Business News

Hexion Specialty Chemicals Reports Third Quarter 2009 Results

Tuesday 17. November 2009 - Hexion Specialty Chemicals, Inc., today reported its results for the third quarter and nine months ended September 30, 2009. Results for the third quarter of 2009 include:

Revenues of $1.08 billion in the third quarter of 2009 compared to $1.61 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 income of $70 million for the third quarter of 2009 compared to $7 million for the prior year period. Third quarter 2009 operating income improved due to lower terminated merger and settlement expenses and a $14 million decrease in selling, general & administrative expense when compared to the prior year.
Net income attributable to Hexion Specialty Chemicals, Inc. of $53 million for the 2009 quarter versus a net loss of $76 million in the prior year period. Third quarter 2009 results reflected decreased interest expense and a $41 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 $128 million in the third quarter of 2009 compared to $130 million during the prior year period. The third quarter of 2008 was negatively impacted by $12 million in hurricane-related costs. (Note: Segment EBITDA is a non-GAAP financial measure and is defined and reconciled to Net Income later in this release.)
“While our third quarter 2009 company volumes trailed prior year levels by 14 percent, we benefited from a 15 percent sequential improvement in volumes from second quarter 2009 levels,” said Craig O. Morrison, Chairman, President and CEO. “The sequential improvement in our third quarter 2009 Segment EBITDA of 42% is a result of our productivity actions, volume gains and strong performances in certain specialty products, such as Specialty Epoxy and Versatic Acids and Derivatives. In addition, previous cost-cutting actions in our Coatings & Inks business also supported sharply improved results in this segment.”

“While we were encouraged by the steady improvement in our recent volumes, certain key end markets remain soft. As part of our response to the ongoing demand volatility, we are continuing to aggressively pursue our productivity initiatives. As of the third quarter of 2009, Hexion had $175 million of in process productivity actions. In addition to our productivity initiatives, we continued to reduce costs globally wherever possible.”

Productivity and Synergy Update

Hexion achieved $43 million in productivity savings in the third quarter of 2009 as it continued to focus on improving the overall operating efficiency of the Company. In addition, Hexion expanded its targeted productivity initiatives on an annualized basis by an additional $37 million in the third quarter of 2009, which was comprised of additional initiatives primarily within the Company’s Epoxy and Phenolic Resins business.

The Company expects to incur net costs of $70 million to achieve the remaining in-process productivity targets. Most of the actions to obtain the targeted productivity savings will occur over the next 15 months.

Nine Month 2009 Results

Sales for the first nine months of 2009 were $2.94 billion, a decrease of $1.97 billion compared to the first nine months of 2008, driven primarily by volume declines across Hexion’s major product lines and the pass through of lower raw material costs. In the first nine months of 2009, the Company posted operating income of $58 million, which included a $49 million decrease in selling, general and administrative expense, compared to an operating loss of $17 million in the first nine months of 2008. Hexion had net income of $98 million for the first nine months of 2009 versus a net loss of $269 million in the first nine months of 2008. During the first nine months of 2009, Hexion recognized a gain of $223 million on the extinguishment of $288 million in face value of outstanding debt securities. The Company generated $311 million in cash flow from operations versus a use of cash of $48 million in the first nine months of 2009 compared to the first nine months of 2008.

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the three and nine months ended September 30, 2009. 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. (Note: Segment EBITDA is defined and reconciled to Net Income later in this release.)


Three months ended September 30, Nine months ended September 30,
2009 2008 2009 2008
Net Sales to Unaffiliated Customers(1)(2):
Epoxy and Phenolic Resins $ 463 $ 650 $ 1,245 $ 1,986
Formaldehyde and Forest Product Resins 312 544 845 1,628
Coatings and Inks 244 319 669 1,009
Performance Products 61 98 182 292

$ 1,080 $ 1,611 $ 2,941 $ 4,915

Segment EBITDA(2):
Epoxy and Phenolic Resins $ 68 $ 62 $ 139 $ 194
Formaldehyde and Forest Product Resins 30 48 72 153
Coatings and Inks 27 9 50 39
Performance Products 16 23 56 67
Corporate and Other (13 ) (12 ) (38 ) (38 )
(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 September 30, Nine months ended Sept. 30,
2009 2008 2009 2008
Segment EBITDA:
Epoxy and Phenolic Resins $ 68 $ 62 $ 139 $ 194
Formaldehyde and Forest Product Resins 30 48 72 153
Coatings and Inks 27 9 50 39
Performance Products 16 23 56 67
Corporate and Other (13 ) (12 ) (38 ) (38 )

Reconciliation:
Items not included in Segment EBITDA
Terminated merger and settlement income (expense), net 12 (51 ) 39 (227 )
Integration and transaction costs — (5 ) — (20 )
Non-cash charges 2 (6 ) 3 (15 )
Unusual items:
(Losses) gains on divestiture of assets (1 ) 1 (2 ) 11
Business realignments (15 ) (9 ) (53 ) (22 )
Asset impairments
—

— (47 ) —
Derivative settlement — (13 ) — (13 )
Other (11 ) (2 ) (33 ) (9 )

Total unusual items (27 ) (23 ) (135 ) (33 )

Total adjustments (13 ) (85 ) (93 ) (295 )
Interest expense, net (52 ) (75 ) (172 ) (227 )
Gain on extinguishment of debt 41 — 223 —
Income tax (expense) benefit (7 ) 5 (7 ) (5 )
Depreciation and amortization (44 ) (51 ) (132 ) (157 )

Net income (loss) attributable to Hexion Specialty Chemicals, Inc. 53 (76 ) 98 (269 )
Net income attributable to noncontrolling interest — 1 1 4

Net income (loss) $ 53 $ (75 ) $ 99 $ (265 )
Liquidity and Capital Resources

At September 30, 2009, Hexion had $3.507 billion of debt. In addition, at September 30, 2009, Hexion had $403 million in liquidity including $139 million of unrestricted cash and cash equivalents, $218 million of borrowings available under our senior secured revolving credit facilities, and $46 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 September 30, 2009 with all of the terms of its outstanding indebtedness, including the financial covenants. The Company expects to have adequate liquidity to fund its ongoing operations and cash debt service obligations for the foreseeable future, including its obligation to redeem $34 million in face value of Industrial Revenue Bonds in the fourth quarter of 2009. Hexion expects to fund its obligations from cash flows provided by operating activities, amounts available for borrowings under our credit facilities and amounts available from its parent.

As previously announced, during the third quarter of 2009, the Company purchased and extinguished $71 million in face value of its outstanding debt securities 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

“We will continue to focus aggressively on cash management going forward. We are pleased with our cash generation during the first nine months of 2009 as Hexion generated cash flow from operations of $311 million,” Morrison said.

“Looking ahead, while Hexion is encouraged by the gradual volume improvement it has experienced in 2009, the Company’s longer-term visibility remains limited at this time. 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 that as the economy recovers, Hexion is well positioned to benefit from its lower cost structure.”