Industry News

Hexion Specialty Chemicals Reports Second Quarter 2008 Results; Sales Up 14 Percent

Published on 2008-08-18. Author : SpecialChem

COLUMBUS, Ohio -- Hexion Specialty Chemicals, Inc. has reported its results for the second quarter ended June 30, 2008. Highlights for the second quarter of 2008 include:

  • Revenues of $1.67 billion in 2008 compared to $1.46 billion during the prior year period, an increase of 14 percent.
  • Operating loss of $105 million for the second quarter of 2008 versus operating income of $89 million for the comparable prior year period. Second quarter 2008 operating income was negatively impacted by the write-off of $167 million for previously-deferred merger costs associated with the possible acquisition of Huntsman Corporation. While Hexion is continuing to comply with the terms of the merger agreement with Huntsman, the Company expensed previously capitalized merger costs because it believes that the transaction is not likely to be consummated.
  • Net loss of $180 million for the 2008 quarter versus a net loss of $4 million in the second quarter of 2007 primarily due to the same factors impacting operating income.
  • Segment EBITDA (earnings before interest, taxes, depreciation and amortization) totaled $131 million in the second quarter of 2008 compared to $154 million during the prior year period. Second quarter 2008 Segment EBITDA was negatively impacted by $25 million in increased raw material and energy costs compared to the prior year. (Note: Segment EBITDA is a non-GAAP financial measure and is defined and reconciled to Net Income later in this release).
  • Adjusted EBITDA was $645 million for the Last Twelve Month (LTM) period ended June 30, 2008. (Note: Adjusted EBITDA is a non-GAAP financial measure and is defined and reconciled to Net Income later in this release).

"The diversity and strength of our product portfolio -- particularly international forest products, oilfield, electronics and specialty epoxy businesses -- partially offset the dramatic increases in raw material, freight and utility costs we experienced during the second quarter of 2008 compared to the prior year period. With such a rapid increase in raw materials there is a contractual lag, as it relates to pricing, that drives a negative EBITDA variance for that reporting period," said Craig O. Morrison, Chairman, President and CEO. "Second quarter 2008 Segment EBITDA was also negatively impacted by $5 million from a major customer shutdown and a vendor force majeure.

"While our second quarter 2008 sales gains reflect our ongoing pricing discipline, we are also working to achieve additional price increases due to the continued volatility for key raw materials. In addition, we remain encouraged by strong international demand from our customers in Eastern Europe, Latin America and the Asia Pacific region. We were pleased with the quarterly results of Arkema GmbH, our most recent acquisition, while we are also progressing as planned with our forest products expansion in Montenegro, Brazil, and our Russian joint venture with OAO Shchekinoazot.

"Our growth strategy remains focused on continued international expansion, strong cost controls, synergy achievement and productivity initiatives in an effort to address the challenging North American market conditions. With $450 million in liquidity and a long-dated, stable capital structure, Hexion remains well positioned to serve our customers, compete and grow globally."

Synergy Update

As part of its synergy program from the Hexion formation, the Company achieved $5 million in synergies during the second quarter of 2008. As of June 30, 2008, Hexion has achieved $131 million in synergies from its program targeting $175 million in savings. The Company continues to expect to take all actions for its synergy program by the end of 2008.

Transaction Update

On July 12, 2007, the Company entered into an agreement to acquire Huntsman in an all-cash transaction initially valued at approximately $10.6 billion, which included the assumption of debt. Under the terms of the agreement, Huntsman stockholders would receive $28.00 in cash for each outstanding share of Huntsman common stock. The Agreement also provided that the cash price per share to be paid by the Company would increase each day through the consummation of the merger at the equivalent of approximately 8% per annum (less any dividends or distributions declared or made) beginning April 6, 2008. The transaction was approved by Huntsman's stockholders on October 16, 2007. The transaction was approved by the European Commission on June 30, 2008, conditioned on the divestiture of certain portions of the Company's global specialty epoxy resins business. The transaction is also subject to completion of the antitrust review process in the United States; however, the Company is hopeful that the divestitures currently being undertaken in connection with the decision of the European Commission are likely to resolve any potential concerns that the United States Federal Trade Commission might have. The transaction is also subject to other customary closing conditions.

On June 18, 2008, the Company and certain related entities filed suit in the Delaware Court of Chancery to declare their contractual rights with respect to the merger agreement with Huntsman. In the action, the Company alleges, among other things, that the capital structure agreed to by the parties for the combined company is no longer viable due primarily to Huntsman's increased net debt and lower than expected earnings, and that consummating the merger on the basis of the agreed capital structure would render the combined company insolvent. The action also alleges that Huntsman has suffered a Company Material Adverse Effect, as defined in the merger agreement. Further information about this and other litigation related to the transaction will be contained in the Company's second quarter Form 10-Q. Trial is set to begin September 8, 2008.

Six month 2008 results

Sales for the first six months of 2008 were $3.3 billion, a 14 percent increase compared to the first half of 2007. Net acquisitions accounted for $88 million in incremental net sales. Operating loss for the first six months of 2008 totaled $23 million compared to operating income of $193 million in the first six months of 2007. Operating results were impacted by $176 million in pending merger costs, rising raw materials and lower volumes in certain product lines. The impact of these factors was partially off-set by pricing actions and the continued realization of synergies compared to the similar year-ago period. Hexion posted a net loss for the first six months of 2008 of $186 million compared to breakeven results in the first six months of 2007.

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the second quarter and first six months of 2008. Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash and non-recurring expenses. Segment EBITDA is the primary performance measure used by the Company to evaluate operating results and allocate resources among segments. Segment EBITDA is also the profitability measure used in management and executive incentive compensation programs. Corporate and Other primarily represents certain corporate, general and administrative expenses that are not allocated to the segments.

About Hexion Specialty Chemicals:

Based in Columbus, Ohio, Hexion Specialty Chemicals 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. Hexion Specialty Chemicals is controlled by an affiliate of Apollo Management, L.P.

Forward Looking Statements

Certain statements in this press release are forward-looking statements within the meaning 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, the management of Hexion Specialty Chemicals, Inc. (which may be referred to as "Hexion," "we," "us," "our" or the "Company") may from time to time make oral forward-looking statements. Forward looking statements may be identified by the words "believe," "expect," "anticipate," "project," "plan," "estimate," "will" or "intend" or similar expressions. Forward-looking statements reflect our current views about future events and are based on currently available financial, economic and competitive data and on our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our markets, services, prices and other factors as discussed in our 2007 Annual Report on Form 10-K, and our other filings, with the Securities and Exchange Commission (SEC). Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: our pending merger with Huntsman Corporation, including the related pending litigation; economic factors such as an interruption in the supply of or increased pricing of raw materials due to natural disasters, competitive factors such as pricing actions by our competitors that could affect our operating margins, and regulatory factors such as changes in governmental regulations involving our products that lead to environmental and legal matters as described in our 2007 Annual Report on Form 10-K, and our other filings, with the SEC.

Source: Hexion Specialty Chemicals, Inc.

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