HEXION HOLDINGS CORPORATION You should read the following discussion and analysis of our results of operations and financial condition for the years endedDecember 31, 2020 , 2019 and 2018 with the audited Consolidated Financial Statements and related notes included elsewhere herein. The following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs, and which involve numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in Item 1A, "Risk Factors." Actual results may differ materially from those contained in any forward-looking statements. Overview and Outlook We are a large participant in the specialty chemicals industry, one of the world's largest producers of thermosetting resins, or thermosets, and a leading producer of adhesive and structural resins and coatings. Thermosets are a critical ingredient for most paints, coatings, glues and other adhesives produced for consumer or industrial uses. We provide a broad array of thermosets and associated technologies and have significant market positions in all of the key markets that we serve. Our products are used in thousands of applications and are sold into diverse markets, such as forest products, architectural and industrial paints, packaging, consumer products and automotive coatings, as well as higher growth markets, such as wind energy and electrical composites. Major industry sectors that we serve include industrial/marine, construction, consumer/durable goods, automotive, wind energy, aviation, electronics, architectural, civil engineering, repair/remodeling and oil and gas drilling. Key drivers for our business include general economic and industrial conditions, including housing starts and auto build rates. In addition, due to the nature of our products and the markets we serve, competitor capacity constraints and the availability of similar products in the market may impact our results. As is true for many industries, our financial results are impacted by the effect on our customers of economic upturns or downturns, as well as by the impact on our own costs to produce, sell and deliver our products. Our customers use most of our products in their production processes. As a result, factors that impact their industries can and have significantly affected our results. Through our worldwide network of strategically located production facilities, we serve more than 2,900 customers in approximately 86 countries. Our global customers include large companies in their respective industries, such asAkzo Nobel , BASF,Norbord , Louisiana Pacific, Bayer, Owens Corning, PPG Industries,Sherwin Williams , Sinoma, Aeolon and Weyerhaeuser. Business Strategy As a significant player in the specialty chemicals industry, we believe we have opportunities to strategically grow our business over the long term. Our products are well aligned with global mega-trends. We believe growth in many of our key applications is being driven by an increasing need for lighter, stronger, higher performance and engineered materials in many end markets such as aerospace, automotive, energy, and construction. Population growth is expected to result in ever increasing demands for more sustainable solutions in energy, such as wind turbines, agriculture, low-emitting coatings,carbon efficient buildings through engineered structural wood, lightweighting composite applications, and improved fire, smoke and toxicity performance. Through these growth strategies, we strive to create shareholder value and generate solid operating cash flow. COVID-19 Impact InMarch 2020 , theWorld 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 throughDecember 31, 2020 . While we have continued to operate during the pandemic, we did incur adverse financial impacts to our sales and profitability results during the year endedDecember 31, 2020 from COVID-19, primarily related to reduced volumes. 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.Hexion Inc. | 36 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents Sale of Phenolic Specialty Resins Business OnSeptember 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") toBlack Diamond Capital Management, LLC andInvestindustrial (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. The sale is subject to customary closing conditions, includingEuropean Works Council consultation, and is expected to close in the first quarter of 2021. As ofDecember 31, 2020 , we reclassified the assets and liabilities of our Held for Sale Business as held for sale on the Consolidated Balance Sheets and reported the results of the operations for the year endedDecember 31, 2020 as "(Loss) income from discontinued operations, net of taxes" on the 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 the our continuing efforts to drive growth and greater operating efficiencies, inJanuary 2020 we changed our reportable segments to align around our two growth platforms: Adhesives; and Coatings and Composites. These new segments 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 inNorth America ,Latin America ,Australia and New Zealand ; and global formaldehyde. •Coatings and Composites: these businesses focus on the global coatings and composites market. They include our base and specialty epoxy resins and Versatic™ Acids and Derivatives businesses. We modified our internal reporting processes and systems to accommodate the new structure and the change to segment reporting is effective starting in the first quarter of 2020. Corporate and Other will continue to be a reportable segment with this segment realignment in 2020. Emergence from Chapter 11 Bankruptcy OnApril 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 theU.S. Bankruptcy Code (the "Bankruptcy Code") in theUnited States Bankruptcy Court for the District of Delaware , (the "Bankruptcy Court "). The Chapter 11 proceedings were jointly administered under the caption In reHexion TopCo, LLC , No. 19-10684 (the "Chapter 11 Cases"). The Debtors continued to operate their businesses as "debtors-in-possession" under the jurisdiction of theBankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of theBankruptcy Court . OnJune 25, 2019 , the Court entered an order (the "Confirmation Order") confirming the Second Amended Joint Chapter 11 Plan of Reorganization ofHexion Holdings LLC and its Debtor Affiliates under Chapter 11 (the "Plan"). On the morning ofJuly 1, 2019 , in accordance with the terms of the Plan and the Confirmation Order, the Plan became effective and the Debtors emerged from bankruptcy (the "Emergence") The Company filed for Chapter 11 bankruptcy protection on the Petition Date and as we previously disclosed, based on our financial condition and our projected operating results, the defaults under our debt agreements, and the risks and uncertainties surrounding our Chapter 11 proceedings, that there was substantial doubt as to the our ability to continue as a going concern as of the issuance of our 2018 Annual Report on Form 10-K. After our Emergence from Chapter 11 onJuly 1, 2019 , based on our new capital structure, current liquidity position and projected operating results, we expect to continue as a going concern for the next twelve months. Refer to Note 5 in Item 8 of Part II of this Annual Report on Form 10-K for more information. Fresh Start Accounting On the Effective Date, in accordance with ASC 852, the Company applied fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company's assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting was applied to the Company's consolidated financial statements as ofJuly 1, 2019 , the date it emerged from bankruptcy, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result, the Company allocated the reorganization value of the Company to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Company's assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill. Refer to Note 6 in Item 8 of Part II of this Annual Report on Form 10-K for more information.Hexion Inc. | 37 | 2020 Form 10-K
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Financial Results Summary
Our financial results for the period fromJanuary 1, 2019 throughJuly 1, 2019 and for fiscal year endedDecember 31, 2018 are referred to as those of the "Predecessor" period. Our financial results for the fiscal year endedDecember 31, 2020 and for the period fromJuly 2, 2019 throughDecember 31, 2019 are referred to as those of the "Successor" period. Our results of operations as reported in our Consolidated Financial Statements for these periods are prepared in accordance with accounting principles generally accepted inthe United States of America ("U.S. GAAP"), which requires that we report on our results for the period fromJanuary 1, 2019 throughJuly 1, 2019 and the period fromJuly 2, 2019 throughDecember 31, 2019 separately. 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 Consolidated Financial Statements in accordance withU.S. GAAP, the tables and discussions below also present the combined results for the year endedDecember 31, 2019 . The combined results (referenced as "Non-GAAP Combined" or "Combined") for the year endedDecember 31, 2019 , which we refer to herein as results for the "Year EndedDecember 31, 2019 " represent the sum of the reported amounts for the Predecessor periodJanuary 1, 2019 throughJuly 1, 2019 combined with the Successor period fromJuly 2, 2019 throughDecember 31, 2019 . These Combined results are not considered to be prepared in accordance withU.