WILMINGTON, DE, July 21, 2008 . . . Hercules Incorporated (NYSE: HPC) today reported net income for the quarter ended June 30, 2008 of $61.0 million, or $0.54 per diluted share, as compared to $41.3 million, or $0.36 per diluted share, for the second quarter of 2007.(1)
Net income from ongoing operations(2) for the second quarter of 2008 was $43.6 million, or $0.39 per diluted share, compared to $45.8 million, or $0.40 per diluted share, in the second quarter of 2007. Please refer to Table 2 for a reconciliation of net income from ongoing operations to reported net income. The ongoing tax rate was 26.9% in the second quarter of 2008 versus 24.5% in the same period last year. Net income from discontinued operations was $25.9 million and was related to the favorable resolution of a tax indemnification for a divested business. Severance, restructuring and other exit charges were $4.9 million, including $2.8 million related to the outsourcing of corporate functions, $1.8 million in Paper Technologies and $0.3 million in Aqualon. Asset impairment charges and accelerated depreciation and amortization were $1.8 million, primarily related to the upgrade of the company’s information technology platform.
Net sales in the second quarter of 2008 were $612.6 million, an increase of 12% from the same period last year. Volume and pricing increased by 5% and 2%, respectively. Rates of exchange increased sales by 6% during the quarter, while mix was 1% unfavorable.
Net sales in the second quarter of 2008 increased in all major regions of the world versus the prior year. Sales increased 7% in North America, 20% in Latin America, 14% in Europe and 17% in Asia Pacific. Europe was lower by 1% excluding the impact of the Euro.
Reported profit from operations in the second quarter of 2008 was $75.2 million, a decrease of 11% compared with $84.9 million for the same period in 2007.(1) Profit from ongoing operations(2) in the second quarter of 2008 was $82.6 million, an increase of 2% compared with $80.9 million in the second quarter of 2007. Please refer to Table 2 for a reconciliation of profit from ongoing operations to reported profit.
Cash flow from operations for the six months ended June 30, 2008 was $67.9 million, including cash outflows for severance, restructuring and other exit costs of $11.9 million. Capital spending for the six months ended June 30, 2008 was $45.4 million.
Interest and debt expense was $18.3 million in the second quarter of 2008, compared to $17.8 million in the second quarter of 2007, reflecting increased interest expense on cross currency interest rate swaps, partially offset by lower outstanding debt balances and improved debt mix.
Total debt was $816.7 million at June 30, 2008, an increase of $20.7 million from year-end 2007. Cash and cash equivalents were $106.6 million at June 30, 2008, as compared to $116.5 million at year-end 2007.
The Company purchased 351,100 shares of common stock at a cost of $6.5 million during the second quarter of this year and has now purchased 4.5 million shares for $84.3 million under its $200 million authorization through June 30, 2008. The repurchase of shares under this authorization is currently suspended due to the previously announced pending transaction with Ashland Inc.
On June 23, 2008, the Company acquired Logos Química Ltda., a Brazilian-based specialty chemical company, for approximately $21 million.
Segment Results – Ongoing Basis(2)
In the Aqualon Group, net sales increased 16% while profit from ongoing operations was 1% lower in the second quarter as compared with the second quarter of 2007. All business units had increased sales in the second quarter as compared to the prior year. In the aggregate, the sales increase was driven by 10% higher volume, including 2% from the 2007 specialty surfactants acquisition, 3% higher prices and 7% favorable rates of exchange, partially offset by 4% unfavorable product mix.
Coatings and construction sales increased 18% in the second quarter of 2008 as compared to the same period of last year, due to 12% higher volume, including 5% from the specialty surfactants acquisition, 4% increased pricing and 8% favorable rates of exchange, partially offset by 6% negative product and regional mix.
Sales into the coatings markets were up 20% in the second quarter of 2008 as compared to the same period of last year. Strong volume growth in Asia, including China, the Middle East and Eastern Europe, offset a soft North American market. Price increases were achieved in most regions and product families. Sales of specialty surfactants have increased sequentially every quarter since the acquisition was completed in July 2007. In addition, sales of specialty surfactants continue to grow outside traditional North American markets.
Construction market sales increased 17% as compared to the second quarter of last year. Strong growth was achieved in Asia, the Middle East, Africa and Eastern Europe, whereas other major regions were lower. Pricing improvements were achieved in most regions and product families. The increased construction sales reflect improved operability at the Hercules Tianpu China joint venture.
