Momentive Specialty Chemicals Inc. Announces Second Quarter 2014 Results

COLUMBUS, Ohio--()--Momentive Specialty Chemicals Inc. (“Momentive Specialty Chemicals” or the “Company”) today announced results for the second quarter ended June 30, 2014.

Second Quarter 2014 Highlights

  • Total revenues increased 7% to $1.34 billion primarily reflecting increased volumes in our specialty epoxy, oilfield, and North American formaldehyde businesses.
  • Segment EBITDA increased 2% to $120 million primarily reflecting higher sales, cost control and productivity initiatives partially offset by continued softness within base epoxies and European dispersions business.

“Our North American forest products, oilfield and specialty epoxy businesses continue to demonstrate strong growth and drove improvements in our consolidated results during the second quarter of 2014,” said Craig Morrison, Chairman, President and CEO. “The trends we see in these businesses are reflective of both positive end market demand fundamentals as well as our aggressive focus on new product development and strategic capital investments. Our results continue to be impacted by soft market conditions in our base epoxy resins business and our dispersions business in Europe, which offset gains in our specialty portfolio businesses. Collectively these trends drove a six percent gain in Segment EBITDA in the first half of 2014 versus the first half of 2013.”

“I am pleased to report continued progress on our strategic growth initiatives. We are nearing completion of a phenolic specialty resins joint venture manufacturing facility in China, which is expected to be operational in the fourth quarter of this year, and our two previously announced forest product facilities remain on schedule to come online in late 2015. These investments are an important part of our broader growth program and will enhance our global manufacturing footprint and drive free cash flow generation going forward.”

Segment Results

Following are net sales and Segment EBITDA by reportable segment for the second quarter ended June 30, 2014. Segment EBITDA is defined as EBITDA adjusted to exclude certain non-cash and non-recurring expenses. Segment EBITDA is an important measure used by the Company's senior management and board of directors to evaluate operating results and allocate capital resources among segments. Corporate and Other primarily represents certain corporate, general and administrative expenses that are not allocated to the segments.

Net Sales (1):

(In millions)

   
Three Months Ended June 30, Six Months Ended June 30,
2014   2013 2014   2013
Epoxy, Phenolic and Coating Resins $ 862 $ 799 $ 1,679 $ 1,564
Forest Products Resins 475 451 951 878
Total $ 1,337 $ 1,250 $ 2,630 $ 2,442

(1) Intersegment sales are not significant and, as such, are eliminated within the selling segment.

   
Segment EBITDA:

(In millions)

 
Three Months Ended June 30, Six Months Ended June 30,
2014   2013 2014   2013
Epoxy, Phenolic and Coating Resins $ 72 $ 73 $ 148 $ 141
Forest Products Resins 65 59 125 114
Corporate and Other (17 ) (14 ) (36 ) (32 )
 
   
Reconciliation of Segment EBITDA to Net Loss (Unaudited)

(In millions)

 
Three Months Ended June 30, Six Months Ended June 30,
2014   2013 2014   2013
Segment EBITDA:
Epoxy, Phenolic and Coating Resins $ 72 $ 73 $ 148 $ 141
Forest Products Resins 65 59 125 114
Corporate and Other (17 ) (14 ) (36 ) (32 )
 
Reconciliation:
Items not included in Segment EBITDA:
Asset impairments (7 ) (7 )
Business realignment costs (12 ) (2 ) (18 ) (11 )
Integration costs (3 ) (2 ) (5 ) (5 )
Other (9 ) (15 ) (23 ) (26 )
Total adjustments (24 ) (26 ) (46 ) (49 )
Interest expense, net (76 ) (76 ) (153 ) (150 )
Loss on extinguishment of debt (6 )
Income tax (expense) benefit (11 ) (6 ) (21 ) 26
Depreciation and amortization (36 ) (38 ) (71 ) (76 )
Net loss $ (27 ) $ (28 ) $ (54 ) $ (32 )
 

Liquidity and Capital Resources

At June 30, 2014, Momentive Specialty Chemicals had total debt of approximately $3.8 billion, unchanged from December 31, 2013. In addition, at June 30, 2014, the Company had $466 million in liquidity comprised of $119 million of unrestricted cash and cash equivalents, $4 million of short-term investments, $303 million of borrowings available under the Company’s asset-backed loan facility (the “ABL Facility”) ($400 million borrowing base less $65 million of outstanding borrowings and $32 million of outstanding letters of credit) and $40 million of borrowings available under credit facilities at certain international subsidiaries.