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 withU.S. GAAP. 2020 Overview Following are highlights from our results of continuing operations for the years endedDecember 31, 2020 and 2019: Non-GAAP Successor Predecessor Combined July 2, 2019 Year Ended through January 1, 2019 Year Ended December 31, December 31, through July 1, December 31, (in millions) 2020 2019 2019 2019 $ Change % Change Statements of Operations: Net sales$ 2,510 $ 1,323 $ 1,481$ 2,804 $ (294) (10) % Operating (loss) income (64) (49) 68 19 (83) (437) % (Loss) income before income tax (149) (104) 2,960 2,856 (3,005) (105) % Net (loss) income from continuing operations (161) (92) 2,760 2,668 (2,829) (106) % Segment EBITDA: Adhesives 214 116 135 251 (37) (15) % Coatings and Composites 151 60 96 156 (5) (3) % Corporate and Other (71) (37) (30) (67) (4) (6) % Total$ 294 $ 139 $ 201$ 340 $ (46) (14) % •Net Sales-Net sales in 2020 were$2,510 , a decrease of 10% compared with$2,804 in 2019. Overall, COVID-19's global impact on demand across various industries and markets in 2020 was the main driver of the decrease in net sales. Pricing negatively impacted sales by$182 due largely due to raw material 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 and specialty epoxy resins businesses. Volume negatively impacted sales by$70 primarily related to volume decreases in our North American andLatin America forest products resins businesses and our North American formaldehyde business driven by COVID-19's negative impact on global demand. These decreases were partially offset by volume increases in our specialty epoxy business driven by strong global demand in wind energy. Foreign exchange translation negatively impacted net sales by$42 due to the weakening of the Brazilian real and the Chinese Yuan against theU.S. dollar in 2020 compared to 2019, partially offset by the overall strengthening of the euro against theU.S. dollar in 2020 compared to 2019. Hexion Inc. | 38 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents •Net Loss-Net loss from continuing operations in 2020 was$161 , a decrease of$2,829 as compared with a net income of$2,668 in 2019. This decrease was driven by a$2,970 reorganization gain in 2019 as a result of the restructuring of our debt through our Chapter 11 proceedings. The decrease was also driven by a reduction in operating income of$83 , primarily related to an increase of$55 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$33 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$44 as a result of the restructuring of our debt through our Chapter 11 proceedings and lower selling, general and administrative expense of$21 mainly driven by$29 of costs related to our Chapter 11 proceedings incurred in 2019 both prior to filing for bankruptcy and post-emergence and lower variable compensation expense in 2020. •Segment EBITDA-In 2020, Segment EBITDA from continuing operations was$294 , a decrease of 14% compared with$340 in 2019. This decrease was primarily due to the impacts of COVID-19 on our businesses, most notably in our forest products resins and formaldehyde businesses, and continued competitive market conditions in our base epoxy resins business. The decrease was also impacted by$18 of previously recorded deferred contract revenue that was accelerated as a result of the application of fresh start accounting in 2019, and temporary manufacturing disruptions at our Pernis site, which negatively impacted our 2020 Segment EBITDA by approximately$15 . These Segment EBITDA decreases were partially offset by favorability in our specialty epoxy business driven by strong global demand in wind energy and strong market conditions in our versatic acids business. •Restructuring and Cost Reduction Programs-During 2020, we achieved$23 in cost savings related to our cost reduction programs. These activities include certain in-process facility rationalizations and the creation of a business service group within the Company to provide certain administrative functions for us going forward. Overall, we have$6 of in-process cost savings related to these activities, which we expect to realize over the next 12 months. •Growth Initiatives and New Product Development- We continue to focus on new product development to further strengthen our industry-leading research and development, technical services capabilities, and to strategically invest in our R&D footprint to increase opportunities for innovation and stimulate growth. These growth activities include the following: •Our new Adhesives product Armorbuilt™, which is designed to protect the critical utility pole infrastructure against wildfires. We expect incremental growth in 2021 from this product. •Extensive conversions were initiated at several major customers in 2020 for next generation OSB PF technology for board surface applications and additional applications are scheduled for 2021 as productivity gains and further reduction in resin usage, positions our products favorably compared to pMDI. •As an alternative technology, we have also developed BPA-free alternative coating technologies to address changing consumer preferences. 2021 Outlook As we look forward to 2021, we anticipate continued economic recovery from the COVID-19 global pandemic including increased demand in several key end markets - housing, wind energy and automotive. 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 develop in the first half of 2020, specifically within automotive and certain industrial markets. In the second half of the year 2020, we saw sequential improvement in many of the industries in which our businesses operate and year-over-year Segment EBITDA improvement in the fourth quarter as the overall economy continued to recover from the global pandemic. While we expect these current positive economic trends to continue into 2021, delays in COVID-19 vaccine distributions, increases in COVID-19 cases, hospitalizations, deaths, restrictions on trade or government lock-downs could disrupt the current recovery and our expectations. 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, we continue to expect our epoxy specialty business to benefit from a strong overall global wind energy market in 2021. Our Versatic AcidsTM and Derivatives business should continue to benefit from modest growth in architectural coatings. We also expect significant year over year improvement in our base epoxy business in 2021 due to anticipated improvements in market conditions. Within our Adhesives segment, we anticipate improvement in Segment EBITDA within our North American forest products resins business in 2021 based on the latest expectations inU.S. housing starts, remodeling and ongoing macroeconomic recovery from the COVID-19 pandemic. We also expect that continued economic recovery will positively impact our North American formaldehyde business in 2021. Hexion Inc. | 39 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents We also anticipate that our businesses will continue to benefit from the savings associated with our restructuring and cost reduction initiatives. In addition, we expect lower raw material costs to continue to positively impact results across many of our businesses. Further, we are in the process of implementing various efficiency initiatives, which include process improvement and other productivity projects. The benefits of our new capital structure and decreasing working capital will continue to have a positive impact on free cash flow in 2021. Lastly, our recent announcement of the sale of our Phenolic Specialty Resin, Hexamine and European-based Forest Products Resins businesses will further streamline our portfolio and improve our specialty product mix. We expect to use the proceeds to further reduce our indebtedness as well as for general corporate purposes including investments in our business. The sale is subject to customary closing conditions, includingEuropean Works Council consultation, and is expected to close in the first quarter of 2021. Matters Impacting Comparability of Results Chapter 11 Bankruptcy and Fresh Start Accounting Impacts As a result 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 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 Consolidated Statements of Operations. 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$29 for the year endedDecember 31, 2019 and are classified within "Selling, general and administrative expense" in the Consolidated Statements of Operations. Raw Material Prices Raw materials comprised approximately 75% of our cost of sales (excluding depreciation expense) in 2020. The three largest raw materials used in our production processes are phenol, methanol and urea. These materials represented approximately 50% of our total raw material costs in 2020. 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 caused volatility in our raw material costs and utility costs. In 2020, the average price of methanol, urea and phenol decreased by approximately 15%, 7% and 11%, respectively, as compared to 2019. In 2019, the average price of methanol and urea decreased by approximately 22% and 5%, respectively, and the average price of phenol increased by 2%, as compared to 2018. 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 Our other comprehensive income is primarily impacted by foreign currency translation and our derivative instruments designated as hedges. 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 theU.S. dollar. The primary assets and liabilities driving the adjustments are cash and cash equivalents; accounts receivable; inventory; property, plant and equipment; accounts payable; pension and other postretirement benefit obligations and certain intercompany loans payable and receivable. The primary currencies in which these assets and liabilities are denominated are the euro, Brazilian real, Chinese yuan, Canadian dollar and Australian dollar. 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 designed as a cash flow hedge and changes in fair value are 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 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 (Refer to Note 6 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K). Hexion Inc. | 40 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents Pension and OPEB MTM Adjustments Under our accounting policy related to the recognition of gains and losses for pension and OPEB plans, upon the annual remeasurement of our pension and OPEB plans in the fourth quarter, or on an interim basis as triggering events warrant, we immediately recognize gains and losses as a mark-to-market ("MTM") gain or loss through net income. The largest component of our pension and OPEB expense typically relates to these MTM adjustments. We recorded a MTM loss of$4 in 2020, a MTM loss of$5 for the Successor periodJuly 2, 2019 toDecember 31, 2019 and a MTM gain of$13 in 2018. These MTM adjustments were largely driven by fluctuations in discount rates, which increased in 2018 and decreased in both 2019 and 2020. In addition, a MTM loss of$44 was recorded upon Emergence, driven by reductions in discount rates, which was included within "Reorganization items, net" on the Consolidated Statement of Operations for the Predecessor periodJanuary 1, 2019 throughJuly 1, 2019 . These MTM adjustments are recognized in "Other non-operating (income) expense, net" in the Consolidated Statements of Operations. Hexion Inc. | 41 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents Results of Operations CONSOLIDATED STATEMENTS OF OPERATIONS Successor Predecessor Non-GAAP Combined Predecessor Year Ended July 2, 2019 through January 1, 2019 Year Ended December 31, (In millions) December 31, 2020 December 31, 2019 through July 1, 2019 2019 2018 Net sales$ 2,510 $ 1,323 $ 1,481 $ 2,804$ 3,137 Cost of sales (exclusive of depreciation and amortization shown below) 2,043 1,117 1,211 2,328
