $100 and $110, a significant decrease from 2016 due to the completion of large strategic growth projects in 2016, as well as our recent divestitures and restructuring activities at certain facilities.

~~Working Capital:~~ In the first nine months of ~~2017, our net working capital increased by $176 due primarily to sequential volume increases, seasonality, inventory build for turnarounds~~2020 and ~~a weaker U.S. dollar. During~~timing of vendor payments and the ~~fourth quarter, we expect a~~ decrease in ~~net working capital, consistent with historical trends. We anticipate an overall increase in working capital in 2017, as compared to 2016.~~

We plan to fund these outflows with available cash and cash equivalents, cash from operations, available borrowings under our ABL Facility, as well as other liquidity actions. Based on our liquidity position as of September 30, 2017 and projections of operating cash flows, we expect to have sufficient liquidity to fund our operations for the next twelve months.

Historically, our liquidity position has been cyclical due to the timing of our interest payment obligations and seasonality of our volumes. We maintain normal commercial terms with our major vendors and customers. If certain of our commercial counterparties request changes to our terms it could put additional pressure on our liquidity position in certain times of the year.

We have $1.9 billion of First Priority Senior Secured Notes and $0.6 billion of Second Priority Notes maturing in 2020. Depending upon market, pricing and other conditions, including the current state of the high yield bond market, as well as our cash balances and available liquidity, we or our affiliates, may seek to acquire notes or other indebtedness of the Company through open market purchases, privately negotiated transactions, tender offers, redemption or otherwise, upon such terms and at such prices as we or our affiliates may determine (or as may be provided forinventories was driven by raw material price decreases in the ~~indentures governing the notes), for cash or other consideration. In addition, the Company may sell certain assets to raise additional funds for reducing debt.~~first nine months of 2020.

Table of Content s

Sources and Uses of Cash

Following are highlights from our unaudited Condensed Consolidated Statements of Cash ~~Flows:~~Flows for continuing operations:


								Successor				Predecessor		Non-GAAP Combined
	Nine Months Ended September 30,							Nine Months Ended September 30, 2020		July 2, 2019 through September 30, 2019		January 1, 2019 through July 1, 2019		Nine Months Ended September 30, 2019
	2017			2016
(Uses) sources of cash:							(Uses) sources of cash:
Operating activities	$	(205	)	$	(131	)	Operating activities	$	(11)	$	7	$	(163)	$	(156)
Investing activities	(81		)	223			Investing activities	(76)		(18)		(40)		(58)
Financing activities	202			(195		)	Financing activities	7		(17)		212		195
Effect of exchange rates on cash flow	5			1			Effect of exchange rates on cash flow	(2)		(3)		—		(3)
Net change in cash and cash equivalents	$	(79	)	$	(102	)	Net change in cash and cash equivalents	$	(82)	$	(31)	$	9	$	(22)

Operating Activities

In the ~~first~~ nine months ~~of 2017,~~ended September 30, 2020, operations used ~~$205~~$11 of cash. Net loss from continuing operations of ~~$146~~$124 included ~~$116~~$182 of net non-cash expense items, consisting of depreciation and amortization of ~~$85,~~$143, non-cash asset impairments ~~and accelerated depreciation~~ of ~~$27, amortization~~$16, non-cash stock based compensation expense of $13, a deferred ~~financing fees~~tax benefit of ~~$12~~$5 and loss on ~~debt extinguishment~~sale of ~~$3,~~assets of $7, partially offset by unrealized foreign currency ~~gains of $5, gains on sale of assets~~losses of $1 and ~~a deferred tax benefit~~other non-cash adjustments of $1. Net working capital used ~~$150,~~$38, which was ~~largely~~ driven by ~~increases~~an increase in accounts receivable and ~~inventories~~a decrease in accounts payable, partially offset by a decrease in inventory, due primarily to ~~volume increases related to market conditions and the seasonality of our businesses, as well as~~ raw material price ~~inflation.~~decreases. Changes in other assets and liabilities and income taxes payable used ~~$25~~$31 due to the timing of when items were expensed versus paid, which primarily included operating lease expense, interest expense, employee retention programs, ~~restructuring reserves,~~ incentive compensation, pension plan contributions and taxes. In the nine months ended September 30, 2020, we contributed $23 to our defined benefit international pension plans in excess of our pension expense.