Momentive Specialty Chemicals expects to have adequate liquidity to fund its ongoing operations for the next twelve months from cash on its balance sheet, cash flows provided by operating activities and amounts available for borrowings under its credit facilities.

Earnings Call

Momentive Specialty Chemicals will host a teleconference to discuss second quarter 2014 results on Wednesday, August 13, 2014, at 9:00 a.m. Eastern Time.

Interested parties are asked to dial-in approximately 10 minutes before the call begins at the following numbers:

U.S. Participants: 877-299-4454
International Participants: 617-597-5447
Participant Passcode: 98872869

Live Internet access to the call and presentation materials will be available through the Investor Relations section of the Company's website: www.momentive.com.

A replay of the call will be available for three weeks beginning at 1:00 p.m. Eastern Time on August 13, 2014. The playback can be accessed by dialing 888-286-8010 (U.S.) and +1-617-801-6888 (International). The passcode is 58946326. A replay also will be available through the Investor Relations Section of the Company's website.

Covenant Compliance

The instruments that govern the Company’s indebtedness contain, among other provisions, restrictive covenants regarding indebtedness (including an Adjusted EBITDA to Fixed Charges ratio incurrence test), dividends and distributions, mergers and acquisitions, asset sales, affiliate transactions and capital expenditures.

Adjusted EBITDA is defined as EBITDA adjusted for certain non-cash and certain non-recurring items and other adjustments calculated on a pro forma basis, including the expected future cost savings from business optimization programs or other programs and the expected future impact of acquisitions, in each case as determined under the governing debt instrument. As the Company is highly leveraged, it believes that including the supplemental adjustments that are made to calculate Adjusted EBITDA provides additional information to investors about the Company’s ability to comply with its financial covenants and to obtain additional debt in the future. Adjusted EBITDA and Fixed Charges are not defined terms under accounting principles generally accepted in the United States of America (U.S. GAAP). Adjusted EBITDA is not a measure of financial condition, liquidity or profitability, and should not be considered as an alternative to net income (loss) determined in accordance with U.S. GAAP or operating cash flows determined in accordance with U.S. GAAP. Additionally, EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not take into account certain items such as interest and principal payments on our indebtedness, depreciation and amortization expense (because the Company uses capital assets, depreciation and amortization expense is a necessary element of our costs and ability to generate revenue), working capital needs, tax payments (because the payment of taxes is part of our operations, it is a necessary element of our costs and ability to operate), non-recurring expenses and capital expenditures. Fixed Charges under the secured indentures should not be considered an alternative to interest expense.

Reconciliation of Last Twelve Months Net Loss to Adjusted EBITDA

The following table reconciles Net loss to EBITDA and Adjusted EBITDA, and calculates the ratio of Adjusted EBITDA to Fixed Charges as calculated under certain of the Company's indentures, for the period presented:

(In millions)

       
June 30, 2014
LTM Period
Net loss $ (656 )
Income tax expense 396
Interest expense, net 306
Depreciation and amortization 143  
EBITDA 189
Adjustments to EBITDA:
Asset impairments 174
Business realignments (1) 29
Integration costs (2) 10
Other (3) 50
Savings from Shared Services Agreement (4) 2
Cost reduction programs savings (5) 4
Pro forma EBITDA adjustment for acquisition (6) 16  
Adjusted EBITDA $ 474  
Pro forma fixed charges (7) $ 295  
Ratio of Adjusted EBITDA to Fixed Charges (8) 1.61  
(1)   Represents headcount reduction expenses and plant rationalization costs related to cost reduction programs and other costs associated with business realignments.
(2) Primarily represents integration costs associated with the Momentive Combination.
(3) Primarily includes pension expense related to formerly owned businesses, business optimization expenses, management fees, retention program costs, stock-based compensation and realized and unrealized foreign exchange and derivative activity.
(4) Primarily represents pro forma impact of expected savings from the Shared Services Agreement with MPM. Savings from the Shared Services Agreement represent the unrealized savings from shared services and logistics optimization, best-of-source contractual terms, procurement savings, and regional site rationalization as a result of the Momentive Combination, and represent our estimate of the unrealized savings from such initiatives that would have been realized had the related actions been completed at the beginning of the LTM period. Best of source contractual terms, procurement and logistics savings relate to cost savings as a result of lower cost contracts for raw materials and logistics as a result of better leverage with vendors.
(5) Represents pro forma impact of in-process cost reduction programs savings. Cost reduction program savings represent the unrealized headcount reduction savings and plant rationalization savings related to cost reduction programs and other unrealized savings associated with the Company’s business realignments activities, and represent our estimate of the unrealized savings from such initiatives that would have been realized had the related actions been completed at the beginning of the LTM period. The savings are calculated based on actual costs of exiting headcount and elimination or reduction of site costs.
(6) Reflects pro forma impact of the acquisition of a manufacturing facility in Shreveport, Louisiana in early 2014, and represents our estimate of incremental annualized EBITDA when the facility is operating at full capacity, as well as related synergies.
(7) Reflects pro forma interest expense based on interest rates at June 30, 2014.
(8) The Company’s ability to incur additional indebtedness, among other actions, is restricted under the indentures governing certain notes, unless the Company has an Adjusted EBITDA to Fixed Charges ratio of 2.0 to 1.0. As of June 30, 2014, we did not satisfy this test. As a result, we are subject to restrictions on our ability to incur additional indebtedness and to make investments; however, there are exceptions to these restrictions, including exceptions that permit indebtedness under our ABL Facility (available borrowings of which were $303 million at June 30, 2014).