2,559
Selling, general and administrative expense 231 124 128 252
243
Depreciation and amortization(1) 191 93 43 136 98 Gain on dispositions - - - - (44) Asset impairments 16 - - - 28 Business realignment costs 69 22 14 36 27 Other operating expense, net 24 16 17 33 37 Operating (loss) income (64) (49) 68 19 189 Operating (loss) income as a percentage of net sales (3) % (4) % 5 % 1 % 6 % Interest expense, net 100 55 89 144 365 Reorganization items, net - - (2,970) (2,970)
-
Other non-operating income, net (15) - (11) (11)
(12)
Total non-operating expense (income) 85 55 (2,892) (2,837)
353
(Loss) income before income tax and earnings from unconsolidated entities (149) (104) 2,960 2,856
(164)
Income tax expense (benefit) 14 (10) 201 191
31
(Loss) income before earnings from unconsolidated entities (163) (94) 2,759 2,665
(195)
Earnings from unconsolidated entities, net of taxes 2 2 1 3
4
(Loss) income from continuing operations, net of taxes (161) (92) 2,760 2,668
(191)
(Loss) income from discontinued operations, net of taxes (69) 4 135 139 28 Net (loss) income (230) (88) 2,895 2,807 (163) Net (income) loss attributable to noncontrolling interest - (1) (1) (2)
1
Net (loss) income attributable to Hexion Inc.$ (230) $ (89) $ 2,894 $ 2,805$ (162) Other comprehensive loss$ (26) $ (1) $ (8) $ (9)$ (10)
(1)For the years ended
Net Sales In 2020, net sales decreased by$294 , or 10%, compared to 2019. Overall, COVID-19's global impact on demand across various industries and markets in 2020 was the main driver of the decrease in net sales. Pricing negatively impacted sales by$182 due largely due to raw material 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 and specialty epoxy resins businesses. Volume negatively impacted sales by$70 primarily related to volume decreases in our North American andLatin America forest products resins businesses and our North American formaldehyde business driven by COVID-19's negative impact on global demand. These decreases were partially offset by volume increases in our specialty epoxy business driven by strong global demand in wind energy. Foreign exchange translation negatively impacted net sales by$42 primarily due to the weakening of the Brazilian real and the Chinese yuan against theU.S. dollar in 2020 compared to 2019, and partially offset by the overall strengthening of the euro against theU.S. dollar 2020 compared to 2019. In 2019, net sales decreased by$333 , or 11%, compared to 2018. This decrease was primarily driven by volume decreases which negatively impacted net sales by$149 primarily related to volume decreases in our North American resins business due to weaker demand driven by customer mill closures and the impact of competitive pricing pressures, and in our base epoxy resins business due to an overall weakness in the market, primarily in the automotive and construction industries. These decreases were partially offset by increased volumes in our epoxy specialty business due to strong demand inChina wind energy. Pricing negatively impacted sales by$102 due primarily to softer market conditions in our base epoxy resins business and raw material price decreases contractually passed through to customers across many of our businesses. Foreign currency translation negatively impacted net sales by$82 due to the weakening of various foreign currencies against theU.S. dollar in 2019.Hexion Inc. | 42 | 2020 Form 10-K
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Operating Income In 2020, operating (loss) income decreased by$83 from operating income of$19 in 2019 to an operating loss of$64 in 2020. This decrease was driven by an increase of$55 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$33 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$29 of costs related to our Chapter 11 proceedings incurred in 2019 both prior to filing for bankruptcy and post-emergence and lower variable compensation expense in 2020. In 2019, operating income decreased by$170 compared to 2018, primarily driven by margin reductions in our base epoxy resins business discussed above, the gain on the disposition of our ATG business of$44 that occurred in the first quarter 2018,$27 of non-cash expense related to the step up of finished goods inventory onJuly 1 as part of fresh start accounting that was expensed in the successor period upon the sale of the inventory, increases in depreciation and amortization of$38 and increases in business realignment costs of$9 and in selling, general and administrative expense of$9 . The increase in depreciation and amortization is due to the step up of our fixed and intangible assets as a result of fresh start adjustments and the increase in business realignment costs is driven by higher severance expenses related to recent cost reduction actions. The increase in selling, general and administrative expense is driven by$29 of certain professional fees and other expenses incurred in the first, third and fourth quarters of 2019 related to our Chapter 11 proceedings, as well as the timing of variable compensation costs, partially offset by savings related to our ongoing cost savings and productivity actions. These decreases to operating income were partially offset by an asset impairment of$28 that occurred in third quarter of 2018 within our oilfield assets, as well as decreases in our other operating expense of$4 . The decrease in other operating expense is due to lower realized and unrealized foreign currency losses. Non-Operating Expense In 2020, total non-operating expense increased by$2,922 from a non-operating income of$2,837 in 2019 to a non-operating loss of$85 due primarily to$2,970 of reorganization gains related to our Chapter 11 proceedings in 2019. This increase in non-operating expense was partially offset by and a decrease in interest expense of$44 as a result of our the restructuring of our debt through our Chapter 11 proceedings in 2019 and an increase of$4 in other non-operating income driven by a lower negative impact of MTM adjustment on pension and OPEB liabilities compared to 2019 and higher realized and unrealized foreign currency gains. In 2019, total non-operating income increased by$3,190 from a non-operating expense of$353 in 2018 to a non-operating income of$2,837 , due to a$2,970 of reorganization items, net primarily related to reorganization and fresh start adjustments associated with our emergence from bankruptcy and a decrease in interest expense of$221 as a result of our the restructuring of our debt through our Chapter 11 proceedings. These items were partially offset by an decrease in other non-operating income of$1 driven by the negative impact of MTM adjustments on pension and OPEB liabilities, partially offset by an increase in realized and unrealized foreign currency gains. Income Tax Expense During 2018, the Company recognized income tax expense of$31 , primarily as a result of income from certain foreign operations. Inthe United States , disallowed interest expense resulted in current year taxable income which utilized a net operating loss carryforward. The disallowed interest expense carryforward of$283 generated a deferred tax asset. The decrease in the valuation allowance due to the net operating loss utilization was offset by an increase in the valuation allowance recorded on the interest expense carryforward deferred tax asset. The Company had a Global Intangible Low Tax Income ("GILTI") inclusion of$21 , which was fully offset by our net operating loss. This further reduced our valuation allowance. During the Predecessor periodJanuary 1, 2019 throughJuly 1, 2019 , thePredecessor Company recorded income tax expense of$40 for reorganization adjustments, primarily consisting of tax expense of$50 for the gain recognized between fair value and tax basis (the gain inPredecessor Company will be substantially offset by thePredecessor Company's tax attributes, including net operating losses and previously disallowed interest expense). A tax benefit of$10 was recorded for the removal of a valuation allowance for certain foreign jurisdictions. Pursuant to the Plan, theSuccessor Company is obligated to indemnify thePredecessor Company for any tax related liabilities.The Predecessor Company recorded income tax expense of$201 in the Predecessor period, primarily related to the increase in deferred tax liabilities resulting from fresh start accounting.The Predecessor Company's U.S. net operating loss carryforward of$1,053 and certain state net operating loss carryforwards, along with other tax attributes, have been utilized or forfeited as a result of the taxable gain realized upon Emergence. Certain foreign net operating losses and other carryforwards of thePredecessor Company were forfeited upon Emergence.Hexion Inc. | 43 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents Upon the Emergence, theSuccessor Company applied fresh start accounting (see Note 6 for more information regarding fresh start accounting) and therefore the deferred tax assets and liabilities were adjusted based on the revisedU.S. GAAP financial statements. As a result of the step-up inU.S. GAAP basis in theSuccessor Company's foreign assets without a corresponding step-up in the tax basis of the foreign assets, theSuccessor Company's deferred tax liability increased. An Internal Revenue Code §338(h)(10) election was made to treat the