The following commentary should be read in conjunction with the audited
Consolidated Financial Statements and the accompanying notes and Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's most recent Annual Report on Form 10-K.
Within the following discussion, unless otherwise stated, "the first quarter of
2021" refers to the three months ended March 31, 2021 and "the first quarter of
2020" refers to the three months ended March 31, 2020.
Forward-Looking and Cautionary Statements
Certain statements in this report, including without limitation, certain
statements made under the caption "Overview and Outlook," are forward-looking
statements within the meaning of and made pursuant to the safe harbor provisions
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. In addition, our management may
from time to time make oral forward-looking statements. All statements, other
than statements of historical facts, are forward-looking statements.
Forward-looking statements may be identified by the words "believe," "expect,"
"anticipate," "project," "might," "plan," "estimate," "may," "will," "could,"
"should," "seek" or "intend" and similar expressions. Forward-looking statements
reflect our current expectations and assumptions regarding our business, the
economy and other future events and conditions and are based on currently
available financial, economic and competitive data and our current business
plans. Actual results could vary materially depending on risks and uncertainties
that may affect our operations, markets, services, prices and other factors as
discussed in the Risk Factors section of this report and our other filings with
the SEC. While we believe our assumptions are reasonable, we caution you against
relying on any forward-looking statements as it is very difficult to predict the
impact of known factors, and it is impossible for us to anticipate all factors
that could affect our actual results. Important factors that could cause actual
results to differ materially from those in the forward-looking statements
include, but are not limited to, a weakening of global economic and financial
conditions, interruptions in the supply of or increased cost of raw materials,
the loss of, or difficulties with the further realization of, cost savings in
connection with our strategic initiatives, the impact of our indebtedness, our
failure to comply with financial covenants under our credit facilities or other
debt, pricing actions by our competitors that could affect our operating
margins, changes in governmental regulations and related compliance and
litigation costs, uncertainties related to COVID-19 and the impact of our
responses to it and the other factors listed in the Risk Factors section of this
report and in our other SEC filings. For a more detailed discussion of these and
other risk factors, see the Risk Factors section of this report and our most
recent filings made with the SEC. All forward-looking statements are expressly
qualified in their entirety by this cautionary notice. The forward-looking
statements made by us speak only as of the date on which they are made. Factors
or events that could cause our actual results to differ may emerge from time to
time. We undertake no obligation to publicly update or revise any
forward-looking statement as a result of new information, future events or
otherwise, except as otherwise required by law.
Overview and Outlook
Business Overview
We are a large participant in the specialty chemicals industry, one of the
world's largest producers of thermosetting resins, or thermosets, and a leading
producer of adhesive and structural resins and coatings. Thermosets are a
critical ingredient for most paints, coatings, glues and other adhesives
produced for consumer or industrial uses. We provide a broad array of thermosets
and associated technologies and have significant market positions in all of the
key markets that we serve.
Our products are used in thousands of applications and are sold into diverse
markets, such as forest products, architectural and industrial paints,
packaging, consumer products and automotive coatings, as well as higher growth
markets, such as wind energy and electrical composites. Major industry sectors
that we serve include industrial/marine, construction, consumer/durable goods,
automotive, wind energy, aviation, electronics, architectural, civil
engineering, repair/remodeling and oil and gas drilling. Key drivers for our
business include general economic and industrial conditions, including housing
starts and auto build rates. In addition, due to the nature of our products and
the markets we serve, competitor capacity constraints and the availability of
similar products in the market may impact our results. As is true for many
industries, our financial results are impacted by the effect on our customers of
economic upturns or downturns, as well as by the impact on our own costs to
produce, sell and deliver our products. Our customers use most of our products
in their production processes. As a result, factors that impact their industries
can and have significantly affected our results.
Through our worldwide network of strategically located production facilities, we
serve more than 2,900 customers in approximately 86 countries. Our global
customers include large companies in their respective industries, such as Akzo
Nobel, BASF, Norbord, Louisiana Pacific, Bayer, Owens Corning, PPG Industries,
Sherwin Williams, Sinoma, Aeolon and Weyerhaeuser.
COVID-19 Impact
In March 2020, the World Health Organization categorized COVID-19 as a global
pandemic. Around the world, local governments' responses to COVID-19 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.

