Building A Global Leader - Corporate-ir

2006 Summary Annual Report
Building
A Global Leader
A Global Leader
Financial Highlights
(Dollars in millions, except per share data)
Year Ended December 31,
2006 (1)
2005(2)
Income Statement Data
Net Sales
$5,205
$4,442
720
661
Operating Income
286
208
Net Income (Loss)
(109)
(87)
Net Loss Available to Common Shareholders
(1.72)
(1.41)
Gross Profit
(1) Net
sales in 2006 include the acquisition of the coatings business from The Rhodia Group (“Coatings
Acquisition”) and the global ink and adhesive resins business of Akzo Nobel (“Inks Acquisition”) from January
31, 2006 and June 1, 2006, respectively, and exclude the results from the Brazilian Consumer Divestiture since
March 31, 2006. Net sales in 2005 include Bakelite results from the date of acquisition, April 29, 2005.
(2)Includes data for Bakelite Aktiengesellschaft from its date of acquisition by Borden Chemical, Inc., on April 29, 2005.
Hexion Specialty Chemicals, Inc.
Based in Columbus, Ohio, Hexion Specialty Chemicals is
the global leader in thermoset resins. Hexion 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. Additional information is available at
www.hexion.com.
Balance Sheet Data
Current Assets
$1,478
$1,375
Total Assets
3,508
3,209
Current Liabilities
1,111
908
Total Liabilities
4,909
3,758
Total Liabilities, Redeemable Preferred Stock,
Common Stock and Shareholder’s Deficit
3,508
3,209
Segment EBITDA
(1) (2)
$271
Epoxy and Phenolic Resins
$244
Formaldehyde and
Forest Product Resins
$152
$152
Coatings and Inks
$81
$63
Performance Products
$65
$52
2006
2005
(1) M
anagement believes that earnings before interest, taxes, depreciation and amortization (EBITDA) is a
meaningful indicator of financial performance. EBITDA is not intended to represent any measure of performance
in accordance with generally accepted accounting principles, or GAAP, and the company’s calculation and use
of this measure may differ from other companies. These non-GAAP measures should not be used in isolation or
as a substitute for measures of performance or liquidity and should not be considered an alternative to net loss
under GAAP for purposes of evaluating the company’s results of operations, prepared in accordance with
GAAP. Please see our full Form 10-K filed with the U.S. Securities and Exchange Commission.
(2) Corporate
and Other segment primarily represents certain corporate general and administrative expenses that are
not allocated to the segments. In 2006, Corporate and Other expenses totaled ($45) compared to ($43) in 2005.
Key Products
Market Position/Description
Forest Product Resins
#1 in N. America
Formaldehyde
#1 Globally
Epoxy Resins
#1 Globally
Foundry Resins
#1 in N. America
Molding Compounds
#1 in Europe
Ink Resins
#1 Globally
Versactic Acids & Derivatives
#1 Globally
Oil Field Resins
Global leadership position
(42% market share)
Composite Resins
Global leadership position
(44% market share in
North America and Europe)
A Letter from the Chairman
To Our Stakeholders
Hexion Specialty Chemicals, Inc. strengthened
its position in 2006 as the world’s largest
thermoset resin company through strong
revenue growth, continued global expansion
and leveraging our diversified product portfolio.
With market leading positions for the majority
of our key products, we offer a unique value
creation platform that far exceeds
the inherent strengths of the
individual companies that merged
to create Hexion in 2005.
One unified company
Financial results included 2006 net sales of $5.2 billion,
On any given day, our products will bind, bond and coat
an increase of 17 percent, and a net loss of $109 million.
applications for more than 11,000 customers in more
than 100 countries. These customers use any number
of Hexion specialty product platforms, including:
Phenolic and epoxy resins, as well as versatic
n
acids and derivatives;
Coatings, performance adhesives, specialty polymers,
n
molding compounds and ink raw materials; and
Formaldehyde and formaldehyde-based binding
n
and bonding resins.
