WILMINGTON, DE, October 24, 2007 . . . Hercules Incorporated (NYSE: HPC) today reported net income for the quarter ended September 30, 2007 of $42.4 million, or $0.37 per diluted share, as compared to net income of $34.2 million, or $0.31 per diluted share, for the third quarter of 2006. Net income for the nine months ended September 30, 2007 was $150.4 million, or $1.31 per diluted share, as compared to a net loss of $3.4 million, or a loss of $0.03 per diluted share, for the same period in 2006.
Net income from ongoing operations(1) for the third quarter of 2007 was $53.4 million, or $0.46 per diluted share, an increase of 28% per diluted share as compared to net income from ongoing operations of $40.9 million, or $0.36 per diluted share, in the third quarter of 2006. Approximately $0.06 per share of the third quarter 2007 earnings are attributable to the sale of certain patents related to paper treatments to enhance printing.
Net income from ongoing operations(1) for the nine months ended September 30, 2007 was $134.9 million, or $1.17 per diluted share, an increase of 27% per diluted share versus the same period in 2006.
Cash flow from operations for the nine months ended September 30, 2007 was $247.5 million, an increase of $140.5 million as compared to the same period last year. The Company has now received $223.2 million of tax refunds during the year and expects to receive an additional $21.2 million in the first half of 2008. During the quarter, the Company purchased approximately 1.15 million shares of common stock for a cost of approximately $22.8 million, or $19.75 per share, pursuant to its previously announced $200 million share repurchase authorization.
Net sales in the third quarter of 2007 were $544.2 million, an increase of 6% from the same period last year. Volume and pricing increased by 4% and 1%, respectively. Rates of exchange also increased sales by 3%, while product mix was 2% unfavorable during the quarter. Net sales for the nine months ended September 30, 2007 were $1.596 billion, an increase of 8% as compared to the same period in 2006, excluding the impact of the FiberVisions transaction.
"We continue to demonstrate solid growth in revenues, earnings per share and cash flow," commented Craig A. Rogerson, President and Chief Executive Officer. "Our priority is to continue to invest in high return opportunities supporting our two global franchises. We also began returning excess cash flow to our shareholders by reinstituting a common stock dividend and through share repurchases."
Net sales in the third quarter of 2007 increased in all regions of the world. Sales increased 1% in North America, 7% in Europe (primarily Euro related), 28% in Latin America and 17% in Asia Pacific as compared to the same period last year.
Reported profit from operations in the third quarter of 2007 was $72.9 million, an increase of 1% compared with the same period in 2006. Profit from ongoing operations(1) in the third quarter of 2007 was $84.2 million, an increase of 10% compared with $76.4 million in the third quarter of 2006. The third quarter of this year included a gain of $7.4 million on the sale of the Paper Technology patents.
Interest and debt expense was $17.0 million in the third quarter of 2007, up $0.3 million compared with the third quarter of 2006. Interest expense for the nine months ended September 30, 2007 was $52.0 million, a decrease of $2.1 million from the same period of last year.
Net debt, total debt less cash and cash equivalents, was $669.0 million at September 30, 2007, a decrease of $154.7 million from year-end 2006.
Capital spending was $24.0 million in the third quarter and $77.8 million year to date. This compares to $26.3 million and $49.2 million in the third quarter and year to date periods last year, respectively.
Segment Results – Reported Basis
In the Aqualon Group, net sales increased 8% while profit from operations decreased 3% in the third quarter as compared with the third quarter of 2006.
All Aqualon business units had increased sales in the third quarter as compared to the prior year. In the aggregate, the sales increase was driven by 7% higher volume, 3% unfavorable product mix, 1% increased pricing and 3% favorable rates of exchange.
"We continue to show strong growth outside of North America, more than offsetting the challenging conditions experienced in this region. However, third quarter margins were impacted by higher supply chain and startup costs associated with our two major expansions in China to support growing demand in that region", noted Mr. Rogerson.