Emergence as an asset sale forU.S. income tax purposes. As a result, the Emergence was treated as a deemed sale of assets of thePredecessor Company while theSuccessor Company received a step-up inU.S. tax basis to fair value.The Successor Company elected bonus depreciation on the stepped-upU.S. eligible fixed assets.The Successor Company elected to amortize the stepped-up basis of intangibles over a 15-year period and theSuccessor Company's depreciation and amortization expense generated aU.S. net operating loss for both the tax years endedDecember 31, 2020 and 2019. TheU.S. net operating loss will be carried forward indefinitely, but will be subject to an 80% limitation onU.S. taxable income starting in 2021. During the Successor periodJuly 2, 2019 throughDecember 31, 2019 , theSuccessor Company recognized income tax benefit of$10 , primarily as a result of losses from certain foreign operations of which the deferred tax asset created is not offset by a valuation allowance. Losses inthe United States created a deferred tax asset which was completely offset by an increase to the valuation allowance.The Successor Company recognized a GILTI inclusion of$5 , which was fully offset by our net operating loss and further reduced our valuation allowance. As previously discussed above, theSuccessor Company elected bonus depreciation in 2019. During the year endedDecember 31, 2020 , theSuccessor Company recognized income tax expense of$14 , primarily as a result of income from certain foreign operations in jurisdictions that do not currently have a NOL to offset income. Losses inthe United States created a deferred tax asset which was completely offset by an increase to the valuation allowance.The Successor Company recognized a GILTI inclusion of$9 , which was fully offset by our net operating loss and further reduced our valuation allowance. Other Comprehensive Loss In 2020, foreign currency translation negatively impacted other comprehensive loss by$8 , due to an overall weakening of various foreign currencies against theU.S. dollar in 2020, and the impact of an unrealized loss of$18 on an interest rate swap designated as a cash flow hedge recorded to other comprehensive loss. In 2019, foreign currency translation negatively impacted other comprehensive loss by$11 , due to an overall weakening of various foreign currencies against theU.S. dollar in 2019, partially offset by an unrealized gain of$2 on an interest rate swap designated as a cash flow hedge recorded to other comprehensive loss. In 2018, foreign currency translation negatively impacted other comprehensive loss by$8 , primarily due to overall weakening of various foreign currencies against theU.S. dollar in 2018, as well as the impact of$2 of amortization of prior service costs on defined benefit pension and postretirement benefits. 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, other income and expenses and discontinued operations. Segment EBITDA is the primary performance measure used by our senior management, the chief operating decision-maker and the board of 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 withU.S. GAAP. Segment EBITDA may not be comparable to similarly titled measures reported by other companies. The combined results (referenced as "Non-GAAP Combined" or "Combined") for the year endedDecember 31, 2019 , which we refer to herein as results for the "Year EndedDecember 31, 2019 " represent the sum of the reported amounts for the Predecessor periodJanuary 1, 2019 throughJuly 1, 2019 combined with the Successor period fromJuly 2, 2019 throughDecember 31, 2019 . These Combined results are not considered to be prepared in accordance withU.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 withU.S. GAAP. See Note 20 in Part I of this Annual Report on Form 10-K and below for reconciliation of net (loss) income to Segment EBITDA for the Successor and Predecessor.Hexion Inc. | 44 | 2020 Form 10-K
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Non-GAAP
Successor Predecessor Combined Predecessor
July 2, 2019
(in millions) Year Ended through January 1, 2019 Year Ended December 31,
December 31, December 31, through July 1,
Net Sales(1): 2020 2019 2019 2019 2018
Adhesives $ 1,188 $ 693 $ 761 $ 1,454 $ 1,641
Coatings and Composites 1,322 630 720 1,350 1,496
Total $ 2,510 $ 1,323 $ 1,481 $ 2,804 $ 3,137
Segment EBITDA:
Adhesives $ 214 $ 116 $ 135 $ 251 $ 252
Coatings and Composites 151 60 96 156 $ 200
Corporate and Other (71) (37) (30) (67) $ (71)
Total $ 294 $ 139 $ 201 $ 340 $ 381 (1)Intersegment sales are not significant and, as such, are eliminated within the selling segment.
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2020 vs. 2019 Segment Results
Following is an analysis of the percentage change in sales by segment from 2019
to 2020:
Currency
Volume Price/Mix Translation Total
Adhesives (10) % (5) % (3) % (18) %
Coatings and Composites 5 % (7) % - % (2) %
Adhesives
Net sales in 2020 decreased by$266 , or 18%, when compared to 2019. Volume negatively impacted net sales by$141 , driven by COVID-19's global economic impact across various industries and markets primarily related to volume decreases in our North American andLatin America forest products resins businesses and our North American formaldehyde business. Volume declines primarily occurred in the second quarter 2020 and improved in the second half of 2020 as the global economy continued to recover from the global pandemic in many end markets. Pricing negatively impacted net sales by$80 , which was primarily due to raw material price decreases contractually passed through to customers across many of our businesses. Foreign exchange translation negatively impacted net sales by$45 , due largely to the strengthening of theU.S. dollar against the Brazilian real in 2020 compared to 2019. Segment EBITDA in 2020 decreased by$37 to$214 compared to 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 2020 decreased by$28 , or 2%, compared to 2019. Pricing negatively impacted net sales by$102 due to raw material 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 and specialty epoxy resins businesses. Volumes positively impacted net sales by$71 , which was primarily related to volume increases in our specialty epoxy business driven by continued strong global demand in wind energy. Foreign exchange translation positively impacted net sales by$3 , due primarily to the overall strengthening of the euro against theU.S. dollar and partially offset by the weakening of the Chinese yuan in 2020 compared to 2019. Segment EBITDA in 2020 decreased by$5 to$151 compared to 2019. The decrease was primarily due to COVID-19 impacts and continued competitive market conditions in our base epoxy resins business, as well as temporary manufacturing disruptions at our Pernis site, which negatively impacted our current year Segment EBITDA by approximately$15 . These Segment EBITDA decreases were partially offset by favorability in our specialty epoxy business driven by strong global demand in wind energy and strong market conditions in our 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, unallocated foreign exchange gains and losses and legacy company costs not allocated to the other segments. Corporate and Other charges increased by$4 to$71 compared to 2019, due primarily to the termination of our Shared Services Agreement with MPM, project fees and unfavorable foreign exchange impacts. These increased costs were partially offset by our ongoing cost reduction efforts, lower compensation costs and travel expenses. 2019 vs. 2018 Segment Results The table below provides additional detail of the percentage change in sales by segment from 2018 to 2019: Currency Volume Price/Mix Translation Total Adhesives (5) % (4) % (2) % (11) % Coatings and Composites (4) % (3) % (3) % (10) % Adhesives Net sales in 2019 decreased by$187 , or 11%, when compared to 2018. Volume negatively impacted net sales by$84 , primarily related to volume decreases in our North American resins business due to weaker demand driven by customer mill closures and competitive pricing pressures. Pricing negatively impacted net sales by$64 , which was primarily due to raw material price decreases contractually passed through to customers across many of our businesses. Foreign exchange translation negatively impacted net sales by$39 , due largely to the strengthening of theU.S. dollar against various currencies in 2019 compared to 2018. Segment EBITDA in 2019 decreased by$1 to$251 compared to 2018. This increase was primarily driven by the volume decreases in our North American resins business discussed above, largely offset by$18 of previously recorded deferred contract revenue that was accelerated during the period as a result of the application of fresh start accounting. Hexion Inc. | 46 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents Coatings and Composites Net sales in 2019 decreased by$146 , or 10%, compared to 2018. Volumes negatively impacted net sales by$65 , which was primarily related to volume decreases in our base epoxy resins and versatic acids businesses driven by overall weakness in the market, primarily in the automotive and construction industries. These decreases were partially offset by increased volumes in our epoxy specialty business due to stronger demand inChina wind energy. Pricing negatively impacted net sales by$38 primarily due to softer market conditions in our base epoxy resins business as compared to 2018. Foreign exchange translation negatively impacted net sales by$43 , due primarily to the strengthening of theU.S. dollar against various foreign currencies in 2019 compared to 2018. Segment EBITDA in 2019 decreased by$44 to$156 compared to 2018. The decrease was primarily driven by the margin reductions in our base epoxy resins business due to softer market conditions discussed above. 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, unallocated foreign exchange gains and losses and legacy company costs not allocated to the other segments. Corporate and Other charges decreased by$4 to$67 compared to 2018, due primarily to our ongoing cost reduction efforts, the timing of variable compensation costs and favorable foreign exchange impacts.
