NAPERVILLE, Ill., May 2, 2006 (PRIMEZONE) -- Nalco Holding Company (NYSE:NLC) delivered rapid sales growth and good cash generation to repay debt in the first quarter, but those results did not immediately translate into improved quarterly net income or Adjusted EBITDA. Nalco is on track, however, to meet its full-year expectations as the fundamental business is strong and several issues that dampened first quarter results are not expected to be with us the balance of the year.
First quarter sales grew 9.2 percent to $849.4 million, including 11.0 percent organic growth partly offset by negative foreign currency impacts of 1.8 percent. Higher interest and business process optimization expenses decreased net income to $8.8 million from $11.0 million in the first quarter of 2005. Earnings per share were 6 cents versus 8 cents in the year-ago period. Net earnings include after-tax charges of $4.9 million for business process optimization, reimbursed benefit plan contributions and unusual charges such as costs related to a secondary share offering in March. Adjusting for such charges, earnings were essentially unchanged from last year's similarly adjusted results. (See Attachment 7).
Adjusted EBITDA of $144 million was similarly unchanged. Solid Free Cash Flow enabled the company to make debt reduction payments of $45 million, even with a sizable use of cash in expanding inventory in preparation for the summer cooling water season.
"Real sales increased at a higher rate than our expectations for the year, benefiting from a year-ago quarter weakened by moving sales ahead of a January 2005 systems conversion. Pricing continues to improve, but we did not sell the mix in the quarter we had expected. We also have an opportunity to improve our management of selling and service expense. Still, we are moving in the right direction and we have an Energy Services business that is on a path to generate 2006 sales in the $1 billion range," said Chairman and Chief Executive Officer Dr. William H. Joyce. "Importantly, our three primary segments improved their earnings contribution at an 11 percent pace. The business is in sound fundamental shape and ready to start delivering significant year-on-year earnings growth."
Real sales growth, excluding price, was 4.9 percent and price contributed 6.1 percent or $48 million to growth. Purchased material and freight costs were about $34 million higher than the year-ago period. Since mid-2004, cumulative purchased material and freight cost increases have totaled $229 million versus about $197 million in increased price.
"Although we are now running price ahead of cost on a year-on-year basis, we obviously need additional increases to get us even with the total costs we have absorbed since raw material and freight cost increases began. This is particularly true in our Energy and Paper segments," Dr. Joyce noted. "It is far too early to declare victory over raw material costs -- particularly with the recent run-up in crude oil prices -- so we need to maintain a strong focus on capturing price."
Hurricane-related lost sales and pre-tax losses are estimated to have been $5 million and $3 million in the quarter, respectively. Energy Services incurred the largest portion of these impacts due to Gulf of Mexico customer rig curtailments. A few continued raw material supplier problems contribute to higher costs and some Industrial and Institutional Services customers have also not yet reopened.
New Technology Introduced
Nalco today announced the introduction of Tech-Bond(R) Sol-Gel Nanotechnology, a revolution in corrosion protection for aluminum which provides improved cost, quality and environmental performance over existing hexavalent chromium and other chrome-free technologies. "This breakthrough technology should expand our industry presence in a wide range of markets -- with applications that include aerospace, car and truck parts, outdoor furniture, skyscraper construction, boats and electronic equipment," Dr. Joyce said.
Nalco's testing confirms that its Tech Bond products can meet military specifications for bare corrosion protection and aerospace, automotive and architectural specifications for painted aluminum surfaces.
"Because of our diversity of end markets and applications, no single product dramatically shifts our financial performance outlook. With Tech Bond, however, we have created innovative, differentiated, patent-protected technology that improves the value we can create for customers and is expected to be an important contributor to our growth for many years to come," Dr. Joyce said.
Segment Review
"Industrial and Institutional Services performed well in the first quarter delivering a strong increase in direct contribution based on good price increase activity and solid expense control. Energy Services delivered exceptional sales growth, but earnings did not keep pace due to lower-than-planned price increase efforts and abnormal levels of expense. The Paper Services segment continues to be our greatest challenge with a weak competitive pricing environment and raw material costs for Paper-specific products that appear likely to continue increasing," said Dr. Joyce.
Nalco's segment reporting has changed in the first quarter to reflect capital charges on each of the segments. These charges for their investments in receivables, customer-consigned inventory and equipment are intended to ensure that business managers recognize the full costs of each business decision and manage the balance sheet accordingly. The change will result in reduced direct contribution and direct contribution margin levels for the segments, offset by an elimination adjustment in consolidation.
