James Hambrick, the chief executive officer said, “During the first nine months of 2008, our volume growth was solid and we managed margins very well in a year marked by unprecedented volatility in raw material costs. However, we were not immune to the significant economic weakness and inventory destocking that affected our industry, as well as many others in the fourth quarter. As a result of the year-end volume decline, we are reducing our estimated 2008 earnings, as adjusted, which are approximately the same as 2007 results. In response to the current economic challenges, we are taking aggressive cost reduction initiatives across the corporation.”
The company estimates that cost reduction actions will result in savings of around $40 million to $50 million in 2009 compared with 2008. These actions reflect reductions in selling, testing, administrative and research expenses, reductions in manufacturing costs and the postponement of pay increases. Additionally, the company will defer some capital spending. Capital expenditures are estimated to be around $30 million lower in 2009 compared with 2008.
In conjunction with revising full-year guidance, the company is also updating its projection for special charges for 2008. These charges include $25 million in restructuring and impairment charges previously announced that are related to coatings business improvement initiatives and the closure of a Canadian additives facility. In the fourth quarter, the company will record around $331 million in goodwill and asset impairment charges. The goodwill impairment charge of around $325 million is related to the company’s performance coatings and engineered polymers product lines. This preliminary estimate of the goodwill impairment charge will be refined prior to the filing of the company’s 2008 Form 10-K after valuation procedures have been completed. The remaining charge is the result of fixed asset impairment in the performance coatings product line.
Hambrick added, “The non-cash goodwill impairment charge in 2008 reflects an increase in our cost of capital since 2007. This increase is due mainly to the significant deterioration in the capital markets in the fourth quarter and the decline in market value of our own equity and debt. The cost of capital is used to discount future cash flows and so is a key assumption used in estimating the fair value of a business. In addition, the impairment charge reflects a reduction in the near-term earnings outlook for our Performance Coatings and Engineered Polymers product lines. While the outlook for these product lines dampened in the fourth quarter of 2008, we continue to view them as integral to building shareholder value, as demonstrated by our recent bolt-on acquisition in the Estane® Engineered Polymers business.”
Remarking on the current year, Hambrick stated, “Despite the headwinds that we currently face in 2009, I am confident that we can manage through this downturn. Our balance sheet is strong, we are taking the necessary steps to meet the challenges of 2009, and we are prepared to implement additional cost reductions if necessary.”