Reconciliation of Net Loss to Segment EBITDA:
Non-GAAP
Successor Predecessor Combined Predecessor
July 2, 2019
Year Ended through January 1, 2019 Year Ended December 31,
December 31, December 31, through
2020 2019 July 1, 2019 2019 2018Reconciliation:
Net (loss) income attributable to Hexion Inc.$ (230) $ (89) $ 2,894 $ 2,805 $ (162) Add: Net income (loss) attributable to noncontrolling interest - 1 1 2 (1) Less: Net (loss) income from discontinued operations (69) 4 135 139 28 Net (loss) income from continued operations (161) (92) 2,760 2,668 (191) Income tax expense (benefit) 14 (10) 201 191 31 Interest expense, net 100 55 89 144 365 Depreciation and amortization (1) 191 93 43 136 98 EBITDA 144 46 3,093$ 3,139 303 Adjustments to arrive at Segment EBITDA: -
Asset impairments and write-downs $ 16 $ -
$ - $ - $ 32
Business realignment costs (2) 69 22 14 36 27
Realized and unrealized foreign
currency losses (gains) - 4 (7) (3) 28
Gain on dispositions - - - - (44)
Unrealized losses (gains) on pension
and OPEB plan liabilities 4 5 - 5 (13)
Transaction costs (3) 6 11 26 37 13
Reorganization items, net (4) - - (2,943) (2,943) -
Non-cash impact of inventory
step-up(5) - 27 (27) - -
Accelerated deferred revenue (6) - - 18 18 -
Other non-cash items (7) 43 10 9 19 14
Other (8) 12 14 18 32 21
Total adjustments 150 93 (2,892) (2,799) 78
Segment EBITDA $ 294 $ 139 $ 201 $ 340 $ 381
Segment EBITDA:
Adhesives 214 116 135 $ 251 252
Coatings and Composites 151 60 96 156 200
Corporate and Other (71) (37) (30) (67) (71)
Total $ 294 $ 139 $ 201 $ 340 $ 381
(1)For the year ended December 31, 2020 and 2018 accelerated depreciation of $2
and $4 , respectively, has been included in "Depreciation and amortization."
There was no accelerated depreciation during the Successor period July 2, 2019
to December 31, 2019 or the Predecessor period January 1, 2019 through July 1,
2019 .
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(2)Business realignment costs for the Successor and Predecessor periods below
included:
Successor Predecessor
Year Ended January 1, 2019 Year Ended
December 31, July 2, 2019 through through December 31,
2020 December 31, 2019 July 1, 2019 2018
Severance costs $ 16 $ 9 $ 8 $ 9
In-process facility rationalizations 11 5 3 11
Contractual costs from exited
business 8 - - -
Business services implementation 22 - - -
Legacy environmental reserves 9 7 1 5
Other 3 1 2 2
(3)For the year ended December 31, 2020 , transaction costs included certain
professional fees related to strategic projects. For the Successor period July
2, 2019 through December 31, 2019 and the Predecessor period January 1, 2019
through July 1, 2019 , transaction costs primarily included $6 and $23 ,
respectively, of certain professional fees and other expenses related to the
Company's Chapter 11 proceedings.
(4)Represents incremental costs incurred directly as a result of the Company's
Chapter 11 proceedings after the date of filing, gains on settlement of
liabilities under the Plan and 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 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.
(6) For the Predecessor period from January 1, 2019 through July 1, 2019 , $18
of deferred revenue was accelerated on July 1 as part of Fresh Start accounting.
(7) Other non-cash items for the Successor and Predecessor periods presented
below included:
Successor Predecessor
July 2, 2019
Year Ended through Year Ended
December 31, December 31, January 1, 2019 through July December 31,
2020 2019 1, 2019 2018
Fixed asset write-offs $ 13 $ 6 $ 3 $ 6
Stock-based compensation costs 17 8 - -
Long-term retention programs 9 (2) 5 8
One-time capitalized variance
impact of inventory fresh start
step-up - (4) - -
Other 4 2 1 -
(8) Other for Successor and Predecessor periods presented below included:
Successor Predecessor
July 2, 2019
through Year Ended
Year Ended December 31, December 31, January 1, 2019 through July December 31,
2020 2019 1, 2019 2018
Legacy and other non-recurring
items $ 8 $ 7 $ 3 $ 7
IT outage (recoveries) costs, net (4) - 9 -
Financing fees and other 8 7 6 14
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Liquidity and Capital Resources
2021 Outlook
We believe we are favorably positioned to fund our ongoing liquidity
requirements for the foreseeable future through cash generated from operations,
as well as available borrowings under our ABL Facility. We have the operational
and financial flexibility 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.
The following factors will impact 2021 cash flows:
•Sales of Assets: During the third quarter of 2020, we entered in 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 reduce the absolute amount of our debt. We will
continue to explore options to optimize our portfolio.
•Interest and Income Taxes: We expect cash outflows in 2021 related to interest
payments on our debt of approximately $85 to $95 and income tax payments between
$20 to $30 .
•Capital Spending: Capital spending in 2021 is expected to be between $120 and
$140 , an increase from 2020 due to our commitment to future investments to
productivity and growth projects in our businesses, as well as the expected
timing of plant turnarounds.
•Working Capital: We anticipate working capital to increase modestly during
2021, as compared to 2020, based on expected increased volumes as key end
markets continue to recover from COVID-19. During the year, we expect an
increase in the first half and a decrease in the second half, consistent with
historical trends.
•Restructuring Activities: We expect that the 2021 cost savings associated with
our in-process facility rationalizations and the creation of a business service
group within the Company to provide certain administrative functions for us
going forward will have a net positive impact on our liquidity.
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 financing arrangements.
At December 31, 2020 , we had $1,792 of outstanding debt and $561 in liquidity
consisting of the following:
•$200 of unrestricted cash and cash equivalents (of which $113 is maintained in
foreign jurisdictions);
•$297 of borrowings available under our ABL Facility ($350 borrowing base less
$53 of outstanding letters of credit; there were no outstanding borrowings); and
•$64 of time drafts and borrowings available under credit facilities at certain
international subsidiaries.
Our net working capital (defined as accounts receivable and inventories less
accounts payable) from continuing operations at December 31, 2020 and 2019 was
$257 and $320 , respectively. A summary of the components of our net working
capital as of December 31, 2020 and 2019 is as follows:
Successor Predecessor
December 31, % of LTM Net December 31, % of LTM Net
2020 Sales 2019 Sales (1)
Accounts receivable $ 331 13 % $ 316 11 %
Inventories 265 11 % 293 10 %
Accounts payable (339) (14) % (289) (10) %
Net working capital (1) $ 257 10 % $ 320 11 %
(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 decrease in net working capital of $63 from December 31, 2019 was driven by
a decrease in inventory of $28 , primarily the result of lower raw material costs
in 2020, and an increase in accounts payable of $50 . The increase in accounts
payable was largely related to improved vendor terms and the timing of vendor
payments. The increase in accounts payable and decrease in inventories were
partially offset by an increase of $15 in accounts receivable driven by overall
higher volumes in the fourth quarter of 2020 compared to the fourth quarter of
2019. Based on our new capital structure, we expect continued structural
improvement in our vendor terms going forward. Consistent with the historical
seasonality of our businesses, we expect an increase in net working capital in
the first quarter of 2021 compared to the fourth quarter 2020.
