Business News

Hexion Specialty Chemicals Reports Second Quarter 2009 Results

Thursday 13. August 2009 - Hexion Specialty Chemicals, Inc., today reported its results for the second quarter and six months ended June 30, 2009. Results for the second quarter of 2009 include:

Revenues of $947 million in the second quarter of 2009 compared to $1.67 billion during the prior year period as the sales decline reflected lower volumes, negative foreign currency translation and the contractual pass through of lower raw material prices, which more than offset pricing actions.
Operating loss of $24 million for the second quarter of 2009, which included $66 million in impairment costs associated with the idling of certain production facilities and restructuring costs associated with Hexion’s productivity initiatives. This compares to an operating loss of $107 million for the prior year period.
Net loss attributable to Hexion Specialty Chemicals, Inc. of $71 million for the 2009 quarter versus a net loss of $181 million in the prior year period. Second quarter 2009 results reflected the same items impacting operating loss and decreased interest expense, as well as a $14 million gain from the extinguishment of debt for amounts less than the face value of the debt securities.
Segment EBITDA (earnings before interest, taxes, depreciation and amortization) totaled $90 million in the second quarter of 2009 compared to $131 million during the prior year period. Lower volumes and reduced operating rates negatively impacted second quarter Segment EBITDA compared to the second quarter of 2008. (Note: Segment EBITDA is a non-GAAP financial measure and is defined and reconciled to Net Income later in this release.)
“As expected, second quarter 2009 sales and volumes improved slightly compared to the first quarter of 2009, but remained significantly below second quarter 2008 levels,” said Craig O. Morrison, Chairman, President and CEO. “Sequential improvement in second quarter 2009 EBITDA reflected the positive impact of productivity actions, modest volume improvements and seasonality of the business.

“Due to the challenging market conditions, we remain vigilant in our cost control efforts. Since completion of the third quarter of 2008 when Hexion announced its incremental productivity targets, the Company has realized $71 million in productivity savings. These actions have helped to decrease our non-raw material costs by $177 million during the first six months of 2009 across numerous areas, such as utilities, wages, travel, and manufacturing variable expenses. At June 30, 2009 we had an additional $181 million of planned productivity actions in process. Senior management is working closely with our global business leaders to ensure that we achieve our targeted cost savings as planned.”

“Hexion also continues to focus on cash management, evidenced by ongoing working capital improvements in the second quarter of 2009. We were pleased by our cash flow from operations of $97 million in the second quarter of 2009 versus $(7) million in the second quarter of 2008.”

Productivity and Synergy Update

Hexion continues to aggressively reduce costs throughout the Company and it achieved $32 million in productivity savings in the second quarter of 2009. In addition, Hexion expanded its targeted productivity initiatives by an additional $63 million in the second quarter of 2009. Planned productivity actions include additional site restructuring activities, employee reductions and various projects designed to increase the overall operating efficiency of the Company. The Company expects to incur an incremental $32 million to achieve the additional productivity targets.

Most of the actions to obtain the targeted productivity savings will occur over the next six to eighteen months and will include an approximate 20 percent reduction in Hexion’s worldwide staffing levels.

Six Month 2009 Results

Sales for the first six months of 2009 were $1.86 billion, a decrease of $1.44 billion compared to the first half of 2008, driven primarily by volume and raw material price declines across Hexion’s major product lines. In the first half of 2009, the Company had an operating loss of $12 million, which included $85 million in restructuring and impairment costs, compared to an operating loss of $24 million in the first half of 2008. Hexion posted net income of $45 million for the first six months of 2009 versus a net loss of $193 million in the first six months of 2008, which reflected a $32 million decrease in interest expense and a $10 million decrease in income tax expense. In addition, during the first six months of 2009, Hexion recognized a gain of $182 million on the extinguishment of $217 million in face value of outstanding debt securities. In the first six months of 2009, the Company generated $254 million in cash flow from operations versus $11 million in 2008.

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the three and six months ended June 30, 2009. Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash and non-recurring expenses. Segment EBITDA or adjusted 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. (Note: Segment EBITDA is a non-GAAP financial measure and is defined and reconciled to Net Income later in this release.)

Three months ended June 30, Six months ended June 30,
2009 2008 2009 2008
Net Sales to Unaffiliated Customers(1)(2):
Epoxy and Phenolic Resins $ 398 $ 697 $ 782 $ 1,336
Formaldehyde and Forest Product Resins 267 515 533 1,085
Coatings and Inks 231 358 425 690
Performance Products 51 98 121 193
$ 947 $ 1,668 $ 1,861 $ 3,304
Segment EBITDA(2):
Epoxy and Phenolic Resins $ 49 $ 58 $ 71 $ 132
Formaldehyde and Forest Product Resins 21 51 42 105
Coatings and Inks 22 12 23 30
Performance Products 15 23 40 44
Corporate and Other (17 ) (13 ) (25 ) (26 )
(1) Intersegment sales are not significant and, as such, are eliminated within the selling segment.