The result is a leading specialty chemical company with
this year was driven by the strength of our core technologies,
strong customer relationships and the mission-critical nature of
thermoset resins. Thermoset resins are heat-activated materials
used in bonding, binding and coating applications for thousands
of everyday products. Our resin systems deliver essential
performance properties as a critical ingredient in adhesives,
paints, and coatings, and as binding and bonding agents
used in materials across a wide range of industries.
Looking ahead, Hexion is squarely focused on creating value
for our stakeholders by driving operational efficiencies and
generating free cash flow as we further build our position as
a global leader. We were encouraged by the strong demand
in 2006 for many of our products and the rapidly growing
applications in wind energy, aerospace, electronics, oilfield
services, highly-specialized versatic coatings and others that
utilize our resin materials.
includes our unrealized synergies and the pro forma impact
of acquisitions. (Please see footnote.) The impact of our
top-line growth coupled with our cost control efforts can
be seen at the operating income level, where the company
posted an increase of approximately 38 percent compared
to the prior year’s operating income. Selling, general and
administrative expenses were a modest 7.4 percent of net
sales and were lower than 2005 levels. In addition, following
our recapitalization process in November 2006, net debt
at year-end was approximately $3.3 billion.
a No. 1 or No. 2 market share position in more than
75 percent of our revenue base. As a vertically integrated,
low-cost manufacturer with the scale, cost structure and
As a leading specialty chemical company, much of our progress
Hexion posted Adjusted EBITDA of $664 million, which
skilled employee base to compete on a global basis,
our 104 plants are located throughout North America,
Latin America, Europe and the Asia-Pacific region. Our
expanded range of products, technologies and technical
Thermoset resins are heat-activated
materials used in bonding, binding
and coating applications for thousands
of everyday products.
support serves many industries and appeals to a diverse
customer base. Our customers include familiar names
like 3M, BASF, Bayer, DuPont, General Electric, Halliburton,
In addition, Hexion continued to realize financial synergies
Honeywell, Owens Corning, PPG Industries, Brenntag,
as planned. Integration teams worked to identify and capture
Saint-Gobain, Mitsui, Sumitomo, Sun Chemicals, Valspar
additional savings in operations, raw materials purchasing,
and Weyerhaeuser. Our thermoset resins ultimately
corporate infrastructure and other areas to achieve these
help make these customers’ products lighter, stronger,
synergies. By year-end 2006, we had achieved $70 million
more adhesive or more durable, while meeting any
of the $125 million in targeted cost savings, known as
number of exacting performance requirements for the
“Phase I synergies.” By year-end 2007, we expect to
specific application.
have taken all the actions necessary to achieve the full
2006 results
Despite the dramatic raw material volatility experienced
throughout the year, Hexion posted improved revenues,
operating margins and earnings before interest, taxes,
depreciation and amortization (EBITDA) from continuing
operations in 2006. The increases were fueled by both
organic growth from our existing customer base and several
accretive “bolt-on” acquisitions. More importantly, because of
our scale and diversification, Hexion benefits from a balanced
revenue stream, with no one customer accounting for more
than three percent of sales.
$125 million in Phase I synergies. Hexion also identified
$50 million in Phase II synergies.
While a number of one-time integration and transaction costs,
as well as expenses associated with the extinguishment of
debt, impacted our earnings in 2006, we believe the strength
of Hexion’s underlying business is solid. We will continue to
focus on maintaining operational discipline and controlling
costs, with a focus on generating free cash flow, achieving
synergies and reducing net debt over time. I encourage
you to review Hexion’s full financial results found in our
Form 10-K Annual Report on file with the U.S. Securities
and Exchange Commission.