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Sources and Uses of Cash
Following are highlights from our Consolidated Statements of Cash Flows for
continuing operations:
Non-GAAP
Successor Predecessor Combined Predecessor
July 2, 2019
through January 1, 2019 December 31,
December 31, December 31, through July 1,
2020 2019 2019 2019 2018
Sources (uses) of cash:
Operating activities $ 116 $ 174 $ (163) $ 11 $ (63)
Investing activities (105) (47) (40) (87) (31)
Financing activities (57) (38) 212 174 81
Effect of exchange rates on cash
flow 2 1 - 1 (5)
Net increase (decrease) in cash and
cash equivalents $ (44) $ 90 $ 9 $ 99 $ (18)
Operating Activities
In 2020, operating activities provided $116 of cash. Net loss of $161 included
non cash adjustments for depreciation and amortization of $191 , deferred tax
expense of $9 , loss on sale of assets of $9 , unrealized losses related to the
remeasurement of our pension and OPEB liabilities of $4 , non cash asset
impairments of $16 and non-cash stock based compensation expense of $17 ,
partially offset by unrealized foreign currency gains of $3 and other non-cash
income adjustments of $1 . Net working capital generated $76 , which was largely
driven by an increase in accounts payable due to improved vendor terms and the
timing of vendor payments offset by increases in accounts receivable due to
higher year-over-year volumes in the fourth quarter of 2020. Changes in other
assets and liabilities and income taxes payable used $41 due to the timing of
when items were expensed versus paid, which primarily included interest expense,
employee retention programs, restructuring reserves, incentive compensation,
pension plan contributions and taxes.
In 2019, operating activities provided $11 of cash. Net income of $2,668
included $3,156 of net non-cash income items related to our reorganization,
unrealized foreign currency gains of $8 and other non-cash income adjustments of
$3 , partially offset by depreciation and amortization of $136 , deferred tax
expense of $131 , deferred financing fees of $136 , non-cash impact of inventory
step-up of $27 , loss on sale of assets of $7 , unrealized losses related to the
remeasurement of our pension and OPEB liabilities of $5 , and non cash stock
based compensation expense of $8 . Net working capital remained flat, which was
largely driven by a decrease in accounts payable due to the timing of vendor
payments offset by decreases in accounts receivable due to lower volumes and
lower raw material prices. Changes in other assets and liabilities and income
taxes payable provided $60 due to the timing of when items were expensed versus
paid, which primarily included interest expense, employee retention programs,
restructuring reserves, incentive compensation, pension plan contributions and
taxes.
In 2018, operating activities used $63 of cash. Net loss of $191 included $135
of net non-cash expense items, consisting of depreciation and amortization of
$98 , non-cash asset impairments and accelerated depreciation of $28 ,
amortization of deferred financing fees of $49 , deferred tax expense of $12 ,
loss on sale of assets of $6 and unrealized foreign currency losses of $2 ,
partially offset by the gain on the sale of ATG of $44 and unrealized gains
related to the remeasurement of our pension and OPEB liabilities of $13 . Net
working capital used $24 , which was largely driven by increases in inventories
due to raw material price inflation and decreases in accounts receivable due to
lower volumes. Changes in other assets and liabilities and income taxes payable
provided $17 due to the timing of when items were expensed versus paid, which
primarily included interest expense, employee retention programs, restructuring
reserves, incentive compensation, pension plan contributions and taxes.
Investing Activities
In 2020, investing activities used $105 , primarily driven by capital
expenditures of $108 , partially offset by proceeds from sale of assets of $3 .
In 2019, investing activities used $87 , primarily driven by capital expenditures
of $88 , partially offset by proceeds from sale of assets of $1 .
In 2018, investing activities used $31 , primarily driven by capital expenditures
of $81 , partially offset by net proceeds from the ATG disposition of $49 and
proceeds from sale of assets of $1 .
Financing Activities
In 2020, financing activities provided $57 . Net short-term debt repayments were
$7 and net long-term debt borrowings were $37 . The Company distributed a $13
affiliate loan to its Parent for share repurchases, which was subsequently
settled with a return of capital.
In 2019, financing activities provided $174 . Net short-term debt repayments were
$28 and net long-term debt borrowings were $40 , proceeds received from the
rights offering were $300 and we also paid $138 of financing fees. Our long-term
debt borrowings primarily consisted of the proceeds from our new Senior Secured
Term loans and Senior Notes, offset by the debt repayments made as part of the
Plan.
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In 2018, financing activities provided $81 . Net short-term debt borrowings were
$10 and net long-term debt borrowings were $72 . Our long-term debt borrowings
primarily consisted of $137 in borrowings under our Predecessor ABL Facility. We
also paid $1 of financing fees.
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.
Outstanding Debt
Following is a summary of our cash and cash equivalents and outstanding debt
at
December 31, 2020 December 31, 2019
Cash and cash equivalents $ 204 $ 254
Senior Secured Credit Facility:
ABL Facility - -
Senior Secured Term Loan - USD due 2026 (includes
708 715
Senior Secured Term Loan - EUR due 2026 (includes
515 473
Senior Notes:
7.875% Senior Notes due 2027 450 450
Other Borrowings:
Australia Facility due 2021 at 4.0% and 3.9% at
30 31
Brazilian bank loans at 10.2% and 9.2% at
24 41
Lease obligations(1) 56 64
Other at 3.9% and 5.0% at December 31, 2020 and 2019,
respectively 9 11
Total $ 1,792 $ 1,785
(1) Lease obligations include finance leases and sale leaseback financing
arrangements.
(2) The foreign exchange translation impact of the Company's foreign currency
denominated debt instruments was an increase of $46 and a decrease of $10 as of
December 31, 2020 and 2019, respectively.
We regularly review our portfolio for optimization through potential
divestitures and potential bolt-on acquisitions or mergers. While there is no
guarantee of any future transactions, it could include a specific business unit
or combination of several businesses. We expect that a portion of the proceeds
from any future divestiture transaction or transactions upon completion would be
used to help reduce the absolute amount of our debt.
Further, depending upon market, pricing and other conditions, including the
current state of the high yield bond market, as well as 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 for in
the indentures governing the notes), for cash or other consideration.
Covenant Compliance
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, events of bankruptcy, a change of
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 indenture that governs our 7.875% Senior Notes due 2027 (the "Indenture")
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 Pro Forma EBITDA to Fixed
Charges Ratio under the Indenture is generally defined as the ratio of (a) 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.
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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) $30 and (b) 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) 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 for the four
most recent quarters for which financial statements have been delivered.
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Reconciliation of Last Twelve Months Net Loss to Pro Forma EBITDA
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. We believe that including the
supplemental adjustments that are made to calculate 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. Pro Forma
EBITDA and Fixed Charges are not defined terms under U.S. GAAP. 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 Indenture should not be considered an alternative to
interest expense.
