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Arch Chemicals Reports Fourth Quarter and Full-year 2006 earnings

Published on 2007-02-13. Author : SpecialChem

NORWALK, Conn. -- ARCH CHEMICALS, INC. (NYSE: ARJ) announced full-year sales of $1,434.7 million in 2006, a 10 percent increase, compared to $1,305.1 million reported in 2005. Included in the 2006 operating results is $24.3 million of non-recurring items, or $1.00 per share, principally for an impairment charge ($23.5 million). Excluding these items, earnings per share from continuing operations grew to $1.61 on $39.2 million of income for 2006. Including these items, earnings per share from continuing operations were $0.61 for 2006 on $14.9 million of income.

Segment operating income was $78.2 million in 2006 compared to $80.2 million in 2005. Included in the 2005 segment operating income was a $10.2 million gain on the sale of the Planar Solutions joint venture. Excluding the gain on sale, segment operating income was $70.0 million in 2005.

"I am very pleased that Arch was able to again achieve significant increases in sales and earnings in 2006, despite substantially higher copper raw material costs which adversely impacted our wood protection results. This is a testament to the value of Arch's position as the most comprehensive supplier of biocides in the world and to our disciplined approach to managing our businesses," said Arch Chairman, President and CEO Michael E. Campbell. "In particular, our water products team achieved an outstanding turnaround in 2006, increasing its return on sales by 600 basis points. We also benefited from record sales of our Omadine® biocide for antidandruff shampoos and from increased demand for our personal care intermediate products. 2007 looks like another good year for Arch. We expect earnings to grow in the range of another 20 percent."

The following compares segment sales and operating income (loss) for the fourth quarters of 2006 and 2005 (including equity in earnings of affiliated companies and excluding restructuring and impairment):

Treatment Products

Treatment Products reported sales of $250.8 million and operating income of $2.4 million compared with sales of $209.0 million and operating income of $1.1 million in 2005.

HTH Water Products

HTH water products reported sales of $80.9 million and an operating loss of $9.1 million for 2006 compared to sales of $63.3 million and an operating loss of $11.0 million for 2005.

Sales increased $17.6 million, or approximately 28 percent, principally due to higher volumes and favorable pricing. The increase in volumes was principally from the acquisition of the remaining 50 percent share of the Company's Nordesclor water products joint venture ($11.6 million or approximately 18 percent). The favorable pricing was achieved in both branded and non-branded pool treatment products in the North American market.

Operating results improved $1.9 million, primarily as a result of the improved pricing in North America, favorable product mix and the positive contribution of the acquired business, partially offset by higher selling and administration costs.

Personal Care and Industrial Biocides

Personal care and industrial biocides reported sales of $75.0 million and operating income of $13.3 million compared to sales and operating income of $65.4 million and $10.1 million, respectively, in 2005.

Sales increased $9.6 million, or approximately 15 percent, principally due to higher volumes and favorable foreign exchange. The higher volumes were attributable to record demand for biocides used in antidandruff products and for strong demand of personal care intermediate products.

Operating income increased $3.2 million. The higher sales volumes more than offset higher raw material costs and unfavorable foreign exchange. Included in the operating results for 2006 is the sale of rights to certain intellectual property of $1.2 million.

Wood Protection and Industrial Coatings

Wood protection and industrial coatings reported sales of $94.9 million and an operating loss of $1.8 million compared to sales and operating income of $80.3 million and $2.0 million, respectively, in 2005.

Sales increased $14.6 million, or approximately 18 percent, due equally to higher volumes, improved pricing and favorable foreign exchange. The higher sales volumes are due to increased demand for industrial coatings, particularly in the Eastern European market, and to a lesser extent for Tanalith® E products used in residential applications in Europe. The improved pricing resulted from price increases to partially mitigate higher raw material costs for wood preservative products used in both residential and industrial applications in North America.

Operating results decreased $3.8 million over the prior year. The lower operating results in the wood protection business were primarily due to a $3.6 million charge from the early termination of a supply contract. Lower operating results in the industrial coatings business were due to higher raw material costs. Included within the operating results of 2006 are a pre-tax gain on the sale of excess land for the wood protection business of $0.8 million and a pre-tax gain of $1.2 million for the sale of an investment in an industrial coatings business.

Performance Products

Performance Products reported sales of $65.1 million and operating income of $7.1 million compared with sales and operating income of $69.3 million and $10.9 million, respectively, in 2005.