                      Hexion Inc. | 21 | Q1 2021 Form 10-Q
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During this pandemic, we have implemented additional guidelines to further
protect the health and safety of our employees as we continue to operate with
our suppliers and customers. We have committed to maintaining a paramount focus
on the safety of our employees while minimizing potential disruptions caused by
COVID-19. For example, we are following all legislatively-mandated travel
directives in the various countries where we operate, and we have also put
additional travel restrictions in place for our associates designed to reduce
the risk from COVID-19. Additionally, we are utilizing extended work from home
options to protect our office associates, while adjusting our meeting protocols
and processes at our manufacturing sites.
Our businesses have been designated by many governments as essential businesses
and our operations have continued through March 31, 2021. 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.
Sale of Phenolic Specialty Resins Business
On September 27, 2020, we entered into a definitive agreement (the "Purchase
Agreement") for the sale of our Phenolic Specialty Resins ("PSR"), Hexamine and
European-based Forest Products Resins businesses (together with PSR, the "Held
for Sale Business") to Black Diamond Capital Management, LLC and
Investindustrial (the "Buyers") for a purchase price of approximately $425. The
consideration consists of $335 in cash and certain assumed liabilities with the
remainder in future contingent proceeds based on the performance of the Held for
Sale Business. The final purchase price is subject to customary post-closing
adjustments. The Held for Sale Business was formerly included in the Company's
Adhesives reportable segment.
On April 30, 2021, we completed the sale of our Held for Sale Business pursuant
to the terms of the Purchase Agreement with the Buyers. We received gross cash
consideration for the Held for Sale Business in the amount of $304. In addition,
the Buyers assumed approximately $31 of certain liabilities, net of preliminary
working capital and other closing adjustments as part of the Purchase Agreement.
A subsequent post-closing adjustment to the initial cash consideration will be
made in accordance with the Purchase Agreement. Hexion expects to use a portion
of the net proceeds to invest in its business, and in May 2021, we used a
portion of its net proceeds to reduce our borrowings under our Senior Secured
Term Loan, in accordance with our credit agreement.
As of March 31, 2021, we reclassified the assets and liabilities of our Held for
Sale Business as held for sale on the unaudited Condensed Consolidated Balance
Sheets and reported the results of the operations for the three months ended
March 31, 2021 as "Loss from discontinued operations, net of taxes" on the
unaudited Condensed Consolidated Statements of Operations. Amounts for prior
periods have similarly been retrospectively reclassified for all periods
presented.
Unless otherwise noted, the tables and discussion below represent the Company's
continuing operations and excludes the Held for Sale Business.
Reportable Segments in 2021
Our reporting segments are aligned around our two growth platforms: (i)
Adhesives and (ii) Coatings and Composites. At March 31, 2021, we have three
reportable segments, which consist of the following businesses:
•Adhesives: these businesses are focused on the global adhesives market. They
include the Company's global wood adhesives business, which also includes the
oilfield technologies group, as well as the forest products resin assets in
North America, Latin America, Australia and New Zealand; and global
formaldehyde.
•Coatings and Composites: these businesses are focused on the global coatings
and composites market. They include our base and specialty epoxy resins and
Versatic™ Acids and Derivatives businesses.
•Corporate and Other: primarily corporate general and administrative expenses
that are not allocated to the other segments, such as shared service and
administrative functions and foreign exchange gains and losses.


                      Hexion Inc. | 22 | Q1 2021 Form 10-Q

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2021 Overview
Following are highlights from our results of continuing operations for the three
months ended March 31, 2021 and 2020:
                                                               Three Months           Three Months
                                                             Ended March 31,        Ended March 31,
                                                                   2021                   2020              $ Change             % Change
Statements of Operations:
Net sales                                                    $         753          $         687          $     66                     10  %
Operating income (loss)                                                 48                    (34)               82                       n/m
Income (loss) before income tax                                         28                    (60)               88                       n/m
Net income (loss) from continuing operations                            12                    (56)               68                       n/m
Segment EBITDA:
Adhesives                                                    $          68          $          55                13                     24  %
Coatings and Composites                                                 65                     39                26                     67  %
Corporate and Other                                                    (19)                   (21)                2                    (10) %
Total                                                        $         114          $          73          $     41                     56  %