Forward-Looking Statements

Certain statements in this press release are forward-looking statements within the meaning of and made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. In addition, our management may from time to time make oral forward-looking statements. All statements, other than statements of historical facts, are forward-looking statements. Forward-looking statements may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “may,” “will,” “could,” “should,” “seek” or “intend” and similar expressions. Forward-looking statements reflect our current expectations and assumptions regarding our business, the economy and other future events and conditions and are based on currently available financial, economic and competitive data and our current business plans. Actual results could vary materially depending on risks and uncertainties that may affect our operations, markets, services, prices and other factors as discussed in the Risk Factors section of our filings with the Securities and Exchange Commission (the “SEC”). While we believe our assumptions are reasonable, we caution you against relying on any forward-looking statements as it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, a weakening of global economic and financial conditions, interruptions in the supply of or increased cost of raw materials, the loss of, or difficulties with the further realization of, cost savings in connection with our strategic initiatives, including transactions with our affiliate, Momentive Performance Materials Inc., the impact of our substantial indebtedness, our failure to comply with financial covenants under our credit facilities or other debt, pricing actions by our competitors that could affect our operating margins, changes in governmental regulations and related compliance and litigation costs and the other factors listed in the Risk Factors section of this report and in our other SEC filings. For a more detailed discussion of these and other risk factors, see the Risk Factors section in our most recent Annual Report on Form 10-K and our other filings made with the SEC. All forward-looking statements are expressly qualified in their entirety by this cautionary notice. The forward-looking statements made by us speak only as of the date on which they are made. Factors or events that could cause our actual results to differ may emerge from time to time. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events or otherwise, except as otherwise required by law.

About the Company

Based in Columbus, Ohio, Momentive Specialty Chemicals Inc. (formerly known as Hexion Specialty Chemicals, Inc.) is the global leader in thermoset resins. Momentive Specialty Chemicals Inc. serves the global wood and industrial markets through a broad range of thermoset technologies, specialty products and technical support for customers in a diverse range of applications and industries. Momentive Specialty Chemicals is controlled by investment funds affiliated with Apollo Global Management, LLC. Additional information about Momentive Specialty Chemicals and its products is available at www.momentive.com.

   
MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
 

Three Months Ended
June 30,

Six Months Ended
June 30,

(In millions)

2014   2013 2014   2013
Net sales $ 1,337 $ 1,250 $ 2,630 $ 2,442
Cost of sales 1,174   1,098   2,303   2,147  
Gross profit 163 152 327 295
Selling, general and administrative expense 95 89 191 181
Asset impairments 7 7
Business realignment costs 12 2 18 11
Other operating (income) expense, net (1 ) 5   3   2  
Operating income 57 49 115 94
Interest expense, net 76 76 153 150
Loss on extinguishment of debt 6
Other non-operating expense (income), net 3   (2 ) 5   3  
Loss before income tax and earnings from unconsolidated entities (22 ) (25 ) (43 ) (65 )
Income tax expense (benefit) 11   6   21   (26 )
Loss before earnings from unconsolidated entities (33 ) (31 ) (64 ) (39 )
Earnings from unconsolidated entities, net of taxes 6   3   10   7  
Net loss $ (27 ) $ (28 ) $ (54 ) $ (32 )
 
   
MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 

(In millions, except share data)

