Business News
Rohm and Haas Company Reports Third Quarter Results
Wednesday 22. October 2008 - Company Delivers Respectable Financial Performance, Despite Challenging External Economic and Operating Environment
Highlights for the Quarter:
Sales up 12 percent from the prior-year period, primarily driven by timely pricing actions and growth in Rapidly Developing Economies.
Adjusted earnings per share, excluding special items, up 3 percent versus the prior-year period.
Proactive cost control and pricing actions coupled with effective financial strategies more than mitigated the impact of deteriorating business conditions.
Rohm and Haas Company (NYSE:ROH) today reported third quarter 2008 sales of $2,471 million, a 12 percent increase over the same period in 2007, driven by timely pricing actions, favorable currencies, acquisitions, and growth in Rapidly Developing Economies, partially offset by decreased demand in North America and Western Europe. The company reported third quarter 2008 earnings from continuing operations of $129 million, or $0.66 per share, compared to $129 million, or $0.61 per share, for the third quarter of 2007. This quarter’s results include special items totaling $0.24 per share: $0.09 per share in costs associated with the proposed merger with The Dow Chemical Company announced in July; $0.07 per share in costs resulting from the impact of hurricanes on the companys operations in the quarter; and $0.08 per share in asset impairments and costs resulting from restructuring actions announced in June. Adjusted earnings per share, excluding the special items noted above, were $0.90, up 3 percent compared to $0.87 in the prior-year period.
“The economic and operating environment deteriorated further this quarter, yet we were able to deliver respectable financial performance in the face of these challenges,” said Raj L. Gupta, chairman and chief executive officer of Rohm and Haas Company. “Our coordinated and prompt response to rapidly changing conditions and our timely pricing and cost reduction actions gained significant traction in the quarter allowing us to largely offset rising raw material and energy costs.”
Gupta added, “Our confidence in a bright future for Rohm and Haas Company remains high, and we fully expect to deliver outstanding results for all our stakeholders as we look forward to the merger with The Dow Chemical Company.”
3rd Quarter
%
In millions except per-share amounts
2008
2007
Change
Sales
$2,471
$2,204
12%
Earnings from continuing operations
$129
$129
0%
Diluted earnings per share from continuing operations
$0.66
$0.61
8%
Earnings from continuing operations excluding special items*
$176
$184
(4)%
Diluted earnings per share excluding special items*
$0.90
$0.87
3%
Weighted average common shares outstanding – diluted
195.7
210.1
(7)%
* Non-GAAP measure; see reconciliation in the appendix.
THIRD QUARTER 2008 FINANCIAL SUMMARY
Business and Regional Performance
Business results for Q3 2008 are presented on an adjusted basis below, where earnings for both periods exclude special items. A reconciliation of these adjusted earnings to GAAP by segment is provided in the appendix.
Electronic Materials Group
The Electronic Materials Group comprises two reportable segments which provide materials for use in applications such as telecommunications, consumer electronics and household appliances. Sales for the Electronic Materials Group were $506 million in the third quarter of 2008, up 14 percent over the same period in 2007, primarily reflecting the impact of acquisitions in Display Technologies.
Adjusted pre-tax earnings for this Group were $86 million, down 16 percent from 2007, primarily reflecting weakening industry demand for semiconductors and electronic devices.
Electronic Technologies
The Electronic Technologies segment is comprised of the companys Semiconductor Technologies, Circuit Board Technologies and Packaging and Finishing Technologies business units. Sales for the segment of $433 million were flat to the third quarter of 2007, reflecting a broad based slowdown in demand for semiconductors and electronic devices. Sales excluding precious metals pass-through were also flat.
Semiconductor Technologies sales were down 1 percent, reflecting primarily lower pricing.
Circuit Board Technologies sales rose 6 percent as compared to the same period last year, reflecting the impact of favorable currencies.
Packaging and Finishing Technologies sales decreased 3 percent versus last year, primarily driven by weakening demand for electronics.
Adjusted pre-tax earnings for this segment of $94 million were down 16 percent from the third quarter of 2007, reflecting primarily lower pricing and weaker demand.
Display Technologies
In June 2007, the company acquired the assets of Eastman Kodak Companys Light Management Films technology business, which produces advanced films that improve the brightness and efficiency of liquid crystal displays (LCD). On November 30, 2007, the company completed the formation of SKC Haas Display Films, a majority-owned joint venture with SKC, Inc., of South Korea for the development, manufacture and marketing of advanced optical and functional films used in the displays industry. On April 4, 2008, the company acquired Gracel Display, Inc., a leading developer and manufacturer of Organic Light Emitting Diode (OLED) materials. The new businesses, along with process-related materials also used in the displays industry previously included as part of the Semiconductor Technologies unit, form the Display Technologies reportable segment.
Display Technologies sales were $73 million in the quarter, compared to $9 million in the prior-year period. The segment reported an adjusted pre-tax loss of $8 million in the quarter, compared to a loss of $10 million in the prior year.
Specialty Materials Group
The Specialty Materials Group comprises three business units and represents the majority of the companys chemical business, serving a broad range of end-use markets. Net sales for this Group of $1,426 million were up 12 percent, primarily due to timely pricing actions and some benefit from favorable currencies, partially offset by decreased demand.
Adjusted pre-tax earnings for this Group were $142 million, down 14 percent from 2007, resulting from continued deterioration in the U.S. and Western Europe building and construction markets, partially offset by strong demand from Rapidly Developing Economies and favorable currencies.