A Letter from the Chairman (continued)
2006 Highlights
Expanding Our Footprint: We made several
A platform for growth
Building upon process
One global mission
Hexion helps customers across a broad range of industries
Hexion is building a culture based on common business
Looking ahead, Hexion will continue the process
bring improved products to market. Our growth is linked to
processes across our global organization. This takes many
of creating a world-class business that delivers
and Inks segment. These transactions, along with
how successful we can be in helping our customers’ meet
forms, such as further aligning our research and technology
value to the marketplace. We will work hard to
several small acquisitions, contributed $331 million
their applications and product development needs and grow
teams with our business units to serve specific marketplace
continue to deliver improved financial results and
their businesses. It also depends on nurturing growth from
needs. We are also measuring new product development
decrease net debt. I am proud of the efforts of
in incremental sales.
existing and new product lines and pursuing acquisitions that
as a percentage of sales in order to track our progress in
our team of approximately 7,000 associates who
enhance our technology, market or geographic footprint.
innovation. We expect this effort to continue to stimulate
remained focused on serving our customers
Extending Credit Maturities: We amended
growth as our expanded teams gain further experience
during a year of organizational change.
and restated our senior secured credit facilities
We are well positioned for future growth. I am
and repaid, repurchased or redeemed certain
excited about the potential of Hexion and the
debt. We used $397 million of the proceeds to
As part of our growth plans, Hexion completed a number of
strategic “bolt-on” acquisitions during 2006, including: the
decorative coatings and adhesives business unit of the Rhodia
Group; the global ink and adhesive resins business of Akzo
Nobel; and the global wax compounds business of Rohm
working together. In addition, our Six Sigma program is
aggressively spreading a planning discipline through our
organization as these quality and process control initiatives
are a key part of our productivity and cost savings efforts.
and Haas Company. In January 2007, we also completed
Another key measure for our organization is our environmental
the acquisition of the adhesives and resins business of Orica
health and safety performance. We significantly reduced safety
Limited, further strengthening our presence in the forest
incidents throughout the year, resulting in an occupational injury
products marketplace in the Asia-Pacific region. In total,
and illness rate that placed Hexion within the upper quartile
these acquisitions represented approximately $550 million
of chemical companies. We improved our environmental
in annual net sales based on historical revenue of the
performance across a range of metrics including spills and
respective acquisitions.
releases, permit exceedences and emissions. Excellence in
safety and environmental performance is vitally important to our
opportunities we have as a world leader in the
specialty chemicals arena.
strategic acquisitions during 2006 in the Coatings
redeem our preferred stock and $500 million of
the proceeds to fund a common stock dividend
to our shareholders.
Sincerely,
Achieving Synergies: We realized $50 million of
Craig O. Morrison
Chairman, President and Chief Executive Officer
planned synergies in 2006 and are on pace to meet
or exceed our planned $125 million of synergies by
the end of 2007.
people, our customers and the communities in which we operate.
Hexion will continue to set aggressive goals in this area.
We were encouraged by the
strong demand in 2006 for many
of our products and the rapidly
growing applications in wind
energy, aerospace, electronics,
oilfield services, highly-specialized
versatic coatings.
Recovering Pricing: Despite experiencing
Hexion’s growth is also linked to how effectively we can
Footnote
develop our global workforce. We are focused on creating a
Management also believes that earnings before interest, taxes,
depreciation and amortization (EBITDA) is a meaningful indicator
of financial performance. EBITDA is not intended to represent
any measure of performance in accordance with generally
accepted accounting principles, or GAAP, and the company’s
calculation and use of this measure may differ from other
companies. These non-GAAP measures should not be used in
isolation or as a substitute for measures of performance or
liquidity and should not be considered an alternative to net loss
under GAAP for purposes of evaluating the company’s results of
operations, prepared in accordance with GAAP. Please see our
full Form 10K filed with the U.S. Securities and Exchange
Commission.
culture that is flexible, open, and collaborative—one that
promotes teamwork, leverages the discipline of process and
rewards performance. Teamwork is vital as we work across
markets and geographies to effectively serve our customers.
Process is critical to optimize efficiencies and best practices
across our global operations, and to enable us to “scale up”
by efficiently absorbing additional acquisitions and businesses.
