HEXION INC. - FORM 8-K - EX-99.1 - NEWS RELEASE

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8-K - CURRENT REPORT - HEXION INC.	earningsreleasemsc.htm

Exhibit 99.1

FOR IMMEDIATE RELEASE

Momentive Specialty Chemicals Inc. Announces Second Quarter 2014 Results

COLUMBUS, Ohio - (August 13, 2014) - Momentive Specialty Chemicals Inc. (“Momentive Specialty Chemicals” or the “Company”) today announced results for the second quarter ended June 30, 2014.

Second Quarter 2014 Highlights


•	Total revenues increased 7% to $1.34 billion primarily reflecting increased volumes in our specialty epoxy, oilfield, and North American formaldehyde businesses.


•	Segment EBITDA increased 2% to $120 million primarily reflecting higher sales, cost control and productivity initiatives partially offset by continued softness within base epoxies and European dispersions business.

“Our North American forest products, oilfield and specialty epoxy businesses continue to demonstrate strong growth and drove improvements in our consolidated results during the second quarter of 2014,” said Craig Morrison, Chairman, President and CEO. “The trends we see in these businesses are reflective of both positive end market demand fundamentals as well as our aggressive focus on new product development and strategic capital investments. Our results continue to be impacted by soft market conditions in our base epoxy resins business and our dispersions business in Europe, which offset gains in our specialty portfolio businesses. Collectively these trends drove a six percent gain in Segment EBITDA in the first half of 2014 versus the first half of 2013.”

“I am pleased to report continued progress on our strategic growth initiatives. We are nearing completion of a phenolic specialty resins joint venture manufacturing facility in China, which is expected to be operational in the fourth quarter of this year, and our two previously announced forest product facilities remain on schedule to come online in late 2015. These investments are an important part of our broader growth program and will enhance our global manufacturing footprint and drive free cash flow generation going forward.”

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the second quarter ended June 30, 2014. Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash and non-recurring expenses. Segment EBITDA is an important measure used by the Company's senior management and board of directors to evaluate operating results and allocate capital resources among segments. Corporate and Other primarily represents certain corporate, general and administrative expenses that are not allocated to the segments.

Net Sales ⁽¹⁾:



	Three Months Ended June 30,				Six Months Ended June 30,
(In millions)	2014		2013		2014		2013
Epoxy, Phenolic and Coating Resins	$	862	$	799	$	1,679	$	1,564
Forest Products Resins	475		451		951		878
Total	$	1,337	$	1,250	$	2,630	$	2,442


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

Segment EBITDA:



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2014			2013			2014			2013
Epoxy, Phenolic and Coating Resins	$	72		$	73		$	148		$	141
Forest Products Resins	65			59			125			114
Corporate and Other	(17		)	(14		)	(36		)	(32		)

Reconciliation of Segment EBITDA to Net Loss (Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2014			2013			2014			2013
Segment EBITDA:
Epoxy, Phenolic and Coating Resins	$	72		$	73		$	148		$	141
Forest Products Resins	65			59			125			114
Corporate and Other	(17		)	(14		)	(36		)	(32		)

Reconciliation:
Items not included in Segment EBITDA
Asset impairments	—			(7		)	—			(7		)
Business realignment costs	(12		)	(2		)	(18		)	(11		)
Integration costs	(3		)	(2		)	(5		)	(5		)
Other	(9		)	(15		)	(23		)	(26		)
Total adjustments	(24		)	(26		)	(46		)	(49		)
Interest expense, net	(76		)	(76		)	(153		)	(150		)
Loss on extinguishment of debt	—			—			—			(6		)
Income tax (expense) benefit	(11		)	(6		)	(21		)	26
Depreciation and amortization	(36		)	(38		)	(71		)	(76		)
Net loss	$	(27	)	$	(28	)	$	(54	)	$	(32	)

Liquidity and Capital Resources

At June 30, 2014, Momentive Specialty Chemicals had total debt of approximately $3.8 billion, unchanged from December 31, 2013. In addition, at June 30, 2014, the Company had $466 million in liquidity comprised of $119 million of unrestricted cash and cash equivalents, $4 million of short-term investments, $303 million of borrowings available under the Company’s asset-backed loan facility (the “ABL Facility”) ($400 million borrowing base less $65 million of outstanding borrowings and $32 million of outstanding letters of credit) and $40 million of borrowings available under credit facilities at certain international subsidiaries.