Debt Reduction and Pension Funding
Debt payments of $45.1 million included the retirement of the remaining $31.9 million dollar-denominated portion of Term Loan A. Nalco also made its only required 2006 principal payment of $3.2 million on the Euro-denominated portion of Term Loan A and paid down $10 million of its Term Loan B obligations that come due in 2010. During the first quarter, lenders agreed to reduce the interest rate on Nalco's Term Loan B obligations by 25 basis points to 175 basis points over LIBOR. Free Cash Flow in the first quarter was $42.5 million.
In early April, Nalco added $45 million in funding to its first quarter U.S. pension plan contribution of $13.5 million, completing its 2006 U.S. pension funding requirements ahead of schedule.
2006 Forecast Update
Nalco maintained its financial performance forecasts for 2006 -- expecting 12 percent growth in Adjusted EBITDA and $170 million in Free Cash Flow. Our earlier projected Earnings Per Share of 65 cents is now reduced by the impact of business process optimization charges.
"In the first quarter, we developed strong positive momentum in our business and are confident that we will have a very good year and deliver on our commitments," Dr. Joyce concluded.
Investor Meeting
An investor day has been scheduled for Tuesday, August 29, 2006 at Nalco's Naperville corporate headquarters and research center.
Conference Call
Nalco will discuss first quarter results in a Webcast to be held Wednesday, May 3, at 10:00 a.m. ET. Information on the Webcast is available on our Web site www.nalco.com.
About Nalco
Nalco is the leading provider of integrated water treatment and process improvement services, chemicals and equipment programs for industrial and institutional applications. The company currently serves more than 70,000 customer locations representing a broad range of end markets. It has established a global presence with more than 10,000 employees operating in more than 130 countries, supported by a comprehensive network of manufacturing facilities, sales offices and research centers. In 2005, Nalco achieved sales of more than $3.3 billion.
The Nalco Company logo is available at http://www.primezone.com/newsroom/prs/?pkgid=1135
Several non-GAAP measures are discussed in today's press release. Management believes that discussion of these measures provides investors with additional insight into the ongoing operations of Nalco Holding Company. Non-GAAP measures are reconciled to the closest GAAP measure in schedules attached to this press release, which may also be found at www.nalco.com. Adjusted EBITDA is a non-GAAP measure used to determine compliance with the Company's debt covenants. Reconciliation to net earnings is included in Attachment 5. Free Cash Flow is reconciled on Attachment 6 to Cash from Operations as shown on Nalco's Cash Flow Statement, and is defined as Cash from Operations less Capital Expenditures and Minority Interest charges. Adjustments to net earnings are identified in Attachment 7. The adjustments represent those items included in Nalco's income statement that are either one-time in nature, support incremental cost reduction programs, or - in the case of the profit-sharing reimbursements by our former owner - are unusual when compared to other companies. In addition, Nalco discusses sales growth in terms of nominal (actual), organic (nominal less foreign currency and acquisition/divestiture/merger/joint venture impacts), and real (organic growth less that portion of the growth which consists of price increases that simply pass along higher purchased material and freight costs). The non-GAAP measures should not be viewed as alternatives to GAAP measures of performance. Furthermore, these measures may not be consistent with similar measures provided by other companies.
This news release includes forward-looking statements, reflecting current analysis and expectations, based on what are believed to be reasonable assumptions. Forward-looking statements may involve known and unknown risks, uncertainties and other factors, which may cause the actual results to differ materially from those projected, stated or implied, depending on many factors, including, without limitation: ability to generate cash, ability to raise capital, ability to refinance, the result of the pursuit of strategic alternatives, ability to execute work process redesign and reduce costs, ability to execute price increases, business climate, business performance, economic and competitive uncertainties, higher manufacturing costs, reduced level of customer orders, changes in strategies, risks in developing new products and technologies, environmental and safety regulations and clean-up costs, foreign exchange rates, the impact of changes in the regulation or value of pension fund assets and liabilities, changes in generally accepted accounting principles, adverse legal and regulatory developments, including increases in the number or financial exposures of claims, lawsuits, settlements or judgments, or the inability to eliminate or reduce such financial exposures by collecting indemnity payments from insurers, the impact of increased accruals and reserves for such exposures, weather-related factors, adverse changes in economic and political climates around the world, including terrorism and international hostilities, and other risk factors identified by the Company. Accordingly, there can be no assurance that the Company will meet future results, performance or achievements expressed or implied by such forward-looking statements. This paragraph is included to provide safe harbor for forward-looking statements, which are not generally required to be publicly revised as circumstances change, and which the Company does not intend to update.