Performance urethanes sales decreased approximately 11 percent over the prior year due to lower volumes, partially offset by improved pricing. The lower volumes were due to the lower demand in the U.S. propylene glycol market. Operating income decreased $6.2 million. Included in the 2005 results is a pre-tax $5.8 million gain on the sale of excess land. Included in the 2006 operating income is a pre-tax gain on the sale of certain assets in Brazil of $0.4 million. Excluding these gains, operating income decreased $0.8 million as lower raw material costs and favorable manufacturing costs were more than offset by the lower sales volumes.

Hydrazine sales increased approximately 41 percent due primarily to facility fees from the new U.S. government contract and higher pricing for Ultra PureTM Hydrazine shipments. Operating income increased $2.4 million, primarily as a result of the increase in sales.

General Corporate Expenses

General corporate expenses increased $13.6 million. Included in 2005, was a $10.2 million gain on the sale of the Planar Solutions joint venture. Excluding the gain, general corporate expenses increased $3.4 million principally due to higher costs associated with the Company's U.K. pension plans.

Other Items

During the fourth quarter of 2006, the Company recorded a non-cash goodwill impairment charge of $23.5 million, which reduced the carrying amount of goodwill related to the industrial coatings business.

Included in Other (gains) and losses in 2006 are pre-tax gains from the sale of excess land of $0.8 million, the sale of certain assets in Brazil of $0.4 million and $1.2 million from the sale of an investment in an industrial coatings business.

The full-year effective tax rate on income from continuing operations for 2006 and 2005 was 56.4 percent and 33.2 percent, respectively. The increase in 2006 is due to the non-deductible impairment charge of $23.5 million. Excluding the impairment charge, the effective tax rate was 33.4 percent, which is comparable to 2005.

2007 Outlook

The Company expects full year sales to increase by approximately three to five percent. Earnings per share from continuing operations are forecast to be in the $1.90 to $2.00 range. Depreciation and amortization is estimated to be approximately $45 million. Capital spending is anticipated to be in the $40 to $45 million range. The increase from 2006 is principally due to the planned construction of a biocides plant in China to meet a strategic customer's growing demand for biocides used in the antidandruff shampoo market. In addition, the Company plans to expand its U.S. biocides manufacturing capacity. The effective tax rate is estimated to be 34 percent. Excluded from the guidance above, the Company expects to record an estimated pre-tax gain of approximately $11 million, or approximately $0.30 per share, during the first half of 2007 for the final payment related to the completion of the Company's storage contract with the U.S. government for its McIntosh, Alabama site.

The Company expects improved performance in 2007, led by a significant improvement in the operating margins in the wood protection business and continued improvement in the operating margins of the HTH water products business. The wood protection business is expected to benefit from increased pricing in North America and Europe for wood preservatives sold in both residential and industrial markets, favorable product mix and lower product sourcing costs. The HTH water products business is expected to continue on its profit improvement plan, with specific focus in 2007 on the European operations. Similar to the North American strategy, the improved performance in Europe will result from price increases, shedding marginally profitable business and lower operating costs. The HTH water products business is forecasting sales of approximately $500 million and operating margins are expected to be in the 10 to 11 percent range. The Company expects continued strong demand for biocides used in the antidandruff and building products markets to be offset by higher regulatory and raw material costs. Performance products results are expected to be lower due to the Venezuelan government's discontinuance of a high-margin surfactant product line.

For the first quarter, the Company anticipates earnings per share from continuing operations to be in the $0.10 to $0.15 per share range.

"The upcoming year should be another one of improved performance, driven primarily by higher pricing and exciting new products in our wood protection business and further improvements in water products," said Mr. Campbell. "We also are well positioned to pursue profitable, global growth opportunities in our core biocides businesses. In addition, our relentless focus on improving margins and maximizing cash generation will also help deliver enhanced shareholder value."

About Arch

Headquartered in Norwalk, Connecticut (USA), Arch Chemicals, Inc. is a global Biocides company with approximately $1.4 billion in annual sales. 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, pressure-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 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," "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; recession or lack of moderate growth in U.S. and European economies; increases in interest rates; economic conditions in Asia; worsening economic and political conditions in Venezuela; changes in foreign currencies against the U.S. dollar; customer acceptance of new products; efficacy of new technology; changes in U.S. 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; an increase in anti-dumping duties on certain products; increased foreign competition in the calcium hypochlorite markets; unfavorable court, arbitration or jury decisions or unfavorable 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; environmental costs in excess of those projected; the occurrence of unexpected manufacturing interruptions/outages at customer or company plants; reduction in expected government contract orders; 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; change in the Company's stock price; and gains or losses on derivative instruments.

Source: ARCH CHEMICALS, INC.


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