In the ~~first~~ nine months ~~of 2016,~~ended September 30, 2019, operations used ~~$131~~$156 of cash. Net income from continuing operations of ~~$59~~$2,716 included ~~$93~~$2,794 of net non-cash income ~~items, primarily~~items. consisting of ~~gains on dispositions of $240~~$3,020 related to ~~the HAI and PAC dispositions, a gain on debt extinguishment of $47 and~~our reorganization, unrealized foreign currency gains of ~~$40. These items were~~$1, and other non-cash adjustments of $3, partially offset by deferred tax expense of $132, depreciation and amortization of ~~$101, accelerated depreciation~~$91, non-cash stock based compensation expense of ~~$127~~$4 and $3loss on the sale of ~~deferred tax expense.~~assets of $3. Net working capital used ~~$155,~~$129, which was largely driven by increases in accounts receivable ~~and inventories~~due primarily to seasonality of our businesses, and decreases in accounts payable ~~in the first nine months of 2016, due primarily~~related to ~~the seasonality of our businesses and the~~ timing of vendor ~~payments.~~payments, primarily as a result of our Chapter 11 proceedings. Changes in other assets and liabilities and income taxes payable provided ~~$58~~$51 due to the timing of when items were expensed versus paid, which primarily included operating lease expense, interest expense, employee retention programs, ~~restructuring reserves,~~ incentive compensation, pension plan contributions and taxes.

Investing Activities

In the ~~first~~ nine months ~~of 2017,~~ended September 30, 2020, investing activities used ~~$81~~$76 of cash primarily ~~driven by~~related to capital expenditures of ~~$87 (including capitalized interest),~~$78, partially offset by ~~net~~ proceeds from ~~the~~ sale of assets of ~~$5 and an increase in restricted~~$2.

In the nine months ended September 30, 2019, investing activities used $58 of cash primarily related to capital expenditures of $59, partially offset by proceeds from sale of assets of $1.

In the first nine months of 2016, investing activities provided $223 of cash, primarily driven by net cash proceeds of $326 related to the HAI and PAC dispositions and cash received on the HAI buyer’s note. These items were partially offset by capital expenditures (including capitalized interest) of $92 and an increase in restricted cash of $11.

Financing Activities

In the ~~first~~ nine months ~~of 2017,~~ended September 30, 2020, financing activities provided ~~$202~~$7 of cash. Net short-term debt borrowings were ~~$15~~$25 and net long-term debt borrowings were ~~$212.~~$42. Our long-term debt borrowings primarily consisted of ~~$124 in~~$67 of ABL borrowings under our ABL Facility, the refinancing of our Old Senior Secured Notes in February 2017, an additional $75 aggregate principal amount of New First Lien Notes issued in May 2017 and $23 related to the sale-leaseback financing of certain equipment at a plant within our Forest Products Resins segment that occurred in the ~~third~~first quarter of ~~2017.~~2020. The Company distributed a $10 affiliate loan to its Parent which was used for share repurchases, which was subsequently settled with a return of capital.

In the ~~first~~ nine months ~~of 2016,~~ended September 30, 2019, financing activities ~~used~~provided $195 of cash. Net short-term debt ~~repayments~~borrowings were ~~$13 and~~$10, net long-term debt ~~repayments~~borrowings were ~~$182.~~$43, proceeds received from the rights offering were $300 and payment of $138 of financing fees. Our long-term debt ~~repayments~~borrowings primarily consisted of ~~$187 used to repurchase a portion of~~the proceeds from our ~~8.875%~~new Senior Secured Term loans and Senior Notes, ~~due 2018 on~~offset by the ~~open market.~~

debt repayments made as part of the Plan.

There are certain restrictions on the ability of certain of our subsidiaries to transfer funds to Hexion Inc. in the form of cash dividends, loans or otherwise, which primarily arise as a result of certain foreign government regulations or as a result of restrictions within certain subsidiaries’ financing agreements limiting such transfers to the amounts of available earnings and profits or otherwise limit the amount of dividends that can be distributed. In either case, we have alternative methods to obtain cash from these subsidiaries in the form of intercompany loans and/or returns of capital in such instances where payment of dividends is limited to the extent of earnings and profits.