Nalco Holding Company and Subsidiaries
Condensed Consolidated Balance Sheets
(dollars in millions)
(Unaudited)
March 31, December 31,
2006 2005
-------- --------
Assets
Current assets:
Cash and cash equivalents $ 42.8 $ 30.8
Accounts receivable, less allowances
of $19.6 in 2006 and $16.6 in 2005 621.9 622.3
Inventories:
Finished products 272.4 242.6
Materials and work in process 76.5 70.6
-------- --------
348.9 313.2
Prepaid expenses, taxes and other
current assets 54.6 83.1
-------- --------
Total current assets 1,068.2 1,049.4
Property, plant, and equipment, net 742.7 755.3
Intangible assets:
Goodwill 2,213.3 2,196.7
Other intangibles, net 1,212.6 1,227.5
Other assets 323.5 323.5
-------- --------
Total assets $5,560.3 $5,552.4
======== ========
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 280.1 $ 285.4
Short-term debt 35.6 22.6
Other current liabilities 244.4 235.2
-------- --------
Total current liabilities 560.1 543.2
Other liabilities:
Long-term debt 3,222.3 3,244.2
Deferred income taxes 333.1 353.0
Accrued pension benefits 413.5 416.4
Other liabilities 284.4 278.9
Minority interest 12.2 11.2
Shareholders' equity 734.7 705.5
-------- --------
Total liabilities and shareholders' equity $5,560.3 $5,552.4
======== ========
ATTACHMENT 1
Nalco Holding Company and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
(dollars in millions, except per share data)
Three Months Ended
March 31,
-----------------------
2006 2005
------- -------
Net sales $ 849.4 $ 777.6
Operating costs and expenses:
Cost of product sold 471.1 412.8
Selling, administrative, and
research expenses 275.4 258.1
Amortization of intangible assets 17.3 20.6
Business optimization expenses 3.8 0.8
------- -------
Total operating costs and expenses 767.6 692.3
------- -------
Operating earnings 81.8 85.3
Other income (expense), net 1.2 (3.4)
Interest income 1.7 2.1
Interest expense (66.3) (62.1)
------- -------
Earnings before income taxes 18.4 21.9
Income tax provision 7.9 9.7
Minority interests (1.7) (1.2)
------- -------
Net earnings $ 8.8 $ 11.0
======= =======
Net earnings per share:
Basic $ 0.06 $ 0.08
======= =======
Diluted $ 0.06 $ 0.08
======= =======
Weighted-average shares outstanding
(millions):
Basic 142.8 141.7
======= =======
Diluted 146.6 146.6
======= =======
ATTACHMENT 2
Nalco Holding Company and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(dollars in millions)
Three Months Ended
March 31,
---------------
2006 2005
----- -----
Operating activities
Net earnings $ 8.8 $11.0
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation 32.4 33.2
Amortization 17.3 20.6
Amortization of deferred financing costs
and accretion of senior discount notes 9.6 9.9
Other, net (5.5) 10.8
Changes in operating assets and liabilities (3.8) (69.8)
----- -----
Net cash provided by operating activities 58.8 15.7
----- -----
Investing activities
Purchase price adjustment on acquisition
of Ondeo Nalco Group -- (3.2)
Additions to property, plant,
and equipment, net (14.6) (12.3)
Other investing activities (0.3) (0.4)
----- -----
Net cash used for investing activities (14.9) (15.9)
----- -----
Financing activities
Changes in short-term debt, net 10.3 7.9
Proceeds from long-term debt 3.3 0.1
Repayments of long-term debt (45.1) (2.1)
Other (0.8) (4.0)
----- -----
Net cash provided by (used for)
financing activities (32.3) 1.9
Effect of exchange rate changes on
cash and cash equivalents 0.4 (0.5)
----- -----
Increase in cash and cash equivalents 12.0 1.2
Cash and cash equivalents at beginning
of period 30.8 33.3
----- -----
Cash and cash equivalents at end
of period $42.8 $34.5
===== =====
ATTACHMENT 3
Nalco Holding Company and Subsidiaries
Segment Information