Momentive Specialty Chemicals expects to have adequate liquidity to fund its ongoing operations for the next twelve months from cash on its balance sheet, cash flows provided by operating activities and amounts available for borrowings under its credit facilities.

Earnings Call

Momentive Specialty Chemicals will host a teleconference to discuss second quarter 2014 results on Wednesday, August 13, 2014, at 9:00 a.m. Eastern Time.

Interested parties are asked to dial-in approximately 10 minutes before the call begins at the following numbers:

U.S. Participants: 877-299-4454

International Participants: 617-597-5447

Participant Passcode: 98872869

Live Internet access to the call and presentation materials will be available through the Investor Relations section of the Company's website: www.momentive.com.

A replay of the call will be available for three weeks beginning at 1:00 p.m. Eastern Time on August 13, 2014. The playback can be accessed by dialing 888-286-8010 (U.S.) and +1-617-801-6888 (International). The passcode is 58946326. A replay also will be available through the Investor Relations Section of the Company's website.

Covenant Compliance

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

Adjusted EBITDA is defined as EBITDA adjusted for certain non-cash and certain non-recurring items and other adjustments calculated on a pro forma basis, including the expected future cost savings from business optimization programs or other programs and the expected future impact of acquisitions, in each case as determined under the governing debt instrument. As the Company is highly leveraged, it believes that including the supplemental adjustments that are made to calculate Adjusted EBITDA provides additional information to investors about the Company’s ability to comply with its financial covenants and to obtain additional debt in the future. Adjusted EBITDA and Fixed Charges are not defined terms under accounting principles generally accepted in the United States of America (U.S. GAAP). Adjusted EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net 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 the Company uses capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures. Fixed Charges under the secured indentures should not be considered an alternative to interest expense.

Reconciliation of Last Twelve Months Net Loss to Adjusted EBITDA

The following table reconciles Net loss to EBITDA and Adjusted EBITDA, and calculates the ratio of Adjusted EBITDA to Fixed Charges, as calculated under certain of the Company’s indentures for the period presented:



(In millions)	June 30, 2014 LTM Period
Net loss	$	(656	)
Income tax expense	396
Interest expense, net	306
Depreciation and amortization	143
EBITDA	189
Adjustments to EBITDA:
Asset impairments	174
Business realignments ⁽¹⁾	29
Integration costs ⁽²⁾	10
Other ⁽³⁾	50
Savings from Shared Services Agreement ⁽⁴⁾	2
Cost reduction programs savings ⁽⁵⁾	4
Pro forma EBITDA adjustment for acquisition ⁽⁶⁾	16
Adjusted EBITDA	$	474
Pro forma fixed charges ⁽⁷⁾	$	295
Ratio of Adjusted EBITDA to Fixed Charges ⁽⁸⁾	1.61


(1)	Represents headcount reduction expenses and plant rationalization costs related to cost reduction programs and other costs associated with business realignments.


(2)	Primarily represents integration costs associated with the Momentive Combination.


(3)	Primarily includes pension expense related to formerly owned businesses, business optimization expenses, management fees, retention program costs, stock-based compensation and realized and unrealized foreign exchange and derivative activity.

