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Hexion Specialty Chemicals Reports Fourth Quarter and Fiscal Year 2007 Results

March 11, 2008 at 12:00 AM EDT

Fiscal Year 2007 Revenues Increase 12%, Operating Income Gains 22% (Adjusted for Fiscal Year 2006 Divestitures) and Segment EBITDA Improves by 17% on Strength of Global Customer Base and Diverse Product Portfolio

COLUMBUS, Ohio, Mar 11, 2008 (BUSINESS WIRE) -- Hexion Specialty Chemicals, Inc. today reported its results for the fourth quarter and fiscal year ended December 31, 2007. Highlights for the fourth quarter of 2007 include:

-- Revenues of $1.48 billion in 2007 compared to $1.31 billion during the prior year period, an increase of 13 percent.

-- Operating income of $21 million for the fourth quarter of 2007 versus $59 million for the comparable prior year period. Fourth quarter 2007 operating income was negatively impacted by asset impairments of $24 million related to the Company's continued site rationalizations and $16 million of manufacturing interruptions and planned facility turnarounds.

-- Net loss of $63 million for the 2007 quarter versus a net loss of $55 million in the fourth quarter of 2006.

-- Despite increased raw material costs, manufacturing interruptions and planned facility turnarounds, Segment EBITDA (earnings before interest, taxes, depreciation and amortization) increased 2 percent to $125 million in fourth quarter 2007 compared to $123 million during the prior year period due to improved product mix and ongoing cost reduction programs. (Note: Segment EBITDA is a non-GAAP financial measure and is defined and reconciled to Net Income later in this release).

Highlights for fiscal year 2007 include:

-- Revenues of $5.8 billion, a 12 percent increase compared to fiscal year 2006. Acquisitions, net of divestitures, added $222 million in incremental sales.

-- Full year operating income reached $302 million, an increase of 22 percent, compared to $247 million recorded in fiscal year 2006 after excluding gains from the sale of businesses.

-- The Company posted a net loss of $65 million in 2007 compared to a net loss of $109 million in fiscal year 2006. Fiscal year 2007 results included $98 million in higher interest and tax expenses compared to the prior year period. Fiscal year 2006 results included a $121 million loss on the extinguishment of debt and a $39 million net gain from the sale of businesses.

-- Hexion recorded 2007 Segment EBITDA of $611 million compared to $524 million in 2006, an increase of 17 percent. Adjusted EBITDA was $707 million for the year ended December 31, 2007. (Note: Adjusted EBITDA is a non-GAAP financial measure and is defined and reconciled to Net Income later in this release).

"Our fourth quarter 2007 Segment EBITDA was negatively impacted by $16 million in raw material inflation, $7 million in planned turnaround maintenance costs and $9 million in manufacturing outages when compared to the fourth quarter of 2006," said Craig O. Morrison, Chairman, President and CEO. "Fortunately, our manufacturing operations have returned to normal production at this time and our pricing actions partially offset raw material headwinds in the fourth quarter of 2007. We are also working to achieve the selective pricing actions that have recently been announced, while closely monitoring the ongoing raw material volatility."

"Our strong gains in 2007 operating income and Segment EBITDA demonstrate our success in serving our growing global customer base, achieving synergies and managing costs. I am also pleased with the improvement in our balance sheet in 2007 as we generated $174 million in cash from operations and completed two bolt-on acquisitions, while maintaining a strong liquidity position of $485 million based on cash plus available borrowing capacity under our credit facilities. Looking ahead to 2008, we will continue to focus on offsetting challenging North American market conditions through our strategy of international diversification, synergy achievement, productivity initiatives and leveraging our global footprint to better serve our customers."

As part of its ongoing synergy program, Hexion achieved $15 million in synergies in the fourth quarter of 2007. As of December 31, 2007, Hexion has achieved $120 million in synergies from its full program targeting $175 million in savings.