Table of Content s

Covenant Compliance

New Credit Facilities and Senior Notes

The instruments that govern our indebtedness contain, among other provisions, restrictive covenants (and incurrence tests in certain cases) regarding indebtedness, dividends and distributions, mergers and acquisitions, asset sales, affiliate transactions, capital expenditures and, in the case of our ABL Facility, the maintenance of a financial ratio (depending on certain conditions). Payment of borrowings under the ABL Facility and our notes may be accelerated if there is an event of default as determined under the governing debt instrument. Events of default under the credit agreement governing our ABL Facility includes the failure to pay principal and interest when due, a material breach of representations or warranties, ~~most covenant defaults,~~ events of bankruptcy, ~~and~~ a change of ~~control.~~control, and most covenant defaults. Events of default under the indentures governing our notes include the failure to pay principal and interest, a failure to comply with covenants, subject to a 30-day grace period in certain instances, and certain events of bankruptcy.

The ~~indentures~~indenture that ~~govern~~governs our ~~6.625% First-Priority~~7.875% Senior ~~Secured~~ Notes ~~10.00% First Lien Notes, New First Lien Notes, New Senior Secured Notes and 9.00% Second-Priority Senior Secured Notes~~due 2027 (the ~~“Secured Indentures”~~“Indenture”) ~~contain an Adjusted~~contains a Pro Forma 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 we are unable to meet this ratio (measured on a last twelve months, or LTM, basis) of at least 2.0:1. The ~~Adjusted~~Pro Forma EBITDA to Fixed Charges Ratio under the ~~Secured Indentures~~Indenture is generally defined as the ratio of (a) ~~Adjusted~~Pro Forma EBITDA to (b) net interest expense excluding the amortization or write-off of deferred financing costs, each measured on an LTM basis. See below for our Pro Forma EBITDA to Fixed Charges Ratio calculation.

~~The~~Our ABL Facility, which is subject to a borrowing base, 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 our availability under the ABL Facility at any time is less than the greater of (a) ~~$35~~$30 and (b) ~~12.5%~~10.0% 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~~Pro Forma 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 September 30, 2017, our availability under~~for the ~~ABL Facility exceeded such levels; therefore, the minimum fixed charge covenant ratio did not apply. As~~four most recent quarters for which financial statements have been delivered.

Reconciliation of ~~September 30, 2017, we were in compliance with all covenants that govern the ABL Facility. We do not believe that a covenant default under the ABL Facility is reasonably likely~~Last Twelve Months Net Income to ~~occur in the foreseeable future.~~Pro Forma EBITDA

~~Adjusted~~Pro Forma 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 we are highly leveraged, we~~We believe that including the supplemental adjustments that are made to calculate ~~Adjusted~~Pro Forma EBITDA provides additional information to investors about our ability to comply with our financial covenants and to obtain additional debt in the future. ~~Adjusted~~Pro Forma EBITDA and Fixed Charges are not defined terms under U.S. GAAP. ~~Adjusted~~Pro Forma EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. Additionally, 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 we use 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~~Indenture should not be considered an alternative to interest expense.

~~Reconciliation~~

Table of ~~Net Loss to Adjusted EBITDA~~ Content s

The following table reconciles net loss to EBITDA and ~~Adjusted~~Pro Forma EBITDA from continuing operations for the twelve month period, and calculates the ratio of ~~Adjusted~~Pro Forma EBITDA to Fixed Charges as calculated under our ~~Secured Indentures~~Indenture for the period presented:

September 30, 2017
LTM Period
Net loss $ (244 )
Income tax expense 13
Interest expense, net 323
Depreciation and amortization 115
Accelerated depreciation 16
EBITDA 223
Adjustments to EBITDA:
Asset impairments 13
Business realignment costs ⁽¹⁾
41
Realized and unrealized foreign currency gains (15 )
Loss on extinguishment of debt 1
Unrealized loss on pension and postretirement benefits ⁽²⁾
34
Other ⁽³⁾
73
Cost reduction programs savings ⁽⁴⁾
54
Adjusted EBITDA $ 424
Pro forma fixed charges ⁽⁵⁾
$ 313
Ratio of Adjusted EBITDA to Fixed Charges ⁽⁶⁾
1.35


	September 30, 2020
	LTM Period
Net loss	$	(248)
Net loss from discontinued operations	(72)
Net loss from continuing operations	(176)
Income tax expense	8
Interest expense, net	103
Depreciation and amortization	187