Coatings and construction sales increased 13% in the third quarter of 2007 as compared to the same period of last year, primarily due to 11% higher volume and 4% favorable rates of exchange, partially offset by 2% unfavorable product mix. Coatings sales were up 15% globally (14% from volume), with strong growth in many regions except the U.S. and Europe. The U.S. region increased 1% versus the third quarter of last year, while Europe was flat versus the prior year, excluding the favorable Euro. Sales into construction markets were up 11% globally (9% from volume) compared to the prior year. Strong growth in Asia, the Middle East, South America and Canada offset declines in Europe and the U.S.
The Company recently acquired a specialty surfactants business which will broaden Aqualon's product offering to the coatings markets and provide an additional growth platform.
Regulated Industries sales increased 3% in the third quarter of 2007 as compared to the same period of last year, primarily due to 2% increased price, 2% favorable mix, and 2% from favorable rates of exchange. Volume in the aggregate was down 3%. Price increases were achieved in many end markets. The improved sales mix reflects a higher portion of sales in the higher priced personal care markets. Volumes were lower in the aggregate as growth achieved in Europe and China was offset by declines in the U.S.
Energy & Specialties sales increased 3% in the third quarter of 2007 as compared to the same period of last year. The increase was due to 9% higher volume and 1% favorable rates of exchange, partially offset by 7% unfavorable mix. Pricing in the aggregate was flat. Lower oilfield volumes were offset by higher volumes in the specialty markets. The unfavorable mix is primarily attributable to a higher portion of guar versus other oilfield product sales.
Aqualon Group's profit from operations decreased $1.4 million as the higher volume and the associated contribution margin was offset by higher raw material, utility and supply chain costs. Margins were adversely impacted due to increased sales of third party materials as a result of our delayed capacity expansions as well as startup costs incurred by the China expansions. Selling, general and administrative (SG&A) costs were also higher compared to the prior year, reflecting increased sales and marketing, business management, and technology costs incurred to support growth initiatives.
In the Paper Technologies and Ventures Group ("PTV"), net sales in the third quarter increased 5% and profit from operations increased 34% compared with the same quarter in 2006.
Paper Technologies sales increased 4% due to 1% increased volume and 4% favorable rates of exchange, partially offset by an unfavorable mix of 1%. Pricing in the aggregate was flat as compared to the prior year. Volume growth was achieved in the Americas and in Europe, whereas Asia was lower. Price increases were achieved in North America, while pricing was lower in both Europe and Asia.
Venture sales increased 7% primarily due to 3% higher volume, 4% higher price, and 2% favorable rates of exchange, partially offset by 2% unfavorable mix. Volumes increased in most of the Venture businesses, while pricing increased in all of the Ventures. The unfavorable mix reflects higher sales of lower priced pulp and tolled products.
The Company recently invested in a joint venture, H2H Innovations, to expand our product offering of specialty formaldehyde-free adhesives which should enable faster penetration into the wood products industry.
PTV’s increased profit from operations reflects higher volume, improved selling price, a favorable product mix and the gain on the sale of the PTV patents, partially offset by higher raw material, transportation, utility and SG&A costs. Price increases were $1.5 million in the aggregate, whereas raw material cost increases were $3.0 million. Severance, restructuring and other exit costs in the third quarter of 2007 were $1.2 million as compared to $1.5 million in the same period of 2006. SG&A costs were higher than the prior year primarily due to increased personnel related costs, partially offset by lower legal and bad debt expenses.
"Performance in the Americas helped offset weaker European and Asian performance. Our success with new product launch, including emerging markets, continues to support overall margins," commented Mr. Rogerson.
Outlook
"We remain confident in our growth strategy and optimistic about both earnings and cash flow growth for the balance of the year and as we look to 2008," said Mr. Rogerson. "Aqualon's volumes should continue to grow globally across its markets and margins should benefit as we make progress with our expanded capacities in China through improved utilization. Paper Technologies' margins are expected to be maintained with sales of new products and growth in emerging markets offsetting raw material headwinds. We also expect pricing initiatives in both businesses to take effect in the fourth quarter and as we enter 2008.”