During the fourth quarter of 2007, Hexion also announced that it had completed the purchase of ARKEMA GmbH, which had 2006 revenues of approximately EUR 101 million, or $127 million. Terms of the agreement were not disclosed. Based in the Leuna industrial park in east central Germany, the ARKEMA German resins and formaldehyde business manufactures formaldehyde and formaldehyde-based resins including urea-formaldehyde, phenol-formaldehyde and melamine-based resins systems. The acquisition expands the Company's presence in Germany, the largest wood panels market in Europe, and in Eastern Europe.

Transaction Update

Hexion recently announced that both it and Huntsman Corporation have agreed to allow additional time for the Federal Trade Commission to review the proposed merger of the two companies. As a result, the merger is not expected to be completed before May 3. To accommodate the extension, Hexion has also given notice to Huntsman that on April 5, it will exercise its option to extend the Termination Date under the Merger Agreement for 90 days, and thus, if the conditions to Hexion's extension right are met on April 5, the termination date under the Merger Agreement will be extended until July 4, 2008.

"We are fully cooperating with regulatory agencies and will continue to work closely with Huntsman and the agencies in order to obtain the regulatory approvals required to complete the merger," Morrison said.

Hexion announced on July 12, 2007, that it had entered into a definitive agreement to acquire Huntsman Corporation in an all-cash transaction valued at approximately $10.6 billion, including the assumption of debt. Under the terms of the Merger Agreement, the cash price per share to be paid by Hexion will increase each day beginning on April 5, 2008 through consummation of the merger at the equivalent of approximately 8% per annum (less any dividends or distributions declared or made). The transaction was approved by Huntsman shareholders on October 16, 2007 and is subject to customary closing conditions, including regulatory approval in the U.S. and several other countries.

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the fourth quarter and full year 2007. 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.

(U.S. Dollars in Millions)
                                            (Unaudited)
                                           Three months  Fiscal Year
                                               ended         Ended
                                           December 31,  December 31,
                                           ------------- -------------
                                            2007   2006   2007   2006
                                           ------ ------ ------ ------
    Net Sales to Unaffiliated Customers
     (1)(2)(3)
    Epoxy and Phenolic Resins             $  616 $  539 $2,424 $2,152
    Formaldehyde and Forest Products
     Resins                                  448    357  1,663  1,440
    Coatings and Inks                        316    326  1,330  1,254
    Performance Products                     100     87    393    359
                                           ------ ------ ------ ------
                                           1,480  1,309  5,810  5,205
                                           ====== ====== ====== ======

    Segment EBITDA (2)(3)
    Epoxy and Phenolic Resins             $   62 $   66 $  337 $  271
    Formaldehyde and Forest Products
     Resins                                   39     43    165    156
    Coatings and Inks                         17     11     86     81
    Performance Products                      20     14     77     61
    Corporate and Other                      (13)   (11)   (54)   (45)
------------------------------------------------------------ ----------

(1) Intersegment sales are not significant and, as such, are
     eliminated within the selling segment.
(2) Net sales and Segment EBITDA include the acquisition of the
     coatings business from the Rhodia Group, the global ink and
     adhesive resins business from Akzo Nobel, the resins and
     adhesives business from Orica and the forest products resins and
     formaldehyde business of Arkema since January 31, 2006, June 1,
     2006, February 1, 2007 and November 1, 2007, respectively, and
     exclude the results from Alba Adesivos, the Brazilian Consumer
     Divestiture, since March 31, 2006.
(3) Certain of the Company's product lines have been realigned,
     resulting in reclassifications between segments. Prior period
     balances have been reclassified to conform to current
     presentations.

Earnings Call

Hexion Specialty Chemicals, Inc. will host a teleconference to discuss Fourth Quarter and Fiscal Year 2007 results on Tuesday, March 11, 2008, at 10:00 a.m. Eastern Standard Time.