(Unaudited)
(dollars in millions)
Net sales by reportable segment were as follows:
Three Months Ended
March 31,
-------------------
2006 2005
------- -------
Industrial and Institutional Services $ 378.4 $ 341.0
Energy Services 246.3 210.6
Paper Services 175.8 170.1
Other 48.9 55.9
------- -------
Net sales $ 849.4 $ 777.6
======= =======
The following table presents direct contribution by reportable
segment and reconciles the total segment direct contribution to
earnings before income taxes:
Three Months Ended
March 31,
-------------------
2006 2005
------- -------
Segment direct contribution:
Industrial and Institutional Services $ 79.8 $ 65.5
Energy Services 48.3 43.0
Paper Services 26.1 30.1
Other (a) (19.4) (5.2)
Capital charge elimination 19.2 19.8
------- -------
Total segment direct contribution 154.0 153.2
Expenses not allocated to segments:
Administrative expenses 51.1 46.5
Amortization of intangible assets 17.3 20.6
Business optimization expenses 3.8 0.8
------- -------
Operating earnings 81.8 85.3
Other income (expense), net 1.2 (3.4)
Interest income 1.7 2.1
Interest expense (66.3) (62.1)
------- -------
Earnings before income taxes $ 18.4 $ 21.9
======= =======
(a) Includes certain costs not allocated to segments, but deducted
in arriving at direct contribution. Significant contributors to
the year-over-year change include:
- $4.0 million resulting from increase in revenue recognition
adjustments, due to higher volumes shipped in late March 2006
vs. 2005. This has no impact on total segment direct
contribution, as the offsetting impact of this change is
included in the other three segments.
- $7.2 million attributable to favorable adjustments in 2005 vs.
2006 for commissions and insurance/legal claims.
ATTACHMENT 4
Nalco Holding Company and Subsidiaries
EBITDA and Adjusted EBITDA (Unaudited)
(dollars in millions)
Three Months Ended
March 31,
---------------------
2006 2005
------ ------
Net earnings $ 8.8 $ 11.0
Income tax provision 7.9 9.7
Interest expense, net of interest income 64.6 60.0
Depreciation 32.4 33.2
Amortization 17.3 20.6
------ ------
EBITDA 131.0 134.5
Business optimization expenses 3.8 0.8
Asset write-offs 0.9 2.4
Profit sharing expense funded by Suez 3.5 3.1
Pension settlement 0.3 --
Franchise taxes 0.8 0.7
Non-cash rent expense 2.6 2.6
Non-wholly owned entities 0.6 (0.5)
Loss (gain) on sale, net of expenses 0.1 0.5
Other unusual charges 0.3 0.2
------ ------
Adjusted EBITDA $143.9 $144.3
====== ======
ATTACHMENT 5
Nalco Holding Company and Subsidiaries
Free Cash Flow
(Unaudited)
(dollars in millions)
Three Months Ended
March 31,
----------------
2006 2005
----- -----
Net cash provided by operating activities $58.8 $15.7
Minority interests (1.7) (1.2)
Additions to property, plant, and equipment, net (14.6) (12.3)
----- -----
Free cash flow $42.5 $ 2.2
===== =====
ATTACHMENT 6
Nalco Holding Company and Subsidiaries
Earnings Per Share and Share Base
(Unaudited)
(dollars in millions, except per share data)
Three Months Ended
March 31,
----------------------------------
2006 2005
---------------- ----------------
Per Per
Actual Share(a) Actual Share(a)
------ -------- ------ --------
Net earnings $ 8.8 $ 0.06 $ 11.0 $ 0.08
====== ======== ====== ========
Net earnings was
reduced by the
following items
(after tax):
Business
optimization
expenses Bus Opt Exp $ 2.4 $ 0.02 $ 0.5 $ --
Profit sharing
expense funded
by Suez COGS/SGA 2.3 0.02 2.0 0.01
Other unusual
charges COGS/SGA/OIOE 0.2 -- 0.1 --
------ ------
$ 4.9 $ 2.6
====== ======
Memo Only
-----------
Net earnings was
reduced by the
following items
(pre tax):
Business
optimization
expenses Bus Opt Exp $ 3.8 $ 0.03 $ 0.8 $ 0.01
Profit sharing
expense funded