~~(1)~~EBITDA	122
Adjustments to arrive at Pro Forma EBITDA:
Asset impairments	16
~~Primarily represents~~ ~~headcount reduction expenses~~Business realignment costs (1)	68
Realized and ~~plant rationalization~~unrealized foreign currency gains	(3)
Unrealized losses on pension and postretirement benefits (2)	5
Transaction costs ~~related to cost reduction programs, termination costs and other costs associated with business realignments, as well as environmental liabilities related to closed sites.~~(3)	10


~~(2)~~			~~Represents~~
Other non-cash ~~losses resulting from pension and postretirement benefit plan liability remeasurements.~~items (4)			38


~~(3)~~ Other (5)			~~Primarily includes~~ ~~employee~~ ~~retention program costs, certain professional fees~~ ~~related to strategic projects and legacy sites,~~ ~~business optimization expenses and management fees.~~

21
~~(4)~~			~~Represents pro forma impact of in-process cost~~ 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 LTM period. The savings are calculated based on actual costs of exiting headcount and elimination or reduction of site costs.(6)

8
~~(5)~~Pro Forma EBITDA			~~Reflects pro forma interest expense based on interest rates at~~ ~~September 30, 2017, as if the 2017 Refinancing Transactions had taken place at the beginning of the period.~~ $

285
~~(6)~~ Pro forma fixed charges (7)	~~The Company’s ability to incur additional indebtedness, among other actions, is restricted under the Secured Indentures, unless the Company has an Adjusted~~$	100
Ratio of Pro Forma EBITDA to Fixed Charges ratio of at least 2.0 to 1.0. As of September 30, 2017, 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 $188 at September 30, 2017).(8)	2.85

(1)Primarily represents costs related to certain in-process cost reduction activities, including severance costs of $19, $19 related to certain in-process facility rationalizations, $11 for future environmental clean-up of closed facilities and one-time implementation and transition costs associated with the creation of a business services group within the Company of $18.

(2)Represents non-cash losses resulting from pension and postretirement benefit plan liability remeasurements.

(3)Represents certain professional fees related to strategic projects, including $3 of certain professional fees and other expenses related to our Chapter 11 proceedings incurred post-emergence.

(4)Primarily includes expenses for stock-based compensation costs of $16, non-cash fixed asset write-offs of $12 and long-term retention programs of $6.

(5)Primarily represents $8 of expenses related to legacy liabilities, $6 of business optimization expense, $10 related to management fees and other expenses, offset by $3 of IT outage recoveries.

(6)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. We expect the savings to be realized within the next 18 months.

(7)Reflects pro forma interest expense based on interest rates at September 30, 2020.

(8)The Company’s ability to incur additional indebtedness, among other actions, is restricted under the Secured Indentures, unless the Company has a Pro Forma EBITDA to Fixed Charges ratio of at least 2.0 to 1.0.

Recently Issued Accounting Standards

See Note 2 in Item 1 of Part I of this Quarterly Report on Form 10-Q for a detailed description of recently issued accounting pronouncements.

Table of Content s


~~Item 3.~~	~~Quantitative and Qualitative Disclosures about Market Risk~~

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no material developments during the first nine months of ~~2017~~2020 on the matters we have previously disclosed about quantitative and qualitative market risk in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~.2019.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our management, including the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer, performed an evaluation of the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, ~~2017~~.2020. Based upon that evaluation, the President and Chief Executive Officer and the Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective at September 30, ~~2017~~.2020.

Changes in Internal Control Over Financial Reporting

~~There have been no~~

In the third quarter 2020, we transitioned certain of our information technology, accounting and finance functions to our new third-party business services partner. We expect to be fully transitioned in early 2021. No other changes occurred in the Company’s internal control over financial reporting during ~~our~~the Company’s most recent fiscal quarter that ~~have~~ materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~Part~~

Table of Content s

PART II - OTHER INFORMATION


~~Item 1.~~	~~Legal Proceedings~~

The Louisville Air Pollution Control District (the “District”) has assessed the Company penalties totaling $296,000 associated with alleged violations of the District’s air pollution laws and the Company’s air permit in 2016 and 2017. The Company is actively cooperating with the District to resolve this matter.

Item ~~1A. Risk Factors~~1. Legal Proceedings

There have been no other material ~~changes~~developments during the ~~first nine months~~third quarter of ~~2017~~2020 in any of the ~~risk factors~~ongoing legal proceedings that ~~were~~are included in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2019.

Item 1A. Risk Factors

Our operations and results may be negatively impacted by the COVID-19 outbreak.