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

U.S. Participants: 866-700-5192
International Participants: 617-213-8833
Participant Passcode: 72131271

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

A replay of the call will be available for three weeks beginning at 12 p.m. Eastern Time, March 11, 2008. The playback can be accessed by dialing 888-286-8010 (U.S.) and 617-801-6888 (International). The passcode is 12933968. A replay also will be available through the Investors Section of the Company's website.

Reconciliation of Segment EBITDA to Net Loss (Unaudited)
                                          Three months
                                            ended Dec.    Year ended
                                                31,         Dec. 31
                                          -------------- -------------
                                            2007   2006   2007   2006
                                          -------- ----- ------ ------
Segment EBITDA:
Epoxy and Phenolic Resins                    $ 62  $ 66  $ 337  $ 271
Formaldehyde and Forest Product Resins         39    43    165    156
Coatings and Inks                              17    11     86     81
Performance Products                           20    14     77     61
Corporate and Other                           (13)  (11)   (54)   (45)

Reconciliation:
Items not included in Segment EBITDA
    Transaction costs                          --     1     (1)   (20)
    Integration costs                         (10)  (12)   (38)   (57)
    Non-cash charges                          (37)   (9)   (54)   (22)
    Unusual items:
         Gain (loss) on divestiture of
          business                             --    (1)     8     39
         Purchase accounting
          effects/inventory step-up            (1)   --     (1)    (3)
         Discontinued operations               --    --     --    (14)
         Business realignments                 (5)    6    (21)     2
         Other                                 (8)   (2)   (17)   (10)
                                          -------- ----- ------ ------
    Total unusual items                       (14)    3    (31)    14
                                          -------- ----- ------ ------
              Total adjustments               (61)  (17)  (124)   (85)
Interest expense, net                         (73)  (71)  (310)  (242)
Loss on extinguishment of debt                 --   (69)    --   (121)
Income tax benefit (expense)                   (1)   27    (44)   (14)
Depreciation and amortization                 (53)  (48)  (198)  (171)
                                          -------- ----- ------ ------

Net loss                                     $(63) $(55) $ (65) $(109)
                                          ======== ===== ====== ======

Reconciliation of Last Twelve Month Net Loss to Adjusted EBITDA

Adjusted EBITDA is defined as EBITDA further adjusted to exclude certain non-cash and certain non-recurring costs. Adjusted EBITDA also includes expected future cost savings and other adjustments permitted in calculating covenant compliance under the indentures governing certain of the Company's debt instruments and the Company's senior credit facility. Certain covenants in these agreements (i) require the maintenance of a senior secured debt to Adjusted EBITDA ratio and (ii) restrict the Company's ability to take certain actions such as incurring additional debt or making certain acquisitions if the Company is unable to meet this ratio and also a defined Adjusted EBITDA to Fixed Charge ratio. The covenant to incur additional indebtedness and the ability to make future acquisitions requires an Adjusted EBITDA to Fixed Charges ratio (measured on a trailing four-quarter basis) of 2.0:1.0. Fixed charges are defined as interest expense excluding the amortization or write-off of deferred financing costs. Failure to comply with these covenants can result in limiting long-term growth prospects by hindering the Company's ability to incur future indebtedness or grow through acquisitions. The Company believes that including the supplemental adjustments applied in presenting Adjusted EBITDA is appropriate to provide additional information to investors to demonstrate compliance with financial covenants and assess the Company's future ability to incur additional indebtedness. Adjusted EBITDA and fixed charges are not defined terms under accounting principles generally accepted in the United States of America (US GAAP).

Adjusted EBITDA is not intended to represent any measure of earnings or cash flow in accordance with US GAAP and the Company's calculation and use of this measure may differ from other companies. These non-GAAP measures should not be used in isolation or as a substitute for measures of performance or liquidity. Adjusted EBITDA should not be considered an alternative to operating income or net loss under US GAAP to evaluate the Company's results of operations or as an alternative to cash flows as a measure of liquidity. Fixed Charges should not be considered an alternative to interest expense.

