Industry News

Arch Chemicals Reports First Quarter 2008 Earnings

Published on 2008-05-19. Author : SpecialChem

NORWALK, Conn. -- Arch Chemicals, Inc. has announced sales for the first quarter of 2008 of $347.1 million, a nine percent increase, compared to $317.4 million reported in 2007. Earnings per share from continuing operations for 2008 were $0.23 on $5.7 million of income. Earnings per share from continuing operations were $0.58 for 2007 on $14.1 million of income, which included a pre-tax gain of $12.8 million related to the completion of a contract with the U.S. Government. Excluding this item, earnings from continuing operations were $0.26 per share on $6.3 million of income for 2007.

Segment operating income was $12.2 million in 2008 compared to $26.9 million in 2007. Included in the 2007 segment operating income was a $12.8 million gain related to the completion of the contract with the U.S. Government. Excluding the gain, segment operating income was $14.1 million in 2007.

"We are pleased with our first quarter results, which were driven principally by our industrial biocides and water products businesses, where we benefited both from profitable growth and from ongoing margin-improvement plans," said Arch Chemicals' Chairman, President and CEO Michael E. Campbell. "Wood protection earnings met our expectations as the positive contribution from the acquisition of the Company's Australian joint venture offset lower demand due to continued weakness in the U.S. housing and construction markets. Performance Products results were lower than our expectations due to record oil-based raw material costs. While we have raised prices wherever possible to offset these rising costs, market conditions are limiting our ability to recover their full impact. We continue to expect 2008 to be another year of double-digit earnings improvement, despite pressures from the very challenging macroeconomic environment in the U.S. combined with persistently higher-than-expected raw material costs," said Mr. Campbell.

The following compares segment sales and operating income (loss) for the first quarters of 2008 and 2007 (including equity in earnings of affiliated companies and excluding restructuring and impairment):

Treatment Products

Treatment Products reported sales of $293.6 million and operating income of $21.6 million compared with sales of $263.6 million and operating income of $20.0 million in 2007.

HTH Water Products

HTH water products reported sales of $97.8 million and operating income of $6.0 million compared to sales of $95.6 million and operating income of $4.5 million for 2007.

Sales increased $2.2 million, or approximately two percent, due to improved pricing in the South African market and favorable product mix in North America. Favorable foreign exchange was offset by lower volumes, primarily in the European market, as a result of shedding marginal business.

Operating income improved $1.5 million as a result of higher sales and lower raw material costs. Higher selling expenses to support sales growth were offset by the absence of severance costs related to the reorganization of the European operations included in the 2007 operating results.

Personal Care and Industrial Biocides

Personal care and industrial biocides reported sales of $80.4 million and operating income of $15.9 million compared to sales and operating income of $76.9 million and $14.2 million, respectively, in 2007.

Sales increased $3.5 million, or approximately five percent, principally due to higher volumes, resulting from increased demand for industrial biocides used in building products and marine antifouling paints. Additionally, favorable foreign exchange more than offset lower pricing due to competitive pressures in worldwide markets, particularly in building products.

Operating income increased $1.7 million, primarily due to the improved sales volumes and the benefit from the Company's profit improvement plans.

Wood Protection and Industrial Coatings

Wood protection and industrial coatings reported sales of $115.4 million and an operating loss of $0.3 million compared to sales and operating income of $91.1 million and $1.3 million, respectively, in 2007.

Sales increased $24.3 million, or approximately 27 percent, primarily due to the acquisition ($17.0 million or approximately 19 percent). Excluding the acquisition, sales increased by $7.3 million or approximately eight percent, due to favorable foreign exchange. Higher volumes for the industrial coatings business as a result of increased demand in the Eastern European market were offset by lower volumes in the wood protection business due to the slowdown in the U.S. construction market that began impacting the business in the second quarter of 2007.

Operating results were $1.6 million lower than the prior year as the positive contribution of the acquisition was more than offset by higher raw material costs for both businesses.

Performance Products

Performance Products reported sales of $53.5 million and an operating loss of $0.3 million compared with sales and operating income of $53.8 million and $15.1 million, respectively, in 2007. Included in the 2007 operating results was a gain of $12.8 million related to the completion of a contract with the U.S. Government. Excluding the gain, 2007 operating income was $2.3 million.

Performance urethanes sales were comparable to the prior year as improved pricing for polyol and glycol products was offset by lower demand in the polyol and glycol markets due to competitive pressures and the slowing U.S. economy. Operating results decreased $2.3 million due to higher raw material costs, principally propylene, driven by record crude oil prices.