(2) 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.

Reconciliation of Segment EBITDA to Net Income (Loss) (Unaudited)

(U.S. Dollars in Millions)


Three months ended June 30, Six months ended June 30,
2009 2008 2009 2008
Segment EBITDA:
Epoxy and Phenolic Resins $ 49 $ 58 $ 71 $ 132
Formaldehyde and Forest Product Resins 21 51 42 105
Coatings and Inks 22 12 23 30
Performance Products 15 23 40 44
Corporate and Other (17 ) (13 ) (25 ) (26 )

Reconciliation:
Items not included in Segment EBITDA
Terminated merger and settlement (expense) income, net (3 ) (167 ) 27 (176 )
Integration and transaction costs — (8 ) — (15 )
Non-cash charges (3 ) (3 ) 1 (9 )
Unusual items:
Gains (losses) on divestiture of assets 2 3 (1 ) 10
Business realignments (22 ) (10 ) (38 ) (13 )
Asset impairments (44 ) — (47 ) —
Other (8 ) — (22 ) (7 )
Total unusual items (72 ) (7 ) (108 ) (10 )

Total adjustments (78 ) (185 ) (80 ) (210 )
Interest expense, net (56 ) (74 ) (120 ) (152 )
Gain on extinguishment of debt 14 — 182 —
Income tax benefit (expense) 3 1 — (10 )
Depreciation and amortization (44 ) (54 ) (88 ) (106 )

Net (loss) income attributable to Hexion Specialty Chemicals, Inc. (71 ) (181 ) 45 (193 )
Net income attributable to noncontrolling interest — 2 1 3

Net (loss) income $ (71 ) $ (179 ) $ 46 $ (190 )
Liquidity and Capital Resources

At June 30, 2009, Hexion had $3.555 billion of debt. In addition, at June 30, 2009, Hexion had $420 million in liquidity including $132 million of unrestricted cash and cash equivalents, $219 million of borrowings available under our senior secured revolving credit facilities, and $69 million of borrowings available under additional credit facilities at certain domestic and international subsidiaries and an equity commitment from certain affiliates of Apollo Management, L.P.

Hexion was in compliance at June 30, 2009 with all of the terms of its outstanding indebtedness, including the financial covenants. Although Hexion anticipates that the remainder of 2009 will be challenging, the Company expects to have adequate liquidity to fund its ongoing operations and cash debt service obligations for the foreseeable future from cash flows provided by operating activities, amounts available for borrowings under our credit facilities and amounts available from its parent.

Hexion continues to take a number of actions in its efforts to preserve liquidity and improve its cost structure, including:

Rationalizing its manufacturing footprint as Hexion ceased production at four locations in the first six months of 2009. In addition, the Company announced a realignment of its U.S.-based Coatings business, which will better align operations with market conditions and significantly reduce operating costs, in the second quarter of 2009.
Continuing to focus on reducing working capital (defined as accounts receivable and inventories less accounts and drafts payable) in 2009. In the first six months of 2009, working capital improvements contributed to Hexion’s generation of $254 million of cash from operations compared to $11 million in the first six months of 2008.
Reducing discretionary SG&A spending wherever possible. In the first six months of 2009, SG&A expenses decreased by $35 million, or 17 percent, versus the first six months of 2008.
Hexion also continues to investigate the sale of non-core assets to further increase liquidity.
As previously announced, during the second quarter of 2009, the Company purchased and extinguished $21 million in face value of its outstanding debt securities for $6 million. The $21 million in face value of repurchased debt securities consisted of $5 million in face value of the Company’s 8.375% unsecured debentures due 2016, $5 million in face value of the Company’s 9.200% unsecured debentures due 2021 and $11 million in face value of the Company’s 7.875% unsecured debentures due 2023. Future repurchases may be funded through available cash or borrowings from our credit facilities. In the second quarter of 2009, Hexion also purchased $180 million of Hexion LLC outstanding debt for $24 million. In addition, after the second quarter 2009 closed, Hexion purchased $71 million in face value of its various unsecured debentures due 2016 and beyond for approximately $31 million. Any future repurchases will depend on prevailing market conditions, the Company’s liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

Outlook

“Looking ahead, we believe the global economy will moderately strengthen during the third quarter of 2009, but we anticipate it will remain significantly below prior year trends,” Morrison said. “Our longer-term visibility remains limited at this time.

“We also believe our strong cash flow generation in the first six months of 2009 and our overall liquidity position should support anticipated increases in working capital in the second half of 2009 due to likely increases in certain raw material costs and an anticipated gradual recovery in volumes.

“We continue to focus on the items we can control, including our cost-control initiatives, site restructuring actions, and serving our global customers. We believe Hexion is well positioned to benefit from the eventual economic rebound.”