                                                         Year Ended
                                                        December 31,
                                                             2007
                                                       ---------------
Reconciliation of Net Loss to Adjusted EBITDA
Net loss                                                        $ (65)
Income taxes                                                       44
Interest expense, net                                             310
Depreciation and amortization expense                             198
                                                       ---------------
    EBITDA                                                        487
Adjustments to EBITDA
    Acquisitions EBITDA (1)                                        38
    Transaction costs                                               1
    Integration costs (2)                                          38
    Non-cash charges (3)                                           54
    Unusual items:
         Gain on sale of businesses                                (8)
         Purchase accounting effects/inventory step-up              1
         Business realignments (4)                                 21
         Other (5)                                                 20
                                                       ---------------
              Total unusual items                                  34
                                                       ---------------
    In process Synergies (6)                                       55
                                                       ---------------
Adjusted EBITDA                                                 $ 707
                                                       ===============
Fixed charges (7)                                               $ 274
                                                       ===============
Ratio of Adjusted EBITDA to Fixed Charges (8)                    2.58
                                                       ===============

(1) Represents the incremental EBITDA impact of the Orica A&R
     Acquisition and the Arkema Acquisition as if they had taken place
     at the beginning of the period. Also includes the impacts of in
     process synergies related to the Coatings and Ink acquisitions.
(2) Represents redundancy and incremental administrative costs
     associated with integration programs. Also includes costs to
     implement a single, company-wide management information and
     accounting system.
(3) Includes non-cash charges for impairments of fixed assets, stock-
     based compensation and unrealized foreign exchange and derivative
     activity.
(4) Represents plant rationalization, headcount reduction and other
     costs associated with business realignments.
(5) Includes the impact of the announced Alkyds Divestiture as if it
     had taken place at the beginning of the period, management fees,
     costs to settle a lawsuit, realized foreign currency activity and
     costs for unplanned plant outages.
(6) Represents estimated net unrealized synergy savings resulting from
     the Hexion Formation.
(7) The charges reflect pro forma interest expense based on interest
     rates at March 3, 2008 as if the Orica A&R Acquisition, the
     Arkema Acquisition, and the amendment of our senior secured
     credit facilities had taken place at the beginning of the period.
(8) We are required to maintain an Adjusted EBITDA to Fixed Charges
     ratio of greater than 2.0 to 1.0 to be able to incur additional
     indebtedness under our indenture for the Second Priority Senior
     Secured Notes. As of December 31, 2007, the Company was able to
     satisfy this covenant and incur additional indebtedness under
     this indenture.

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 2006 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: 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 2006 Annual Report on Form 10-K, and our other filings, with the SEC.

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. Additional information is available at www.hexion.com.

CONSOLIDATED STATEMENTS OF OPERATIONS
HEXION SPECIALTY CHEMICALS, INC. (Unaudited)
                                                        Three months
                                                        ended December
                                                             31,
                                                       ---------------
(In millions)                                           2007    2006
------------------------------------------------------ ------- -------
Net sales                                              $1,480  $1,309
Cost of sales                                           1,308   1,143
                                                       ------- -------
    Gross profit                                          172     166
Selling, general & administrative expense                 104      91
Transaction costs                                          --      (1)
Integration costs                                          10      12
Other operating expense, net                               37       5
                                                       ------- -------
    Operating income                                       21      59
Interest expense, net                                      73      71
Loss on extinguishment of debt                             --      69
Other non-operating expense, net                           10       1
                                                       ------- -------
    Loss from continuing operations before income tax,
    earnings from unconsolidated entities and minority
     interest                                             (62)    (82)
Income tax expense (benefit)                                1     (27)
                                                       ------- -------
    Loss from continuing operations before earnings
    from unconsolidated entities and minority interest    (63)    (55)
Earnings from unconsolidated entities, net of taxes         1      --
Minority interest in net income of consolidated
 subsidiaries                                              (1)     --
                                                       ------- -------
    Net loss                                           $  (63) $  (55)
                                                       ======= =======
    Comprehensive income (loss)                        $  (50) $    2
                                                       ======= =======