•Net Sales-In the first three months of 2021, net sales increased by $66, or
10%, compared to the first three months of 2020. Pricing positively impacted
sales by $64 due to raw material price increases contractually passed through to
customers across many of our businesses, as well as favorable product mix and
improved market conditions in our base epoxy resins and specialty epoxy resins
businesses. Foreign currency translation positively impacted net sales by $13
due to the strengthening of various foreign currencies against the U.S. dollar
in the first three months of 2021 compared to the first three months of 2020.
Volumes negatively impacted net sales by $11, primarily due to the impact of
winter storm Uri in the U.S. gulf coast on several of our businesses, offset by
volume increases in our specialty epoxy resins and global resins businesses.
•Net Income (Loss) from continuing operations-In the first three months of 2021,
net income from continuing operations increased by $68 from a net loss of $56 as
compared to the first three months of 2020. The increase was driven by an
increase in operating income of $82, primarily due to an increase in gross
profit as a result of improved market conditions across many of our businesses
mentioned above as well as the absence of a $16 asset impairment charge related
to our oilfield and phenolic specialty resins businesses in the first quarter of
2020, and a $15 decrease in business realignment costs driven by lower severance
expenses.
•Segment EBITDA-For the first three months of 2021, Segment EBITDA was $114, an
increase of 56% compared with $73 in the first three months of 2020. This
increase was primarily due to improved market conditions in our base epoxy
resins, specialty epoxy resins business, and due to raw material productivity
impacting our forest products resins and formaldehyde businesses, partially
offset by $6 of repair costs and $12 of lost volume due to temporary
manufacturing outages caused by winter storm Uri in the U.S. gulf coast.
Additionally, our Corporate and Other charges in the first three months of 2021
decreased by $2 compared to the first three months of 2020.
•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.
•An expansion of our Brimbank, Australia facility to develop fire-resistant
cladding materials leveraging proprietary phenolic resin technology.
Short-term Outlook
As we look towards the remainder of 2021, we anticipate continued strong
economic recovery from the COVID-19 global pandemic resulting in increased
demand in many of our key end markets. 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 2020 and in the first quarter of 2021, we saw
sequential improvement in many of the industries in which our businesses operate
and year-over-year Segment EBITDA improvement as the overall economy continued
to recover from the global pandemic. We expect these strong tailwinds to
continue into the second quarter and second half of 2021.
                      Hexion Inc. | 23 | Q1 2021 Form 10-Q
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While we expect these current positive economic trends to continue during 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 significant
year over year improvement in our base epoxy business in 2021 due to strong
improvements in market conditions. Our Versatic AcidsTM and Derivatives business
should continue to benefit from modest growth in architectural coatings.
Additionally, within our epoxy specialty resins business we anticipate lower
demand in the China wind energy market in the second half of 2021.
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 in U.S. and Canadian housing starts, remodeling and ongoing
macroeconomic recovery from the COVID-19 pandemic. We also expect that continued
economic recovery and strong market demand will positively impact our North
American formaldehyde business in 2021.
We also anticipate that our businesses will continue to benefit from the savings
associated with our restructuring and cost reduction initiatives. Further, we
are in the process of implementing various efficiency initiatives, which include
process improvement and other productivity projects.
Lastly, we completed the sale of our Phenolic Specialty Resin, Hexamine and
European-based Forest Products Resins businesses, on April 30, 2021, which 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.
Matters Impacting Comparability of Results
Raw Material Prices
Raw materials comprise approximately 75% of our cost of sales (excluding
depreciation expense). The three largest raw materials used in our production
processes are phenol, methanol and urea. These materials represent about half of
our total raw material costs. Fluctuations in energy costs, such as volatility
in the price of crude oil and related petrochemical products, as well as the
cost of natural gas have historically caused volatility in our raw material and
utility costs. In the first three months of 2021 compared to the first three
months of 2020, the average price of phenol, urea and methanol increased by
approximately 3%, 45% and 30%, respectively. The impact of passing through raw
material price changes to customers can result in significant variances in sales
comparisons from year to year.
We expect long-term raw material cost volatility to continue because of price
movements of key feedstocks. To help mitigate raw material volatility, we have
purchase and sale contracts and commercial arrangements with many of our vendors
and customers that contain periodic price adjustment mechanisms. Due to
differences in timing of the pricing trigger points between our sales and
purchase contracts, there is often a "lead-lag" impact. In many cases this
"lead-lag" impact can negatively impact our margins in the short term in periods
of rising raw material prices and positively impact them in the short term in
periods of falling raw material prices.
Foreign Currency Exchange
The impact of foreign currency translation is driven by the translation of
assets and liabilities of our foreign subsidiaries which are denominated in
functional currencies other than the U.S. dollar. Our non-U.S. operations
accounted for approximately 56% of our sales in the first three months of 2021.
The primary assets and liabilities driving the adjustments are cash and cash
equivalents; accounts receivable; inventory; property, plant and equipment;
accounts payable; pension and other postretirement benefit obligations and
certain intercompany loans payable and receivable. The primary currencies in
which these assets and liabilities are denominated are the euro, Brazilian real,
Chinese yuan, Canadian dollar and Australian dollar.
                      Hexion Inc. | 24 | Q1 2021 Form 10-Q

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