The following table reconciles net loss to EBITDA and Pro Forma EBITDA from
continuing operations for the twelve month period and calculates the ratio of
Pro Forma EBITDA to Fixed Charges as calculated under our Indenture for the
period presented:
December 31, 2020
LTM Period
Net loss $ (230)
Net loss from discontinued operations (69)
Net loss from continuing operations (161) Income tax expense 14 Interest expense, net 100 Depreciation and amortization 191 EBITDA $ 144 Adjustments to arrive at Pro Forma EBITDA: Asset impairments
16
Business realignment costs (1)
69
Realized and unrealized foreign currency gains
-
Unrealized loss on pension and OPEB plan liabilities (2) 4 Transaction costs (3) 6 Other non-cash items (4) 43 Other (5) 16 Cost reduction programs savings (6) 6 Pro Forma EBITDA $ 304 Pro forma fixed charges (7) $ 84 Ratio of Pro Forma EBITDA to Fixed Charges(8)
3.62
(1)Primarily represents costs related to certain in-process cost reduction activities, including severance costs of$16 ,$11 related to certain in-process facility rationalizations,$8 of contractual costs for exited businesses,$9 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$22 . (2)Represents non-cash losses from pension and postretirement benefit plan liability remeasurements. (3)Represents certain professional fees related to strategic projects. (4)Primarily include expenses for retention programs of$9 , fixed asset disposals of$13 , and share-based compensation costs of$17 . (5)Primarily includes legacy and other non-recurring expenses of$8 , financing fees and other expenses of$8 and business optimization expense of$4 , offset by IT outage recoveries of$4 . (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 12 months. (7)Reflects pro forma interest expense based on interest rates atDecember 31, 2020 and expected 2021 debt pay downs. (8)The Company's ability to incur additional indebtedness, among other actions, is limited under our Senior Secured Term Loans and Senior Notes, unless the Company has a Pro Forma EBITDA to Fixed Charges ratio of at least 2.0 to 1.0. Hexion Inc. | 53 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents Contractual Obligations The following table presents our contractual cash obligations atDecember 31, 2020 . Our contractual cash obligations consist of legal commitments atDecember 31, 2020 that require us to make fixed or determinable cash payments, regardless of the contractual requirements of the specific vendor to provide us with future goods or services. This table does not include information about most of our recurring purchases of materials used in our production; our raw material purchase contracts do not meet this definition since they generally do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless a cancellation would result in a major disruption to our business. For example, we have contracts for information technology support that are cancellable, but this support is essential to the operation of our business and administrative functions; therefore, amounts payable under these contracts are included. These contractual obligations are grouped in the same manner as they are classified in the Consolidated Statements of Cash Flows in order to provide a better understanding of the nature of the obligations. Payments Due By Year 2026 and Contractual Obligations 2021 2022 2023 2024 2025 beyond
Total
Operating activities: Purchase obligations (1)$ 190 $ 134
53 52 51 51 50 71 328
Interest on variable rate debt obligations (2) 13 12 12 11 11 20
79
Operating lease obligations 23 16 11 9 9 58
126
Funding of pension and other postretirement obligations (3) 43 45 46 46 46 -
226
Financing activities: Long-term debt, including current maturities 79 33 16 7 8 1,650 1,793 Finance lease obligations (4) 2 1 1 1 1 3 9 Total$ 403 $ 293 $ 231 $ 175 $ 174 $ 2,055 $ 3,331 (1)Purchase obligations are comprised of the fixed or minimum amounts of goods and/or services under long-term contracts and assumes that certain contracts are terminated in accordance with their terms after giving the requisite notice which is generally two to three years for most of these contracts; however, under certain circumstances, some of these minimum commitment term periods could be further reduced which would significantly decrease these contractual obligations. (2)Based on applicable interest rates in effect atDecember 31, 2020 . (3)Pension and other postretirement contributions have been included in the above table for the next five years. These amounts include estimated contributions to our funded defined benefit plans as well as estimated benefit payments to be made for unfunded foreign defined benefit pension plans. The assumptions used by our actuaries in calculating these projections includes a weighted average annual return on pension assets of approximately 3.5% for the years 2021 - 2025 and the continuation of current law and plan provisions. These estimated payments may vary based on the actual return on our plan assets or changes in current law or plan provisions. See Note 15 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K for more information on our pension and postretirement obligations. (4)Sale leaseback financing arrangements are included in "Long-term debt, including current maturities" because they are not considered leases under Topic 842. The table above excludes payments for income taxes and environmental obligations since, at this time, we cannot determine either the timing or the amounts of all payments beyond 2020. AtDecember 31, 2020 , we recorded unrecognized tax benefits and related interest and penalties of$194 . We estimate that we will pay between$20 and$30 in 2021 forU.S. Federal, state and foreign income taxes. We expect non-capital environmental expenditures for 2021 through 2026 totaling$10 . See Notes 14 and 17 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on 10-K for more information on these obligations. Off Balance Sheet Arrangements We had no off-balance sheet arrangements as ofDecember 31, 2020 . Hexion Inc. | 54 | 2020 Form 10-K -------------------------------------------------------------------------------- Table of Contents Critical Accounting Estimates In preparing our financial statements in conformity withU.S. GAAP, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and accompanying notes. Some of these accounting policies require the application of significant judgment by management to select the appropriate assumptions to determine these estimates. By their nature, these judgments are subject to an inherent degree of uncertainty; therefore, actual results may differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other available information, as appropriate. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements in Item 8 of Part II of this Annual Report on Form 10-K. Our most critical accounting policies, which reflect significant management estimates and judgment to determine amounts in our audited Consolidated Financial Statements, are as follows: Fresh Start Accounting On the Effective Date, in accordance with ASC 852, the Company applied fresh start accounting to its financial statements as (i) the holders of existing voting shares of the Company prior to its emergence received less than 50% of the voting shares of the Company outstanding following its emergence from bankruptcy and (ii) the reorganization value of the Company's assets immediately prior to confirmation of the plan of reorganization was less than the post-petition liabilities and allowed claims. Fresh start accounting was applied to the Company's consolidated financial statements as ofJuly 1, 2019 , the date it emerged from bankruptcy, which resulted in a new basis of accounting and the Company became a new entity for financial reporting purposes. As a result, the Company allocated the reorganization value of the Company to its individual assets based on their estimated fair values. Reorganization value represents the fair value of the Company's assets before considering liabilities. The excess reorganization value over the fair value of identified tangible and intangible assets was reported as goodwill. Environmental Remediation and Restoration Liabilities Accruals for environmental matters are recorded when we believe that it is probable that a liability has been incurred and we can reasonably estimate the amount of the liability. We have accrued$47 and$51 atDecember 31, 2020 and 2019, respectively, for all probable environmental remediation and restoration liabilities, which is our best estimate of these liabilities. Based on currently available information and analysis, we believe that it is reasonably possible that the costs associated with these liabilities may fall within a range of$34 to$93 . This estimate of the range of reasonably possible costs is less certain than the estimates that we make to determine our reserves. To establish the upper limit of this range, we used assumptions that are less favorable toHexion among the range of reasonably possible outcomes, but we did not assume that we would bear full responsibility for all sites to the exclusion of other potentially responsible parties. Some of our facilities are subject to environmental indemnification agreements, where we are generally indemnified against damages from environmental conditions that occurred or existed before the closing date of our acquisition of the facility, subject to certain limitations. In other cases we have sold facilities subject to an environmental indemnification agreement pursuant to which we retain responsibility for certain environmental conditions that occurred or existed before the closing date of the sale of the facility. Income Tax Assets and Liabilities and Related Valuation Allowances AtDecember 31, 2020 , we had a valuation allowance of$217 against our deferred income tax assets. This valuation allowance is made up of a$120 valuation allowance against all of our netU.S. federal and state deferred income tax assets, as well as a valuation allowance of$97 against a portion of our net foreign deferred income tax assets, primarily inthe Netherlands . AtDecember 31, 2019 , we had a valuation allowance of$122 against our deferred income tax assets. This valuation allowance is made up of a$59 valuation allowance against all of our netU.S. federal and state deferred income tax assets, as well as a valuation allowance of$63 against a portion of our net foreign deferred income tax assets, primarily inGermany andthe Netherlands . The valuation allowances require an assessment of both negative and positive evidence, such as operating results during the most recent three-year period. This evidence is given more weight than our expectations of future profitability, which are inherently uncertain. The Company considered all available evidence, both positive and negative, in assessing the need for a valuation allowance for deferred tax assets. The Company evaluated four possible sources of taxable income when assessing the realization of deferred tax assets: •Taxable income in prior carryback years; •Future reversals of existing taxable temporary differences; •Tax planning strategies; and •Future taxable income exclusive of reversing temporary differences and carryforwards.