And we believe rewarding performance enables us to attract,
develop and retain a world-class workforce.
significant volatility in our raw material costs and
phenol and methanol prices remaining at historically
high levels at year-end 2006, Hexion was able to
pass along most of these increased costs in many
of our product lines.
Serving Customers Via a Diverse Portfolio:
We experienced strong customer demand for a
number of our products, including epoxy resins
and intermediates, phenolic specialty resins, oilfield
services and international forest product resins
and formaldehyde applications, helping partially
offset softer demand in products associated with
North American residential new construction and
automotive markets.
2006 Annual Report
This Is Hexion
Hexion Specialty Chemicals is the world’s
largest producer of thermoset resins, with
2006 net sales exceeding $5.2 billion and
leading positions across various end-markets
and geographies. With approximately 7,000
employees and 104 sites, Hexion 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.
Hexion holds leading market share
positions in 75 percent of its revenue
based on its complete range of thermoset
resin technologies, strong technical service
component and a vertically integrated,
low-cost manufacturing base.
Epoxy and Phenolic Resins – 2006 Net Sales $2,152 (dollars in millions)
Major Products:
■
Epoxy Resins and Intermediates
■
Composite Resins
■
Molding Compounds
■
Formaldehyde-based Resins and Intermediates:
– Phenolic Specialty Resins
■
Epoxy Coating Resins
■
Versatic Acids and Derivatives
Primary Application:
■
Adhesive and Structural
■
Adhesive and Structural
■
Adhesive and Structural
Adhesive and Structural
Coating
■
Coating
■
■
Formaldehyde and Forest Products Resins – 2006 Net Sales $1,385
Major Products:
■
Formaldehyde-based Resins and Intermediates:
– Forest Products Resins
– Formaldehyde Applications
Primary Application:
■
■
Adhesive and Structural
Adhesive and Structural
Coatings and Inks – 2006 Net Sales $1,254
Major Products:
■
Polyester Resins
■
Alkyd Resins
■
Acrylic Resins
■
Ink Resins and Additives
Primary Application:
■
Coating
■
Coating
■
Coating
■
Coating
Performance Products – 2006 Net Sales $414
Major Products:
■
Phenolic Encapsulated Substrates
Primary Application:
■
Adhesive and Structural
Selected Financial Statements Hexion Specialty Chemicals, Inc.
■
Consolidated
Statements of Operations
Consolidated
Balance Sheets
Year Ended December 31,
(In millions, except share and per share data)
2006 2005 Net sales
$
5,205 $
4,442 $
2,019 Cost of sales
4,485 3,781 1,785 Gross profit
Selling, general & administrative expense
2004 720 661 234 384 391 163 Transaction costs
20 44 56 Integration costs
57 13 — Other operating (income) expense, net
(27) 5 6 Operating income
286 208 9 Interest expense
242 203 117 Loss on extinguishment of debt
121 17 — Other non-operating expense, net
Loss from continuing operations before income tax, earnings from
unconsolidated entities and minority interest
Income tax expense
Loss from continuing operations before earnings from unconsolidated
entities and minority interest
3 (80) 16 (28) (113)
14 48 — (94) (76) (113)
Earnings from unconsolidated entities, net of taxes
3 2 — Minority interest in net (income) loss of consolidated subsidiaries
(4) (3) 8 (95) (77) (105)
Loss from continuing operations
Loss from discontinued operations
Net loss
Accretion of redeemable preferred stock
Net loss available to common shareholders
Comprehensive loss
Basic and Diluted Per Share Data
(14) (10) — (109) (87) (105)
33 30 — (142) (117) (105)
$
(11) $
(172) $
ASSETS
Current Assets
(36)
Loss from continuing operations
$
(1.55) $
(1.30) $
(1.27)
Loss from discontinued operations
(0.17) (0.11) — Net loss available to common shareholders
$
(1.72) $
(1.41) $
(1.27)
Common stock dividends declared
$
6.12 $
6.66 $
— Weighted average number of common shares outstanding during the period—
basic and diluted
82,583,068 82,629,906 82,629,906 This Summary Annual Report is intended to provide investors with an overview of Hexion Specialty Chemicals, Inc. and our businesses, our performance
in 2006 and our plans for the future. It does not include nor is it intended as a substitute for the information contained in our Annual Report on Form 10-K
for the year ended December 31, 2006 on file with the U.S. Securities and Exchange Commission. Investors and others interested in the company are
encouraged to carefully review the Form 10-K and other Hexion Specialty Chemicals, Inc. filings with the SEC to obtain a more complete understanding
of the company and its operations.