(4)

Primarily represents pro forma impact of expected savings from the Shared Services Agreement with MPM. Savings from the Shared Services Agreement represent the unrealized savings from shared services and logistics optimization, best-of-source contractual terms, procurement savings, and regional site rationalization as a result of the Momentive Combination, and represent our estimate of the unrealized savings from such initiatives that would have been realized had the related actions been completed at the beginning of the LTM period. Best of source contractual terms, procurement and logistics savings relate to cost savings as a result of lower cost contracts for raw materials and logistics as a result of better leverage with vendors.

(5)

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 LTM period. The savings are calculated based on actual costs of exiting headcount and elimination or reduction of site costs.


(6)	Reflects pro forma impact of the acquisition of a manufacturing facility in Shreveport, Louisiana in early 2014, and represents our estimate of incremental annualized EBITDA when the facility is operating at full capacity, as well as related synergies.


(7)	Reflects pro forma interest expense based on interest rates at June 30, 2014.

(8)

The Company’s ability to incur additional indebtedness, among other actions, is restricted under the indentures governing certain notes, unless the Company has an Adjusted EBITDA to Fixed Charges ratio of 2.0 to 1.0. As of June 30, 2014, we did not satisfy this test. As a result, we are subject to restrictions on our ability to incur additional indebtedness and to make investments; however, there are exceptions to these restrictions, including exceptions that permit indebtedness under our ABL Facility (available borrowings of which were $303 million at June 30, 2014).

Forward-Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of and made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, our management may from time to time make oral forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “may,” “will,” “could,” “should,” “seek” or “intend” and similar expressions. Forward-looking statements reflect our current expectations and assumptions regarding our business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors as discussed in the Risk Factors section of our filings with the Securities and Exchange Commission (the “SEC”). While we believe our assumptions are reasonable, we caution you against relying on any forward-looking statements as it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, a weakening of global economic and financial conditions, interruptions in the supply of or increased cost of raw materials, the loss of, or difficulties with the further realization of, cost savings in connection with our strategic initiatives, including transactions with our affiliate, Momentive Performance Materials Inc., the impact of our substantial indebtedness, our failure to comply with financial covenants under our credit facilities or other debt, pricing actions by our competitors that could affect our operating margins, changes in governmental regulations and related compliance and litigation costs 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 in our most recent Annual Report on Form 10-K and our other filings made with the SEC. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The forward-looking statements made by us speak only as of the date on which they are made. Factors or events that could cause our actual results to differ may emerge from time to time. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

About the Company

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

Contacts

Investors and Media:

John Kompa

614-225-2223

john.kompa@momentive.com

(See Attached Financial Statements)

MOMENTIVE SPECIALTY CHEMICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)



	Three Months Ended June 30,						Six Months Ended June 30,
(In millions)	2014			2013			2014			2013
Net sales	$	1,337		$	1,250		$	2,630		$	2,442
Cost of sales	1,174			1,098			2,303			2,147
Gross profit	163			152			327			295
Selling, general and administrative expense	95			89			191			181
Asset impairments	—			7			—			7
Business realignment costs	12			2			18			11
Other operating (income) expense, net	(1		)	5			3			2
Operating income	57			49			115			94
Interest expense, net	76			76			153			150
Loss on extinguishment of debt	—			—			—			6
Other non-operating expense (income), net	3			(2		)	5			3
Loss before income tax and earnings from unconsolidated entities	(22		)	(25		)	(43		)	(65		)
Income tax expense (benefit)	11			6			21			(26		)
Loss before earnings from unconsolidated entities	(33		)	(31		)	(64		)	(39		)
Earnings from unconsolidated entities, net of taxes	6			3			10			7
Net loss	$	(27	)	$	(28	)	$	(54	)	$	(32	)

MOMENTIVE SPECIALTY CHEMICALS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)