CONSOLIDATED STATEMENTS OF OPERATIONS
HEXION SPECIALTY CHEMICALS, INC.
                                                         Fiscal Year
                                                       ---------------
(In millions)                                           2007    2006
------------------------------------------------------ ------- -------
Net sales                                              $5,810  $5,205
Cost of sales                                           4,994   4,485
                                                       ------- -------
    Gross profit                                          816     720
Selling, general & administrative expense                 415     384
Transaction costs                                           1      20
Integration costs                                          38      57
Other operating expense (income), net                      60     (27)
                                                       ------- -------
    Operating income                                      302     286
Interest expense, net                                     310     242
Loss on extinguishment of debt                             --     121
Other non-operating expense, net                           15       3
                                                       ------- -------
    Loss from continuing operations before income tax,
    earnings from unconsolidated entities and minority
     interest                                             (23)    (80)
Income tax expense                                         44      14
                                                       ------- -------
    Loss from continuing operations before earnings
    from unconsolidated entities and minority interest    (67)    (94)
Earnings from unconsolidated entities, net of taxes         4       3
Minority interest in net income of consolidated
 subsidiaries                                              (2)     (4)
                                                       ------- -------
    Loss from continuing operations                       (65)    (95)
Loss from discontinued operations                          --     (14)
                                                       ------- -------
    Net loss                                              (65)   (109)
Accretion of redeemable preferred stock                    --      33
                                                       ------- -------
    Net loss available to common shareholders          $  (65) $ (142)
                                                       ======= =======
    Comprehensive income (loss)                        $   28  $  (11)
                                                       ======= =======

CONSOLIDATED BALANCE SHEETS
HEXION SPECIALTY CHEMICALS, INC.
                                                     December December
                                                        31,      31,
(In millions)                                          2007     2006
---------------------------------------------------- -------- --------
Assets
Current assets
    Cash and equivalents                             $   199   $   64
    Accounts receivable (less allowance for doubtful
    accounts of $22 and $21, respectively)               874      763
    Inventories:
         Finished and in-process goods                   418      362
         Raw materials and supplies                      185      187
    Other current assets                                  78      102
                                                     -------- --------
         Total current assets                          1,754    1,478
                                                     -------- --------
Other assets                                             223      107
Property and equipment
         Land                                            105       96
         Buildings                                       325      276
         Machinery and equipment                       2,231    2,009
                                                     -------- --------
                                                       2,661    2,381
Less accumulated depreciation                         (1,046)    (830)
                                                     -------- --------
                                                       1,615    1,551
Goodwill                                                 206      193
Other intangible assets, net                             208      179
                                                     -------- --------
         Total assets                                $ 4,006   $3,508
                                                     ======== ========

CONSOLIDATED BALANCE SHEETS
HEXION SPECIALTY CHEMICALS, INC.
                                                     December December
                                                        31,      31,
(In millions)                                          2007     2006
---------------------------------------------------- -------- --------
Liabilities and Shareholder's Deficit
Current liabilities
    Accounts and drafts payable                      $   718  $   616
    Debt payable within one year                          85       66
    Interest payable                                      54       58
    Income taxes payable                                  47      108
    Other current liabilities                            342      263
                                                     -------- --------
         Total current liabilities                     1,246    1,111
                                                     -------- --------
Long-term liabilities
    Long-term debt                                     3,635    3,326
    Long-term pension and post employment benefit
     obligations                                         220      223
    Deferred income taxes                                141      142
    Other long-term liabilities                          138      107
                                                     -------- --------
         Total liabilities                             5,380    4,909
                                                     -------- --------
Minority interest in consolidated subsidiaries            12       13