2006 2005 Cash and equivalents
$
64 $
183 Accounts receivable (less allowance for doubtful accounts of $21 and $19, respectively)
763 589 Inventories:
Finished and in-process goods
362 287 Raw materials and supplies
187 146 Other current assets
102 131 Assets of discontinued operations
— 39 1,478 1,375 Other Assets
107 103 Property and Equipment
Land
Buildings
Machinery and equipment
Total Current Assets
96 276 205 2,009 1,779 2,381 2,046 (830) (655)
1,551 1,391 Goodwill
193 164 Other Intangible Assets, net
179 176 $
3,508 $
3,209 Less accumulated depreciation
5 Year Ended December 31,
(In millions)
Total Assets
62 LIABILITIES, REDEEMABLE PREFERRED STOCK AND SHAREHOLDER’S DEFICIT
(In
millions, except
share and
per
share data) Current Liabilities
Accounts and drafts payable
$
616 $
493 Debt payable within one year
66 38 Interest payable
58 45 Income taxes payable
108 91 Other current liabilities
263 216 Liabilities of discontinued operations
— 25 1,111 908 Total Current Liabilities
Long-Term Liabilities
Long-term debt
3,326 2,303 Long-term pension obligations
197 200 Non-pension postemployment benefit obligations
26 117 Deferred income taxes
142 138 Other long-term liabilities
107 92 Total Liabilities
4,909 3,758 Minority interest in consolidated subsidiaries
13 11 Commitments and Contingencies
Redeemable Preferred Stock - $0.01 par value; liquidation preference $25 per share;
60,000,000 shares authorized, 14,781,959 issued and outstanding at December 31, 2005
Shareholder’s Deficit
Common stock - $0.01 par value; 300,000,000 shares authorized, 170,605,906 issued
and 82,556,847 outstanding at December 31, 2006; 300,000,000 shares authorized,
170,678,965 issued and 82,629,906 outstanding at December 31, 2005
Additional paid-in (deficit) capital
Treasury stock, at cost – 88,049,059 shares
Accumulated other comprehensive income (loss)
Accumulated deficit
Total Shareholder’s Deficit
Total Liabilities, Redeemable Preferred Stock and Shareholder’s Deficit
— 364 1 1 (17 ) 515 (296) (296)
81 (70)
(1,183) (1,074)
(1,414) (924)
$
3,508 $
3,209 Selected Financial Statements Hexion Specialty Chemicals, Inc.
Selected Financial Statements Hexion Specialty Chemicals, Inc.