June 30,
2014

December 31,
2013

Assets
Current assets:
Cash and cash equivalents (including restricted cash of $16 and $14, respectively) $ 135 $ 393
Short-term investments 4 7
Accounts receivable (net of allowance for doubtful accounts of $16) 728 601
Inventories:
Finished and in-process goods 331 257
Raw materials and supplies 154 103
Other current assets 68   72  
Total current assets 1,420   1,433  
Investment in unconsolidated entities 49 45
Deferred income taxes 19 21
Other long-term assets 138 134
Property and equipment:
Land 91 88
Buildings 317 308
Machinery and equipment 2,508   2,427  
2,916 2,823
Less accumulated depreciation (1,834 ) (1,776 )
1,082 1,047
Goodwill 126 112
Other intangible assets, net 91   82  
Total assets $ 2,925   $ 2,874  
Liabilities and Deficit
Current liabilities:
Accounts payable $ 510 $ 483
Debt payable within one year 137 109
Interest payable 83 83
Income taxes payable 17 12
Accrued payroll and incentive compensation 62 47
Other current liabilities 119   127  
Total current liabilities 928   861  
Long-term liabilities:
Long-term debt 3,709 3,665
Long-term pension and post employment benefit obligations 226 234
Deferred income taxes 22 21
Other long-term liabilities 157   163  
Total liabilities 5,042   4,944  
Commitments and contingencies
Deficit
Common stock—$0.01 par value; 300,000,000 shares authorized, 170,605,906 issued and 82,556,847 outstanding at June 30, 2014 and December 31, 2013 1 1
Paid-in capital 525 522
Treasury stock, at cost—88,049,059 shares (296 ) (296 )
Accumulated other comprehensive loss (17 ) (21 )
Accumulated deficit (2,329 ) (2,275 )
Total Momentive Specialty Chemicals Inc. shareholder’s deficit (2,116 ) (2,069 )
Noncontrolling interest (1 ) (1 )
Total deficit (2,117 ) (2,070 )
Total liabilities and deficit $ 2,925   $ 2,874  
 
 
MOMENTIVE SPECIALTY CHEMICALS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 
Six Months Ended June 30,

(In millions)

2014   2013
Cash flows used in operating activities
Net loss $ (54 ) $ (32 )
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 71 76
Deferred tax benefit (2 ) (41 )
Non-cash asset impairments 7
Loss on extinguishment of debt 6
Unrealized foreign currency losses (gains) 8 (26 )
Other non-cash adjustments (3 ) 1
Net change in assets and liabilities:
Accounts receivable (116 ) (159 )
Inventories (120 ) (70 )
Accounts payable 24 119
Income taxes payable 5 6
Other assets, current and non-current 13 18
Other liabilities, current and long-term (12 ) 30  
Net cash used in operating activities (186 ) (65 )
Cash flows used in investing activities
Capital expenditures (78 ) (60 )
Capitalized interest (1 )
Purchase of businesses (64 )
Proceeds from the sale of (purchases of) debt securities, net 3 (1 )
Change in restricted cash (2 ) 15
Disbursement of affiliated loan (50 )
Repayment of affiliated loan 50
Investment in unconsolidated affiliates, net (2 ) (13 )
Proceeds from sale of assets   1  
Net cash used in investing activities (143 ) (59 )
Cash flows provided by financing activities
Net short-term debt borrowings 27 9
Borrowings of long-term debt 160 1,127
Repayments of long-term debt (117 ) (1,040 )
Long-term debt and credit facility financing fees   (36 )
Net cash provided by financing activities 70   60  
Effect of exchange rates on cash and cash equivalents (1 ) (5 )
Decrease in cash and cash equivalents (260 ) (69 )
Cash and cash equivalents (unrestricted) at beginning of period 379   401  
Cash and cash equivalents (unrestricted) at end of period $ 119   $ 332  
Supplemental disclosures of cash flow information
Cash paid for:
Interest, net $ 148 $ 126
Income taxes paid, net 18 3
Non-cash financing activities:
Non-cash issuance of debt in exchange for loans of parent $ $ 200
Non-cash distribution declared to parent 208
Settlement of note receivable from parent 24

Contacts

Momentive Specialty Chemicals Inc.
Investors and Media:
John Kompa, 614-225-2223
john.kompa@momentive.com

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Contacts

Momentive Specialty Chemicals Inc.
Investors and Media:
John Kompa, 614-225-2223
john.kompa@momentive.com