Global or national health concerns, including the outbreak of pandemic or contagious disease, such as the recent COVID-19 pandemic, may adversely affect us.

Since December 2019, the COVID-19 virus which was first reported in Wuhan, China, has spread further in China and other regions including Europe and the United States, where we have operations. In March 2020, the World Health Organization declared the COVID-19 outbreak a global pandemic. Around the world, local governments’ responses to COVID-19 continue to evolve, which has led to stay-at-home orders, social distancing guidelines and other preventative measures that have disrupted various industries in the global economy and created significant volatility in the financial markets.

While the Company has continued to operate during the pandemic, it incurred adverse financial impacts to its sales and profitability results during the three and nine months ended September 30, 2020 from COVID-19, primarily related to reduced volumes associated with the pandemic. Future COVID developments could adversely result in business and manufacturing disruption, inventory shortages, delivery delays, our ability to obtain financing on favorable terms, and reduced sales due to an economic downturn that could affect demand for our products. The extent to which COVID-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. A prolonged economic downturn from COVID-19 could also result in impairments to long-lived assets, including goodwill and intangibles.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.


~~Item 3.~~	~~Defaults upon Senior Securities~~

Item 3. Defaults upon Senior Securities

None.


~~Item 4.~~	~~Mine Safety Disclosures~~

Item 4. Mine Safety Disclosures

This item is not applicable to the registrant.


~~Item 5.~~	~~Other Information~~

~~In November 2017, the Company initiated new restructuring actions with the intent to optimize its cost structure. The Company expects these restructuring actions to generate approximately $40~~Item 5. Other Information

None.

Table of incremental cost savings over the next 12 to 18 months. As of the filing date of this Quarterly Report on Form 10-Q, the total one-time cash costs expected to be incurred for these restructuring activities are estimated between $30 and $40, consisting primarily of workforce reduction costs. Content s

Item 6. Exhibits



31.1		Rule 13a-14 Certifications:

		(a) Certificate of ~~the~~ t h e Chief Executive Officer

	(b) Certificate of the Chief Financial Officer

32.1		Section 1350 Certifications

101.INS*		XBRL Instance Document

101.SCH*		XBRL Schema Document

101.CAL*		XBRL Calculation Linkbase Document

101.DEF*		XBRL Definition Linkbase Document

101.LAB*		XBRL Label Linkbase Document

101.PRE*		XBRL Presentation Linkbase Document

* Attached as Exhibit 101 to this report are documents formatted in XBRL (Extensible Business Reporting Language). The financial information in the XBRL-related documents is “unaudited” or “unreviewed.”

† Represents a management contract or compensatory plan or arrangement

Table of Content s

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


			HEXION INC.

Date:		November 9, 2020	~~HEXION INC.~~

~~Date:~~	~~November 14, 2017~~	/s/ George F. Knight
			George F. Knight
			Executive Vice President, ~~and~~ Chief Financial Officer
			(Principal Financial Officer)

4146



	Contract Termination Costs			Asset Retirement Obligation			Total
Accrued liability at December 31, 2016	$	18		$	13		$	31
Activity ⁽¹⁾	(15		)	(13		)	(28		)
Accrued liability at September 30, 2017	$	3		$	—		$	3



	Pension Benefits												Non-Pension Postretirement Benefits
	Three Months Ended September 30,												Three Months Ended September 30,
	2017						2016						2017				2016
	U.S. Plans			Non-U.S. Plans			U.S. Plans			Non-U.S. Plans			U.S. Plans		Non-U.S. Plans		U.S. Plans			Non-U.S. Plans
Service cost	$	1		$	4		$	1		$	4		$	—	$	—	$	—		$	—
Interest cost on projected benefit obligation	2			3			2			3			—		—		—			—
Expected return on assets	(3		)	(3		)	(4		)	(3		)	—		—		—			—
Net expense (benefit)	$	—		$	4		$	(1	)	$	4		$	—	$	—	$	—		$	—

