COLUMBUS, Ohio - (March 3, 2009) - Hexion Specialty Chemicals, Inc., today reported itsresults for the fourth quarter and year ended December 31, 2008. Results for the fourth quarterof 2008 include:
· Revenues of $1.18 billion in the fourth quarter of 2008 compared to $1.48 billion during the prior year period as lower volumes more than offset increased pricing.
· Operating loss of $876 million for the fourth quarter of 2008 versus operating income of $21 million for the comparable prior year period. Hexions fourth quarter 2008 operating loss was primarily impacted by $800 million in terminated merger and settlement costs, which included legal fees and settlement costs associated with litigation relating to the Huntsman Corporation transaction. In addition, unabsorbed fixed costs associated with extended shutdowns in December 2008 increased Hexions operating loss by $23 million.
· Net loss of $921 million for the 2008 quarter versus a net loss of $63 million in the fourth quarter of 2007 primarily due to the same factors impacting operating loss, partially offset by income tax benefits due to increased pre-tax losses from international operations.
· Segment EBITDA (earnings before interest, taxes, depreciation and amortization) totaled $46 million in the fourth quarter of 2008 compared to $125 million during the prior year period. Lower volumes, extended plant shutdowns and reduced operating rates
negatively impacted fourth quarter Segment EBITDA. (Note: Segment EBITDA is a non-
GAAP financial measure and is defined and reconciled to Net Income later in this
release.)
Highlights for fiscal year 2008 include:
· Revenues of $6.1 billion in 2008 compared to $5.8 billion, an increase of 5 percent.
Acquisitions, net of divestitures, added $158 million in incremental revenues.
· An operating loss of $893 million versus operating income of $302 million in 2007.
Hexions operating loss reflected $1,027 million in terminated merger and settlement
costs.
· The Company posted a net loss of $1,190 million in 2008 compared to a net loss of $65
million in the prior year.
· Hexion recorded 2008 Segment EBITDA of $461 million compared to $611 million in
2007. Adjusted EBITDA was $596 million for the year ended December 31, 2008. (Note:
Segment EBITDA and Adjusted EBITDA are non-GAAP financial measures and defined
and reconciled to Net loss later in this release.)
“In addition to the impact of the merger termination and settlement costs, Hexion faced extremely challenging market conditions in the fourth quarter of 2008 as our results were negatively impacted by dramatically lower volumes, inventory destocking by customers and extended customer shutdowns due to the global economic slowdown,” said Craig O. Morrison, Chairman, President and CEO. “While our fourth quarter results were disappointing, we remain focused on achieving our restructuring programs, taking actions to enhance our liquidity position and investing in international markets, such as our forest product expansions currently under construction in Brazil and in Russia, as well as recent growth in our oilfield technology business.”
“We are anticipating that market conditions will remain challenging in 2009. Based on operating trends to date in the first quarter of 2009, we expect first quarter volumes and operating margins to be in line with the fourth quarter of 2008. We believe that Hexions customer, geographic and product diversity should help us partially offset the global slowdown, and we believe we are well-positioned for the eventual economic rebound. We are also encouraged by the recent relief we have seen in raw material prices, although these have historically been volatile. We are aggressively reducing costs and taking incremental actions to conserve cash.”
Productivity and Synergy Update The Company has taken aggressive actions in response to the fourth quarter slowdown and the limited visibility into 2009 demand levels. Hexion announced today that it is expanding its previously announced $60 million productivity program to a revised target of approximately $100 million to further improve the fficiency of its business. Hexions expanded productivity savings are expected to be generated primarily in two areas: manufacturing and commercial, with $56 million in targeted savings; and support services, with $44 million in targeted savings.
The Companys remaining $119 million in synergy and productivity savings are comprised of the $100 million target and ongoing actions from the Companys synergy program. Hexion expects that most of the actions to obtain the remaining synergy and productivity savings will be initiated or completed within the next 18 months and will include an approximate 15 percent reduction in Hexions worldwide staffing levels. Hexion expects to incur $44 million to achieve these savings, including $28 million for workforce reductions. The Company expects to fund these costs through working capital reductions.
In the fourth quarter of 2008, the Company achieved $17 million in productivity savings and synergies.
“While these are always difficult decisions, we are taking these actions to bolster the long-term health of the Company and continue to serve our customers in the face of unprecedented market declines,” Morrison said.
Full Year 2008 Results
Sales for fiscal year 2008 were $6.1 billion, a 5 percent increase compared to 2007. The increase in sales was driven by positive pricing actions and the impact of acquisitions, as well as favorable foreign currency translation. Operating loss in 2008 totaled $893 illion compared to operating income of $302 million in 2007. Fiscal year 2008 operating results were impacted by $1,027 million in terminated merger and settlement costs, as well as raw material cost increases, lower volumes in certain product lines and Hurricanes Gustav and Ike. The impact of these factors was partially off-set by pricing actions and the continued realization of synergies compared to the similar year-ago period. Hexion posted a net loss in 2008 of $1,190 million compared to a net loss of $65 million in 2007.
Update Related to the Huntsman Litigation Settlement Agreement
As previouslyannounced, on December 14, 2008, the Company entered into a settlement
agreement and release with Huntsman Corporation (NYSE: HUN) (“Huntsman”) and certain other parties with respect to litigation among various of the parties relating to the Huntsman merger agreement.
Under the settlement agreement, Hexion paid Huntsman a $325 million termination fee, as required by the merger agreement. As disclosed at the time of the settlement, the termination fee was borrowed by Hexion LLC, the parent company of Hexion. The termination fee loan is a sixyear bank loan to Hexion LLC with a payment in kind (PIK) provision that enables Hexion LLC, at its option, to accrue the interest at intervals during the term loan in lieu of making cash interest payments. Since the borrowing was made by Hexions parent, the Companys cash flow and debt covenant calculations are not impacted. In addition, the Company paid Huntsman $225 million, while reserving all rights with respect to reallocation of the payments to certain other affiliates of Apollo, and certain affiliates of Apollo paid Huntsman $200 million, while reserving all rights with respect to reallocation of the payments to certain other affiliates of Apollo. Finally, certain affiliates of Apollo purchased $250 million of Huntsmans 7% convertible senior notes.
Separately, pursuant to the settlement agreement, certain affiliates of Apollo have committed to purchase $200 million of preferred units and warrants of Hexion LLC by December 31, 2011. Hexion LLC and Hexion will have the right to require the Apollo investors to purchase all or a portion of the preferred units and warrants prior to December 31, 2011 as necessary to satisfy certain financial maintenance covenants applicable to Hexion. Hexion LLC will contribute the proceeds from the issuance of equity to Hexion to be used by Hexion for general business purposes.
In addition, prior to the purchase by the Apollo affiliates of all the preferred shares and warrants, the Apollo affiliates committed to provide liquidity facilities to Hexion LLC (or directly to Hexion if so directed by Hexion LLC) on an interim basis. The aggregate liquid facilities zutstanding, together with the purchase price for any preferred shares and warrants, will at no time exceed $200 million.
“We appreciate Apollos ongoing support of Hexion, which will help the Company solidify its position in the marketplace,” Morrison said. “We believe we are ell-positioned to compete globally as a stand-alone company, and we look forward to focusing fully on serving our customers and growing our business.”
Segment Results
Following are net sales and Segment EBITDA by reportable segment for the fourth quarter and twelve months ended in December 2008. 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 com ensation 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.)