For 2020, previous and current losses in the
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Uncertainty in income taxes is recognized in the financial statements in
accordance with the applicable accounting guidance. The guidance prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of tax positions taken or expected to be taken in
its tax return. We also apply the guidance relating to de-recognition,
classification, interest and penalties, accounting in interim periods,
disclosure and transition.
The calculation of our income tax liabilities involves dealing with
uncertainties in the application of complex domestic and foreign income tax
regulations. Unrecognized tax benefits are generated when there are differences
between tax positions taken in a tax return and amounts recognized in the
Consolidated Financial Statements. Tax benefits are recognized in the
Consolidated Financial Statements when it is more likely than not that a tax
position will be sustained upon examination. Tax benefits are measured as the
largest amount of benefit that is greater than 50% likely to be realized upon
settlement. To the extent we prevail in matters for which liabilities have been
established, or are required to pay amounts in excess of our liabilities, our
effective income tax rate in a given period could be materially impacted. An
unfavorable income tax settlement may require the use of cash and result in an
increase in our effective income tax rate in the year it is resolved. A
favorable income tax settlement would be recognized as a reduction in the
effective income tax rate in the year of resolution. At December 31, 2020 and
2019, we recorded unrecognized tax benefits and related interest and penalties
of $194 and $186 , respectively.
Pensions and Non-Pension Postretirement Benefit Plans
The amounts that we recognize in our financial statements for pension benefit
obligations are determined by actuarial valuations. Inherent in these valuations
are certain assumptions, the more significant of which are:
•The weighted average rate used for discounting the liability;
•The weighted average expected long-term rate of return on pension plan assets;
•The method used to determine market-related value of pension plan assets;
•The weighted average rate of future salary increases; and
•The anticipated mortality rate tables.
The discount rate reflects the rate at which pensions could be effectively
settled. When selecting a discount rate, our actuaries provide us with a cash
flow model that uses the yields of high-grade corporate bonds with maturities
consistent with our anticipated cash flow projections. Our pension and OPEB
liabilities and related service and interest cost are calculated using a
split-rate interest discounting methodology, whereby expected future cash flows
related to these liabilities are discounted using multiple interest rates on a
forward curve that correspond to the timing of the expected cash flows.
The expected long-term rate of return on plan assets is determined based on the
various plans' current and projected asset mix. To determine the expected
overall long-term rate of return on assets, we take into account the rates on
long-term debt investments that are held in the portfolio, as well as expected
trends in the equity markets, for plans including equity securities.
The market-related value of pension plan assets is determined based on the
nature of the investment. Equity and fixed income securities are primarily in
pooled asset and mutual funds and are valued based on underlying net asset value
multiplied by the number of shares held. The underlying asset values are based
on observable inputs and quoted market prices. Cash equivalents represent
investments in a collective short term investment fund, which is a cash sweep
for uninvested cash that earns interest monthly. For these investments, book
value is assumed to equal fair value due to the short duration of the investment
term. Investments in commingled funds with exposure to a variety of hedge fund
strategies, which are not publicly traded and have ongoing redemption
restrictions, are measured at net asset value per share as a practical expedient
for fair value, which is derived from the underlying asset values in these
funds, only some of which represent observable inputs and quoted market prices.
The rate of increase in future compensation levels is determined based on salary
and wage trends in the chemical and other similar industries, as well as our
specific compensation targets.
The mortality tables that are used represent the most commonly used mortality
projections for each particular country, and reflect projected mortality
improvements.
We believe the current assumptions used to estimate plan obligations and pension
expense are appropriate in the current economic environment. However, as
economic conditions change, we may change some of our assumptions, which could
have a material impact on our financial condition and results of operations.
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The following table presents the sensitivity of our projected pension benefit
obligation ("PBO"), accumulated benefit obligation ("ABO"), deficit ("Deficit")
and 2020 pension expense to the following changes in key assumptions:
Increase / (Decrease) at Increase /
December 31, 2020 (Decrease)
PBO ABO 2020 Expense
Assumption:
Increase in discount rate of 0.5% $ (87) $ (81) $ (3)
Decrease in discount rate of 0.5% 100 93 4
Increase in estimated return on assets of 1.0% N/A N/A (8)
Decrease in estimated return on assets of 1.0% N/A N/A 8
Impairment of Long-Lived Assets,
Our reporting units in continuing operations include epoxy, versatics and forest products. Our reporting units are generally one level below our operating segments for which discrete financial information is available and reviewed by segment management. However, components of an operating segment can be aggregated as one reporting unit if the components have similar economic characteristics. Our consolidated goodwill balance from continuing operations was$164 as ofDecember 31, 2020 , including$127 related to the forest products reporting unit,$36 related to the versatics reporting unit and$1 related to the epoxy reporting unit. We test goodwill annually for impairment of value or more frequently when potential impairment triggering events are present. Our annual impairment testing date isOctober 1 .Goodwill is tested for impairment by comparing the estimated fair value of a reporting unit to its carrying value. We use a weighted market and income approach to estimate the fair value of our reporting units. The market approach is a comparable analysis technique commonly used in the investment banking and private equity industries based on the EBITDA (earnings before interest, income taxes, depreciation and amortization) multiple technique, and the income approach is based on a discounted cash flow model. The key assumptions and estimates utilized in the market and income approaches primarily include market multiples, discount rates and future levels of revenue growth and operating margins, and to a lesser extent, estimates and assumptions related to working capital investment, taxes, depreciation and amortization and capital spending projections. If the carrying value of the reporting unit exceeds the estimated fair value, an impairment charge is recorded for the difference. As ofOctober 1, 2020 and 2019, the estimated fair value of each of our reporting units containing goodwill were deemed to be in excess of the carrying amount of assets and liabilities assigned to each unit. The step-up of fixed and intangible asset values during fresh start accounting resulted in an increase of the carrying amounts of net assets for the Company's reporting units that have goodwill, thereby reducing the amount of headroom between the fair value and carrying value of these reporting units. As a result, future unfavorable changes to business results and/or discounted cash flows for these reporting units are more likely to result in asset impairments.
Other Intangible Assets
We review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Factors that may be a change in circumstances, indicating that the carrying value of our amortizable intangible assets may not be recoverable, include goodwill impairment, idling of a plant and a reduction to the estimated useful life. We may in the future be required to record a significant charge in our consolidated financial statements during the period in which any impairment of our amortizable intangible assets is determined, negatively affecting our results of operations. Long-Lived Assets As events warrant, we evaluate the recoverability of long-lived assets, other than goodwill, by assessing whether the carrying value can be recovered over their remaining useful lives through the expected future undiscounted operating cash flows of the underlying business. Our evaluation of long-lived asset recoverability includes our operating and financing lease right of use assets. Impairment indicators include, but are not limited to, a significant decrease in the market price of a long-lived asset; a significant adverse change in the manner in which the asset is being used or in its physical condition; a significant adverse change in legal factors or the business climate that could affect the value of a long-lived asset; an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset; current period operating or cash flow losses combined with a history of operating or cash flow losses associated with the use of the asset; or a current expectation that it is more likely than not that a long-lived asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. As a result, future decisions to change our manufacturing process, exit certain businesses, reduce excess capacity, temporarily idle facilities and close facilities could result in material impairment charges. Long-lived assets are grouped together at the lowest level for which identifiable cash flows are largely independent of cash flows of other groups of long-lived assets. Any impairment loss that may be required is determined by comparing the carrying value of the assets to their estimated fair value. We do not have any indefinite-lived intangible assets, other than goodwill.
Recently Issued Accounting Standards See Note 2 in Item 8 of Part II of this Annual Report on Form 10-K for a detailed description of recently issued accounting pronouncements.
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