(In millions, except share data)	June 30, 2014			December 31, 2013
Assets
Current assets:
Cash and cash equivalents (including restricted cash of $16 and $14, respectively)	$	135		$	393
Short-term investments	4			7
Accounts receivable (net of allowance for doubtful accounts of $16)	728			601
Inventories:
Finished and in-process goods	331			257
Raw materials and supplies	154			103
Other current assets	68			72
Total current assets	1,420			1,433
Investment in unconsolidated entities	49			45
Deferred income taxes	19			21
Other long-term assets	138			134
Property and equipment:
Land	91			88
Buildings	317			308
Machinery and equipment	2,508			2,427
	2,916			2,823
Less accumulated depreciation	(1,834		)	(1,776		)
	1,082			1,047
Goodwill	126			112
Other intangible assets, net	91			82
Total assets	$	2,925		$	2,874
Liabilities and Deficit
Current liabilities:
Accounts payable	$	510		$	483
Debt payable within one year	137			109
Interest payable	83			83
Income taxes payable	17			12
Accrued payroll and incentive compensation	62			47
Other current liabilities	119			127
Total current liabilities	928			861
Long-term liabilities:
Long-term debt	3,709			3,665
Long-term pension and post employment benefit obligations	226			234
Deferred income taxes	22			21
Other long-term liabilities	157			163
Total liabilities	5,042			4,944
Commitments and contingencies
Deficit
Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at June 30, 2014 and December 31, 2013	1			1
Paid-in capital	525			522
Treasury stock, at cost—88,049,059 shares	(296		)	(296		)
Accumulated other comprehensive loss	(17		)	(21		)
Accumulated deficit	(2,329		)	(2,275		)
Total Momentive Specialty Chemicals Inc. shareholder’s deficit	(2,116		)	(2,069		)
Noncontrolling interest	(1		)	(1		)
Total deficit	(2,117		)	(2,070		)
Total liabilities and deficit	$	2,925		$	2,874

MOMENTIVE SPECIALTY CHEMICALS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)



	Six Months Ended June 30,
(In millions)	2014			2013
Cash flows used in operating activities
Net loss	$	(54	)	$	(32	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	71			76
Deferred tax benefit	(2		)	(41		)
Non-cash asset impairments	—			7
Loss on extinguishment of debt	—			6
Unrealized foreign currency losses (gains)	8			(26		)
Other non-cash adjustments	(3		)	1
Net change in assets and liabilities:
Accounts receivable	(116		)	(159		)
Inventories	(120		)	(70		)
Accounts payable	24			119
Income taxes payable	5			6
Other assets, current and non-current	13			18
Other liabilities, current and long-term	(12		)	30
Net cash used in operating activities	(186		)	(65		)
Cash flows used in investing activities
Capital expenditures	(78		)	(60		)
Capitalized interest	—			(1		)
Purchase of businesses	(64		)	—
Proceeds from the sale of (purchases of) debt securities, net	3			(1		)
Change in restricted cash	(2		)	15
Disbursement of affiliated loan	(50		)	—
Repayment of affiliated loan	50			—
Investment in unconsolidated affiliates, net	(2		)	(13		)
Proceeds from sale of assets	—			1
Net cash used in investing activities	(143		)	(59		)
Cash flows provided by financing activities
Net short-term debt borrowings	27			9
Borrowings of long-term debt	160			1,127
Repayments of long-term debt	(117		)	(1,040		)
Long-term debt and credit facility financing fees	—			(36		)
Net cash provided by financing activities	70			60
Effect of exchange rates on cash and cash equivalents	(1		)	(5		)
Decrease in cash and cash equivalents	(260		)	(69		)
Cash and cash equivalents (unrestricted) at beginning of period	379			401
Cash and cash equivalents (unrestricted) at end of period	$	119		$	332
Supplemental disclosures of cash flow information
Cash paid for:
Interest, net	$	148		$	126
Income taxes paid, net	18			3
Non-cash financing activities:
Non-cash issuance of debt in exchange for loans of parent	$	—		$	200
Non-cash distribution declared to parent	—			208
Settlement of note receivable from parent	—			24

HEXION INC. - FORM 8-K - EX-99.1 - NEWS RELEASE - August 13, 2014

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HEXION INC. Reports