Consolidated
Statements of Cash Flows
Consolidated Statements of Shareholder’s
Deficit and Comprehensive Income
■
■
Year Ended December 31,
(In millions)
2005 2004 2006 Cash Flows Provided by (used in) Operating Activities
Net loss
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation and amortization
Loss on sale of discontinued operations
Gain on sale of businesses, net of taxes
Write-off of deferred IPO costs
Write-off of deferred financing fees
Minority interest in net income of consolidated subsidiaries
Stock based compensation expense
Deferred tax benefit
Amortization of deferred financing fees
Debt redemption interest adjustment
Impairments
Other non-cash adjustments
Net change in operating assets and liabilities (net of acquisitions):
Accounts receivable
Inventories
Accounts and drafts payable
Income taxes payable
Other assets, current and non-current
Other liabilities, current and long-term
Net cash used in operating activities of discontinued operations
Net cash provided by (used in) operating activities
Cash Flows used in Investing Activities
Capital expenditures
Capitalized interest
Casualty loss insurance proceeds
Acquisition of businesses, net of cash acquired
Proceeds from the sale of businesses, net of cash sold
Cash combination of Borden Chemical
Proceeds from the sale of assets
Net cash used in investing activities of discontinued operations
Net cash used in investing activities
Cash Flows provided by Financing Activities
Net short-term debt borrowings (repayments)
Borrowings of long-term debt
Repayments of long-term debt
Payment of dividends on common stock
Proceeds from issuance of preferred stock, net of issuance costs
Redemption of preferred stock
Long-term debt and credit facility financing fees
IPO related costs
Capital contribution related to Resolution Specialty transaction
Other
Net cash from financing activities of discontinued operations
Net cash provided by financing activities
Effect of exchange rates on cash and equivalents
(Decrease) increase in cash and equivalents
Cash and equivalents at beginning of year
Cash and equivalents at end of year
Supplemental Disclosures of Cash Flow Information
Cash paid:
Interest, net
Debt redemption costs
Income taxes, net
Non-cash investing and financing activity:
Settlement of note receivable from parent
Unpaid common stock dividends declared
Redeemable preferred stock accretion
Issuance of Note in Resolution Specialty transaction
$ (109) 171 14 (33) 15 27 4 6 (18) 9 6 12 (3) (112) (56) 86 15 (3) (7) (3) 21 (122) (3) 2 (201) 47 — — — (277) 13 4,471 (3,433) (485) — (397) (38) (4) — — 1 128 9 (119) 183 64 220 94 16 — 20 — — $ (87 )
147 — (2 )
— 11 3 12 (3 )
9 — 8 19 8 57 (23 )
58 (53 )
12 (5 )
171 (103 )
— — (252 )
3 — — (2 )
(354 )
(4 )
1,193 (748 )
(523 )
334 — (22 )
(11 )
— — — 219 (5 )
31 152 $ 183 $ 192 — 8 581 27 30 — $ (105 )
86 — (1)
— — (8)
4 (3)
5 — 2 — (81 )
(53 )
133 — (20 )
9 — (32)
(57 )
— — (152 )
— 185 4 — (20 )
(6)
293 (195 )
— — — — — 60 (4)
— 148 7 103 49 $ 152 $ 102
— 3
— — — 50
Common
Stock
Paid-in
Capital
Treasury
Stock
Receivable
from Parent
Balance, December 31, 2003
Accumulated
Other
Comprehensive
(Loss) Income (a)
Accumulated
Deficit
Total
(In millions)
$
1 $
143 $
— $
— $
82 $
(74)
$
152 Net loss
— — — — — (105)
(105 )
Translation adjustments
— — — — 67 — 67 Minimum pension liability adjustment, net of tax
— — — — 2 — 2 Comprehensive loss
— — — — — — (36 )
Acquisition of Resolution Specialty to Consolidated group
— 57 — — — — 57 Acquisition of Borden Chemical to Consolidated group
— 1,252 (296)
(542)
(131)
(817)
(534 )
Interest accrued on notes from parent of Borden Chemical
— 19 — (19)
— — — Compensation expense under deferred compensation plan
— 4 — — — — 4 Deferred tax adjustments as a result of the Combination
— 48 — — — — 48 Balance, December 31, 2004
$
$ 1,523 $ (296 )
$ (561)
$
20 $
(996)
$
(309 )
Net loss
— — — — — (87)
(87 )
Translation adjustments
— — — — (69)
— (69 )