The results for Specialty Materials are reported under the three separate reportable segments as follows:
Paint and Coatings Materials
Sales for the Paint and Coatings Materials business were $636 million, an increase of 12 percent over the same period in 2007, largely driven by higher selling prices, the impact of an acquisition and favorable currencies, partially offset by lower demand. Timely pricing actions paired with strong demand growth in Rapidly Developing Economies offset continued weakness in Western Europe and the U.S.
Adjusted pre-tax earnings of $80 million in the third quarter of 2008 were down 18 percent compared to the same period last year, reflecting lower demand in the U.S. and Western Europe, partially offset by demand growth in Rapidly Developing Economies.
Packaging and Building Materials
Packaging and Building Materials sales in the quarter were $476 million, up 3 percent over the same period in 2007, reflecting higher selling prices and favorable currencies partially offset by lower demand. Demand remained depressed in North America and Western Europe during the quarter, while growth moderated in Rapidly Developing Economies.
Adjusted pre-tax earnings of $34 million were down 21 percent versus the prior-year period, with favorable currencies only partially offsetting lower demand.
Primary Materials
Primary Materials sales were $667 million, an increase of 23 percent over the same period in 2007. Primary Materials results include sales to our internal downstream monomer-consuming businesses, along with sales to third-party customers of Monomers, Dispersants and Industrial and Household Polymers. Third-party sales increased 28 percent over the same period last year, reflecting higher selling prices, increased demand, and favorable currencies. Captive volumes were down 12 percent in the quarter.
Adjusted pre-tax earnings of $28 million in the third quarter of 2008 were up 17 percent compared to the third quarter of 2007. Higher selling prices and the impact of favorable currencies were partially offset by higher raw material, energy and freight costs.
Performance Materials Group
Sales for the Performance Materials Group were $322 million in the quarter, up 9 percent over the same period last year. The impact of favorable currencies, increased demand in Rapidly Developing Economies, and higher selling prices more than offset weakness in North America.
Process Chemicals and Biocides sales were up 14 percent over the same period last year, reflecting favorable currencies, strong demand in Rapidly Developing Economies and higher selling prices.
Powder Coatings sales were up 7 percent compared to the comparable period in 2007, driven by favorable currencies and higher selling prices partially offset by decreased demand.
Adjusted pre-tax earnings for the Performance Materials Group were $43 million for the third quarter of 2008, down 2 percent versus the prior-year period. Increased demand, particularly in Process Chemicals and Biocides, higher selling prices, and favorable currencies partially offset higher raw material, energy and freight costs.
Salt
Salt sales of $217 million were up 14 percent compared to the same period a year ago, driven by pricing management, improved mix, increased demand for consumer and industrial salt products, and higher-than-normal early-season demand for highway salt.
Adjusted pre-tax earnings for the Salt business in the quarter were $13 million, up $2 million versus the same period a year ago, reflecting continued improvement in operating efficiencies, pricing and expense control efforts.
Regional Performance
Sales grew across all regions, particularly in Asia and Latin America. Sales in Rapidly Developing Economies were up 25 percent for the quarter, representing 28 percent of total company sales versus 26 percent of the total a year ago.
3rd Quarter Sales
%
In millions
2008
2007
Change
North America Region
$1,100
$1,039
6%
Europe, Middle East and Africa Region
$631
$549
15%
Asia Pacific Region
$615
$515
19%
Latin America Region
$125
$101
24%
TOTAL
$2,471
$2,204
12%
Rapidly Developing Economies (RDEs)
$704
$564
25%
* RDEs include all countries in the company’s defined Latin America Region; Central and Eastern Europe and Turkey; and the Asia Pacific Region excluding Japan, Australia and New Zealand.
Corporate
Adjusted Corporate expense of $81 million was up $10 million versus the prior-year period. The increase year-on-year was largely due to higher interest expense and currency losses.
Income Statement and Other Highlights
Gross profit of $597 million in the quarter was 3 percent lower than the same period in 2007, primarily reflecting weaker demand as well as special items. Higher selling prices resulting from timely pricing actions effectively offset increased raw material, energy and freight costs.
Selling and administrative expense was $287 million, up 12 percent over the same period last year, largely attributable to acquisitions, currencies and special items.
Research and development expense of $85 million was up 18 percent from the same period last year, primarily reflecting the impact of acquisitions.
Interest expense for the quarter was $39 million, up $9 million from the same period in 2007, reflecting the impact of debt issued to fund the companys accelerated share repurchase agreement executed in the third quarter of 2007.
Income tax expense for the third quarter of 2008 was zero, compared to a 21.4 percent effective rate for third quarter earnings in 2007. The lower tax expense during the quarter is primarily due to a reduction to the estimated tax rate expected to be applicable for the full fiscal year, as well as for tax benefits recognized during the quarter for the favorable resolution of certain tax contingencies.
Net cash provided by operating activities was $619 million, up $29 million from the same period in 2007. Net debt at the end of September 30, 2008 was $2,953 million, a decrease of $79 million from year-end 2007.
The company made good progress in implementing the comprehensive set of actions to restore profitability and ensure the achievement of its Vision 2010 goals by realigning the companys manufacturing and support services announced June 17, 2008. These actions will impact 937 positions, primarily in North America, and are expected to generate approximate pre-tax annual run-rate savings of $110 million in 2010, with less than half of the benefit realized in 2009. The company noted that the vast majority of these savings is driven by changes to the companys supply chain infrastructure, including a 30 percent reduction of installed capacity in the North American emulsions network as well as other site closings and reductions.