Hydrazine sales were comparable to the first quarter of 2007. The increased demand for hydrazine hydrates offset the lower pricing for Ultra Pure™ hydrazine. Operating income, excluding the 2007 gain on the completion of the government contract, was also comparable to prior year.

General Corporate Expenses

General corporate expenses increased principally due to higher compensation-related expense.

Antidumping Ruling

In April 2008, the U.S. Department of Commerce ("DOC") announced its preliminary determination related to an administrative review for the period of June 1, 2006 through May 31, 2007. The DOC has preliminarily determined that the rate for the Company's supplier for this period should be reduced from 76 percent to 23 percent. The determination relates to chlorinated isocyanurates ("isos") that the Company imported from a major Chinese supplier. Arch expects the DOC to issue its final determination for this review period in the fourth quarter of 2008. Assuming a final duty rate consistent with this determination, the Company would expect to recognize a net pre-tax benefit of approximately $8 million in the fourth quarter of 2008, consistent with its previous guidance. This preliminary determination has no impact on the rate the Company is paying on cash deposits for its current imports, which is at 20 percent.

2008 Outlook

The Company anticipates earnings per share from continuing operations in the second quarter of 2008 to be in the $1.30 to $1.40 range, compared to earnings per share from continuing operations of $1.39 during the second quarter of 2007 (which excludes charges of $0.48 per share for restructuring and related asset impairment charges). The improvement in Treatment Products, principally driven by the Company's HTH water products business and, to a lesser extent, the industrial biocides business, will be offset by lower operating results for Performance Products due to higher raw material costs.

For full year 2008, sales are expected to increase by approximately six to eight percent; the increase from previous guidance is due to the impact of favorable foreign exchange. Earnings per share from continuing operations before special items are forecast to be in the $2.55 to $2.65 range. Depreciation and amortization are estimated to be approximately $48 million. Capital spending is anticipated to be in the $50 to $55 million range. The effective tax rate is estimated to be 36 percent. Excluded from the guidance above is an expected $2.0 million pre-tax charge, or approximately $0.05 per share, related to a pension settlement to be recognized in 2008, associated with severance recorded in 2007.

About Arch:

Headquartered in Norwalk, Connecticut (USA), Arch Chemicals, Inc. is a global Biocides company with annual sales of approximately $1.5 billion. Arch and its subsidiaries provide innovative, chemistry-based solutions to control the growth of harmful microbes. The Company's concentration is in water, hair and skin care products, treated wood, paints and coatings, building products and health and hygiene applications. Arch Chemicals operates in two segments: Treatment Products and Performance Products. Together with its subsidiaries, Arch has approximately 3,000 employees and manufacturing and customer-support facilities in North and South America, Europe, Asia, Australia and Africa.

Except for historical information contained herein, the information set forth in this communication contains forward-looking statements that are based on management's beliefs, certain assumptions made by management and management's current expectations, outlook, estimates and projections about the markets and economy in which the Company and its various businesses operate. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "intends," "opines," "plans," "predicts," "projects," "should," "targets" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions ("Future Factors"), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expected or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of future events, new information or otherwise. Future Factors which could cause actual results to differ materially from those discussed include but are not limited to: general economic and business and market conditions; lack of growth in U.S. and European economies; increases in interest rates; economic conditions in Asia; changes in foreign currencies against the U.S. dollar; customer acceptance of new products; efficacy of new technology; changes in U.S. or foreign laws and regulations; increased competitive and/or customer pressure; the Company's ability to maintain chemical price increases; higher-than-expected raw material costs and availability for certain chemical product lines; a change in the antidumping duties on certain products; price increases due to changes in Chinese taxes related to exports from China; increased foreign competition in the calcium hypochlorite markets; unfavorable court decisions, including unfavorable decisions in appeals of antidumping rulings, arbitration or jury decisions or tax matters; the supply/demand balance for the Company's products, including the impact of excess industry capacity; failure to achieve targeted cost-reduction programs; capital expenditures in excess of those scheduled, such as the China plant; environmental costs in excess of those projected; the occurrence of unexpected manufacturing interruptions/outages at customer or Company plants; a decision by the Company not to start up the hydrates manufacturing facility; unfavorable weather conditions for swimming pool use; inability to expand sales in the professional pool dealer market; the impact of global weather changes; changes in the Company's stock price; and gains or losses on derivative instruments.

Source: Arch Chemicals Inc.

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