Regulated industry sales increased 16% in the second quarter of 2008 as compared to the same period of last year, primarily due to 4% higher volume, 3% improved product mix, 3% increased pricing and 6% favorable rates of exchange. Sales were higher in all markets. Sales increased in the pharmaceutical, personal care and food markets by 34%, 15% and 8%, respectively, as compared to the second quarter of last year. Growth was achieved in all major regions of the world. Pricing increases were achieved in most regions and product families. Sales of the AquariusTM film coating product line for the pharmaceutical industry continue to grow since the product launch in mid 2007.
Energy and specialties sales increased 11% in the second quarter of 2008 as compared to the same period of last year. The increase was due to 11% higher volumes, 4% higher prices and 4% favorable rates of exchange, partially offset by 8% unfavorable product mix. Energy sales increased 16% and specialties increased 5%, as compared to the prior year. Sales of both the energy and specialty businesses grew in most major regions of the world. Price increases were achieved across most product families.
Profit from ongoing operations was 1% lower, primarily as a result of higher raw material, transportation and utility costs, higher selling, general and administrative costs, and negative product and regional mix, partially offset by higher volume and the associated contribution margin, increased selling prices, lower pension expenses and favorable rates of exchange. Margins were adversely impacted as price increases did not fully offset higher raw material, freight and utility costs. Pricing increased $9.3 million from the second quarter of last year, whereas raw material, freight and utility costs increased $14.8 million. The recovery of cost increases through pricing continues to improve as 63% of cost increases were recovered in the second quarter versus 35% in the first quarter 2008. The negative mix reflects strong growth in both lower margin products and in lower margin regions which did not offset the impacts of the challenging North American coatings and construction markets.
In the Paper Technologies and Ventures Group, net sales in the second quarter increased 8% while profit from ongoing operations decreased 2% compared with the same quarter in 2007.
Paper Technologies sales increased 3% due to 7% favorable rates of exchange and 2% increased prices, partially offset by 6% lower volume. Product mix was flat in the aggregate. Volumes were lower in both North America and Europe while Asia volume was flat as compared to the second quarter of last year. North American volumes reflected lower sales of sizing products. European volumes reflected lower sales of strength chemicals. Price increases were achieved in the Americas and Europe while Asia pricing was lower in the aggregate. The favorable rates of exchange primarily reflect the strong Euro. Sales in fast growing markets, including Brazil, Chile, Indonesia, Russia and the Middle East, were up 26% compared to the prior year. Sales of new products continued to drive growth in overall sales and profitability.
Ventures sales increased 26% primarily due to 8% higher volume, 7% higher prices, 6% improved product mix, and 5% favorable rates of exchange. Sales increased in all Ventures business units: Lubricants increased 80%; Water management increased 9%; Pulp chemicals increased 18%; Building and converted products increased 17%; and Tolled products increased 5%. Pricing was favorable in most Venture businesses.
The recent acquisition of Logos Química Ltda. is expected to strengthen the pulp chemicals business within Ventures and increase the Company's presence in Latin America.
The decrease in profit from ongoing operations reflected higher raw material, freight and utility costs, and increased SG&A costs, which included a bad debt associated with a customer bankruptcy, partially offset by favorable rates of exchange, higher volume and improved selling prices in Ventures, and lower pension costs.
Price increases were $7.7 million as compared to the second quarter of last year, while raw material, freight and utility costs increased $11.1 million. The recovery of cost increases through pricing continues to improve as 69% of cost increases were recovered in the second quarter versus 46% in the first quarter 2008.
PTV severance and restructuring charges of $1.8 million were recorded in the quarter, primarily related to European operations, reflecting the re-alignment of manufacturing and sales organizations in response to the changing market dynamics in that region.
Outlook
As previously announced on July 11, 2008, the Company has entered into a definitive merger agreement under which Ashland Inc. (Ashland) would acquire all of the outstanding shares of the Company. The transaction is expected to close by the end of 2008.
Recovery of cost increases through pricing actions continues to improve. The Company now expects approximately $100 million in 2008 raw material, freight and utility cost increases as compared to the prior year. Implementation of price increases is expected to offset a majority of these costs. Despite the run up in energy related inputs, the Company expects modest operating margin improvement through higher utilization of recent capacity expansions and the impact of new product introductions. The full year ongoing tax rate is estimated to be 27%.
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Hercules manufactures and markets chemical specialties globally for making a variety of products for home, office and industrial markets. For more information, visit the Hercules website at www.herc.com.