	Pension Benefits												Non-Pension Postretirement Benefits
	Nine Months Ended September 30,												Nine Months Ended September 30,
	2017						2016						2017				2016
	U.S. Plans			Non-U.S. Plans			U.S. Plans			Non-U.S. Plans			U.S. Plans		Non-U.S. Plans		U.S. Plans			Non-U.S. Plans
Service cost	$	2		$	12		$	3		$	11		$	—	$	—	$	—		$	—
Interest cost on projected benefit obligation	6			7			6			8			—		1		—			1
Expected return on assets	(10		)	(8		)	(11		)	(8		)	—		—		—			—
Amortization of prior service benefit	—			—			—			—			—		—		(1		)	—
Net (benefit) expense	$	(2	)	$	11		$	(2	)	$	11		$	—	$	1	$	(1	)	$	1



	Three Months Ended September 30,				Nine Months Ended September 30.
	2017		2016		2017		2016
Epoxy, Phenolic and Coating Resins	$	528	$	476	$	1,537	$	1,664
Forest Products Resins	386		343		1,159		1,016
Total	$	914	$	819	$	2,696	$	2,680



	Three Months Ended September 30, 2017								Three Months Ended September 30, 2016
	Defined Benefit Pension and Postretirement Plans		Foreign Currency Translation Adjustments			Total			Defined Benefit Pension and Postretirement Plans			Foreign Currency Translation Adjustments			Total
Beginning balance	$	3	$	(27	)	$	(24	)	$	3		$	(18	)	$	(15	)
Other comprehensive income before reclassifications, net of tax	—		10			10			—			7			7
Ending balance	$	3	$	(17	)	$	(14	)	$	3		$	(11	)	$	(8	)

	Nine Months Ended September 30, 2017								Nine Months Ended September 30, 2016
	Defined Benefit Pension and Postretirement Plans		Foreign Currency Translation Adjustments			Total			Defined Benefit Pension and Postretirement Plans			Foreign Currency Translation Adjustments			Total
Beginning balance	$	3	$	(42	)	$	(39	)	$	4		$	(19	)	$	(15	)
Other comprehensive income (loss) before reclassifications, net of tax	—		25			25			(1		)	8			7
Ending balance	$	3	$	(17	)	$	(14	)	$	3		$	(11	)	$	(8	)



	Hexion Inc.			Combined Subsidiary Guarantors			Combined Non-Guarantor Subsidiaries			Eliminations			Consolidated
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $0 and $18, respectively)	$	6		$	—		$	112		$	—		$	118
Accounts receivable, net	131			2			367			—			500
Intercompany accounts receivable	104			—			22			(126		)	—
Intercompany loans receivable - current portion	9			—			—			(9		)	—
Inventories:
Finished and in-process goods	87			—			153			—			240
Raw materials and supplies	35			—			57			—			92
Other current assets	16			—			33			—			49
Total current assets	388			2			744			(135		)	999
Investment in unconsolidated entities	146			13			20			(159		)	20
Deferred income taxes	1			—			11			—			12
Other assets, net	16			6			27			—			49
Intercompany loans receivable	1,110			—			208			(1,318		)	—
Property and equipment, net	416			—			502			—			918
Goodwill	52			—			61			—			113
Other intangible assets, net	35			—			10			—			45
Total assets	$	2,164		$	21		$	1,583		$	(1,612	)	$	2,156
Liabilities and Deficit
Current liabilities:
Accounts payable	$	109		$	—		$	238		$	—		$	347
Intercompany accounts payable	22			—			104			(126		)	—
Debt payable within one year	10			—			111			—			121
Intercompany loans payable within one year	—			—			9			(9		)	—
Interest payable	99			—			2			—			101
Income taxes payable	8			—			5			—			13
Accrued payroll and incentive compensation	10			—			37			—			47
Other current liabilities	69			—			57			—			126
Total current liabilities	327			—			563			(135		)	755
Long-term liabilities:
Long-term debt	3,528			—			84			—			3,612
Intercompany loans payable	208			—			1,110			(1,318		)	—
Accumulated losses of unconsolidated subsidiaries in excess of investment	614			159			—			(773		)	—
Long-term pension and post employment benefit obligations	39			—			224			—			263
Deferred income taxes	2			—			11			—			13
Other long-term liabilities	105			—			68			—			173
Total liabilities	4,823			159			2,060			(2,226		)	4,816
Total Hexion Inc. shareholder’s deficit	(2,659		)	(138		)	(476		)	614			(2,659		)
Noncontrolling interest	—			—			(1		)	—			(1		)
Total deficit	(2,659		)	(138		)	(477		)	614			(2,660		)
Total liabilities and deficit	$	2,164		$	21		$	1,583		$	(1,612	)	$	2,156