Minimum pension liability adjustment, net of tax of $8
— — — — (16)
— (16 )
Comprehensive loss
(172 )
Effect of the Hexion Formation
— (581)
— 581 — — — Purchase accounting related to acquisition of minority interest
— 121 — — (5)
11 127 Dividends declared ($6.66 per share)
— (550)
— — — — (550 )
Stock-based compensation expense
— 12 — — — — 12 Redeemable preferred stock accretion
— (30)
— — — — (30 )
Interest accrued on notes from parent of Borden Chemical
— 20 — (20)
— — — Other
— — — — — (2)
(2 )
Balance, December 31, 2005
$
1 $
515 $ (296 )
$
— $ (70)
$ (1,074)
$
(924 )
Net loss
— — — — — (109)
(109 )
Translation adjustments, net of tax of $1
— — — — 80 — 80 Deferred losses on cash flow hedges
— — — — (4)
— (4 )
Minimum pension liability adjustment, net of tax of $2
— — — — 22 — 22 Comprehensive loss
(11 )
Impact of adoption of new accounting standard for
pension and postretirement obligations, net of tax of $0
— — — — 53 — 53 Dividends declared ($6.12 per share)
— (505)
— — — — (505 )
Stock-based compensation expense
— 6 — — — — 6 Redeemable preferred stock accretion
— (33)
— — — — (33 )
Balance, December 31, 2006
$
$
(17)
$ (296)
$
— $
81 $ (1,183)
$
(1,414 )
1 1 (a) Accumulated other comprehensive income at December 31, 2006 represents $103 of net foreign currency translation gains, net of tax, a $4 unrealized loss
on derivative instruments, net of tax, and a $18 loss, net of tax, relating to net actuarial losses and prior service costs for the Company’s defined benefit
pension and postretirement benefit plans. Accumulated other comprehensive loss at December 31, 2005 represents $23 of net foreign currency translation
gains and a $93 net loss relating to the Company’s minimum pension liability adjustment.
See Notes to Consolidated Financial Statements in our Form 10-K filed with the U.S. Securities and Exchange Commission
Selected Financial Statements Hexion Specialty Chemicals, Inc.
■
Reconciliation of Net Loss
to Adjusted EBITDA
Directors and
Executive Officers
Year
Ended December 31, 2006
(In millions)
Net loss
$
Income taxes
(109)
14
Directors
Craig O. Morrison
Director, Chairman, President and Chief Executive Officer
Interest expense, net
242
William H. Carter
Director, Executive Vice President and Chief Financial Officer
Loss from extinguishment of debt
121
Depreciation and amortization expense
171
Marvin O. Schlanger
Director, Vice Chairman
Joshua J. Harris
Director
Scott M. Kleinman
Director
Robert V. Seminara
Director
Jordan C. Zaken
Director
EBITDA
439
Adjustments to EBITDA
Acquisitions EBITDA (1)
35
Transaction costs (2)
20
Integration costs (3)
57
Non-cash charges (4)
Unusual items:
Purchase accounting effects/inventory step-up
22
3
Gain on divestiture of business
Joseph P. Bevilaqua
Executive Vice President, President – Phenolic and Forest Products Resins
Cornelis Kees Verhaar
Executive Vice President, President – Epoxy and Coating Resins
Sarah R. Coffin
Executive Vice President, President – Performance Products
(14)
Richard L. Monty
Executive Vice President – Environmental Health and Safety
105
George F. Knight
Senior Vice President – Finance and Treasurer
(39)
Discontinued operations
14
Business realignments
(2)
Other (5)
10
Total unusual items
In process Synergies (6)
Adjusted EBITDA (7)
$
Fixed charges (8)
$
Ratio of Adjusted EBITDA to Fixed Charges
Executive Officers
664
290
2.29
Investor Information
Corporate Contact Information
(1) Represents the incremental EBITDA impact for the Coatings Acquisition, the Inks Acquisition, as well as two smaller acquisitions, and the Orica
Acquisition which closed February 1, 2007, less EBITDA generated prior to the Brazilian Consumer Divestiture, as if they had taken place at the
beginning of the period.
Hexion Specialty Chemicals, Inc.
(2) Represents the write-off of deferred accounting, legal and printing costs associated with the Company’s proposed IPO, as well as costs associated
with terminated acquisition activities.