by Suez COGS/SGA 3.5 0.02 3.1 0.02
Other unusual
charges COGS/SGA/OIOE 0.3 -- 0.2 --
------ ------
$ 7.6 $ 4.1
====== ======
Weighted-average shares
outstanding (millions):
Basic 142.8 141.7
Diluted 146.6 146.6
(a) Diluted
ATTACHMENT 7
Nalco Holding Company and Subsidiaries
Condensed Consolidated Statements of Operations
2005 Results Reclassified to Conform with 2006 Presentation
(Unaudited)
(dollars in millions, except per share data)
Three Months ended Year
------------------------------------- ended
March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
2005 2005 2005 2005 2005
------- ------- ------- ------- --------
Net sales $ 777.6 $ 836.3 $ 834.9 $ 863.6 $3,312.4
Operating costs and
expenses:
Cost of product
sold 412.8 480.3 457.9 481.2 1,832.2
Selling,
administrative,
and research
expenses 258.1 262.9 252.3 256.4 1,029.7
Amortization of
intangible assets 20.6 20.5 20.3 20.2 81.6
Business
optimization
expenses 0.8 17.0 3.5 4.3 25.6
------- ------- ------- ------- --------
Total operating
costs and expenses 692.3 780.7 734.0 762.1 2,969.1
------- ------- ------- ------- --------
Operating earnings 85.3 55.6 100.9 101.5 343.3
Other income
(expense), net (3.4) (0.1) (0.1) 6.7 3.1
Interest income 2.1 2.0 2.1 2.2 8.4
Interest expense (62.1) (64.8) (65.8) (65.3) (258.0)
------- ------- ------- ------- --------
Earnings (loss)
before income taxes 21.9 (7.3) 37.1 45.1 96.8
Income tax provision
(benefit) 9.7 (3.1) 18.1 18.6 43.3
Minority interests (1.2) (1.6) (1.6) (1.3) (5.7)
------- ------- ------- ------- --------
Net earnings (loss) $ 11.0 $ (5.8) $ 17.4 $ 25.2 $ 47.8
======= ======= ======= ======= ========
Net earnings (loss)
per share:
Basic $ 0.08 $ (0.04) $ 0.12 $ 0.18 $ 0.34
======= ======= ======= ======= ========
Diluted $ 0.08 $ (0.04) $ 0.12 $ 0.17 $ 0.33
======= ======= ======= ======= ========
Weighted-average
shares outstanding
(millions):
Basic 141.7 141.7 141.7 141.8 141.7
======= ======= ======= ======= ========
Diluted 146.6 141.7 146.6 146.6 146.6
======= ======= ======= ======= ========
ATTACHMENT 8
Nalco Holding Company and Subsidiaries
Segment Information
2005 Results Reclassified to Conform with 2006 Presentation
(Unaudited)
(dollars in millions)
Three Months ended Year
------------------------------------- ended
March 31, June 30, Sept. 30, Dec. 31, Dec. 31,
2005 2005 2005 2005 2005
------- ------- ------- ------- --------
Industrial and
Institutional
Services $ 341.0 $ 377.5 $ 379.5 $ 384.1 $1,482.1
Energy Services 210.6 221.5 223.4 244.2 899.7
Paper Services 170.1 176.1 173.9 178.0 698.1
Other 55.9 61.2 58.1 57.3 232.5
------- ------- ------- ------- --------
Net Sales $ 777.6 $ 836.3 $ 834.9 $ 863.6 $3,312.4
======= ======= ======= ======= ========
Segment direct
contribution:
Industrial and
Institutional
Services $ 65.5 $ 82.9 $ 87.5 $ 86.6 $ 322.5
Energy Services 43.0 39.7 42.8 47.5 173.0
Paper Services 30.1 27.4 30.8 29.7 118.0
Other (5.2) (28.9) (14.2) (17.6) (65.9)
Capital charge
elimination 19.8 19.6 19.8 19.9 79.1
------- ------- ------- ------- --------
Total segment
direct
contribution 153.2 140.7 166.7 166.1 626.7
Expenses not
allocated to
segments:
Administrative
expenses 46.5 47.6 42.0 40.1 176.2
Amortization of
intangible
assets 20.6 20.5 20.3 20.2 81.6
Business
optimization
expenses 0.8 17.0 3.5 4.3 25.6
------- ------- ------- ------- --------
Operating earnings 85.3 55.6 100.9 101.5 343.3
Other income
(expense), net (3.4) (0.1) (0.1) 6.7 3.1
Interest income 2.1 2.0 2.1 2.2 8.4
Interest expense (62.1) (64.8) (65.8) (65.3) (258.0)
------- ------- ------- ------- --------
Earnings (loss)
before income
taxes $ 21.9 $ (7.3) $ 37.1 $ 45.1 $ 96.8
======= ======= ======= ======= ========
ATTACHMENT 9