Commitments and contingencies

Shareholder's Deficit
    Common stock--$0.01 par value; 300,000,000
     shares
    authorized, 170,605,906 issued and 82,556,847
    outstanding at September 30, 2007 and December
     31, 2006                                              1        1
    Paid-in deficit                                      (13)     (17)
    Treasury stock, at cost--88,049,059 shares          (296)    (296)
    Accumulated other comprehensive income               174       81
    Accumulated deficit                               (1,252)  (1,183)
                                                     -------- --------
         Total shareholder's deficit                  (1,386)  (1,414)
                                                     -------- --------
              Total liabilities and shareholder's
               deficit                               $ 4,006  $ 3,508
                                                     ======== ========

CONSOLIDATED STATEMENTS OF CASH FLOWS
HEXION SPECIALTY CHEMICALS, INC.
                                                          Year ended
                                                         December 31,
                                                         -------------
(In millions)                                             2007   2006
                                                         ------ ------
Cash flows provided by operating activities
    Net loss                                             $ (65) $(109)
    Adjustments to reconcile net loss to net cash
     provided by operating activities:
         Depreciation and amortization                     198    171
         Loss from discontinued operations                  --     14
         Gain on sale of businesses, net of taxes           (8)   (33)
         Write-off of deferred initial public offering
          costs                                             --     15
         Write-off of deferred financing fees               --     27
         Minority interest in net income of consolidated
          subsidiaries                                       2      4
         Stock-based compensation expense                    5      6
         Deferred tax expense (benefit)                     (3)   (18)
         Amortization of deferred financing fees             7      9
         Debt redemption interest adjustment                --      6
         Impairments                                        32     12
         Other non-cash adjustments                         14     (3)
    Net change in assets and liabilities:
         Accounts receivable                               (51)  (112)
         Inventories                                       (14)   (56)
         Accounts and drafts payable                        57     86
         Income taxes payable                              (33)    15
         Other assets, current and non-current              17     (3)
         Other liabilities, current and long-term           16     (7)
         Net cash used in operating activities of
          discontinued operations                           --     (3)
                                                         ------ ------
              Net cash provided by operating activities    174     21
                                                         ------ ------

    Cash flows used in investing activities
         Capital expenditures                             (122)  (122)
         Capitalized interest                               (1)    (3)
         Casualty loss insurance proceeds                   --      2
         Acquisition of businesses, net of cash acquired  (130)  (201)
         Deferred acquisition costs                       (101)    --
         Proceeds from the sale of businesses, net of
          cash sold                                          5     47
         Proceeds from the sale of assets                   14     --
                                                         ------ ------
              Net cash used in investing activities       (335)  (277)
                                                         ------ ------

    Cash flows provided by financing activities
         Net short-term debt borrowings (repayments)       1       13
         Borrowings of long-term debt                  2,405    4,471
         Repayments of long-term debt                 (2,100)  (3,433)
         Payment of dividends on common stock            (13)    (485)
         Proceeds from issuance of preferred stock,
          net of issuance costs                           --       --
         Redemption of preferred stock                    --     (397)
         Long-term debt and credit facility
          financing fees                                  (5)     (38)
         IPO related costs                                --       (4)
         Net cash from financing activities of
          discontinued operations                         --        1
                                                     -------- --------
              Net cash provided by financing
               activities                                288      128
                                                     -------- --------
         Effect of exchange rates on cash and cash
          equivalents                                      8        9
         Increase (decrease) in cash and cash
          equivalents                                    135     (119)
         Cash and cash equivalents at beginning of
          year                                            64      183
                                                     -------- --------

         Cash and cash equivalents at end of year    $   199  $    64
                                                     ======== ========

SOURCE: Hexion Specialty Chemicals, Inc.

Hexion Specialty Chemicals, Inc.
Investors:
John Kompa, +1-614-225-2223
Director, Investor Relations
john.kompa@hexion.com
or
Media:
Peter F. Loscocco, +1-614-225-4127
Vice President, Public Affairs
peter.loscocco@hexion.com