Columbus, Ohio 43215
(3) Represents redundancy and plant rationalization costs and incremental administrative costs associated with integration programs. It also includes
costs related to the implementation of a single, company-wide management information and accounting system.
www.hexion.com
180 East Broad Street
+1 614 225 4000
(4) Includes non-cash charges for impairments of fixed assets, stock based compensation and unrealized foreign exchange and derivative losses.
(5) Includes the impact of announced Alkyds Divestiture, one-time benefit plan costs and management fees.
(6) Represents estimated net unrealized synergy savings resulting from the Hexion Formation.
(7) The Company is required to have an Adjusted EBITDA to Fixed Charges ratio of greater than 2.0 to 1.0 to incur additional indebtedness under
our indenture for the Second Priority Senior Secured Notes. As of December 31, 2006, the Company was able to satisfy this covenant and incur
additional indebtedness under this indenture.
(8) The fixed charges reflect pro forma interest expense as if the debt refinancing and the Orica acquisition, which occurred in November 2006 and
February 2007, respectively, had taken place at the beginning of the period.
About This Report
This Summary Annual Report is intended to provide investors with an overview of Hexion Specialty Chemicals, Inc. and our businesses, our performance
in 2006 and our plans for the future. It does not include nor is it intended as a substitute for the information contained in our Annual Report on Form 10-K
for the year ended December 31, 2006 on file with the U.S. Securities and Exchange Commission. Investors and others interested in the company are
encouraged to carefully review the Form 10-K and other Hexion Specialty Chemicals, Inc. filings with the SEC to obtain a more complete understanding
of the company and its operations.
Forward Looking Statements
Certain statements in this press release are forward-looking statements within the meaning 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, the management of Hexion Specialty Chemicals, Inc. (which may be
referred to as “Hexion,” “we,” “us,” “our” or the “Company”) may from time to time make oral forward-looking statements. Forward looking statements
may be identified by the words “believe,” “expect,” “anticipate,” “project,” “plan,” “estimate,” “will” or “intend” and similar expressions. The forwardlooking statements contained herein reflect our current views with respect to future events and are based on our currently available financial, economic
and competitive data and on current business plans. Actual results could vary materially depending on risks and uncertainties that may affect the
Company’s operations, markets, services, prices and other factors as discussed in Item 1A – Risk Factors, of the Company’s Form 10-K filed with the
Securities Exchange Commission (SEC) on March 22, 2007. Important factors that could cause actual results to differ materially from those in the forwardlooking statements include, but are not limited to: economic factors such as an interruption in the supply of or increased pricing of raw materials due to
natural disasters, competitive factors such as pricing actions by our competitors that could affect our operating margins, and regulatory factors such as
changes in governmental regulations involving our products that lead to environmental and legal matters as described in Item 3 – Legal Proceedings, of
the Company’s Form 10-K filed with the SEC on March 22, 2007.
Hexion Specialty Chemicals, Inc.
180 East Broad Street
Columbus, OH 43215 USA
+1 614 225 4000
For worldwide locations visit hexion.com
® and ™ Licensed trademarks of Hexion Specialty Chemicals, Inc.
© 2007 Hexion Specialty Chemicals, Inc. HCI-158 4/07 Printed in U.S.A.
The information provided herein was believed by Hexion Specialty Chemicals (“Hexion”) to be accurate at the time of preparation or prepared from sources believed to be
reliable, but it is the responsibility of the user to investigate and understand other pertinent sources of information, to comply with all laws and procedures applicable to the
safe handling and use of the product and to determine the suitability of the product for its intended use. All products supplied by Hexion are subject to Hexion’s terms and
conditions of sale. HEXION MAKES NO WARRANTY, EXPRESS OR IMPLIED, CONCERNING THE PRODUCT OR THE MERCHANTABILITY OR FITNESS THEREOF FOR
ANY PURPOSE OR CONCERNING THE ACCURACY OF ANY INFORMATION PROVIDED BY HEXION, except that the product shall conform to Hexion’s specifications.
Nothing contained herein constitutes an offer for the sale of any product.