NAPERVILLE, IL, Aug. 4, 2004 (BUSINESS WIRE) -- Nalco Company reported solid second quarter gains in sales, net income and non-GAAP EBITDA measures, as well as continued discretionary debt reduction payments. Sales in the period increased 6.6% to $740.4 million from $694.5 million in 2003. Net income increased to $12.4 million from a year-earlier net loss of $212.1 million that included a $244.4 million after-tax goodwill impairment charge.
Pro Forma Adjusted EBITDA, a non-GAAP measure defined by the privately held company's debt agreements, increased from $141.0 million in 2003 to $145.5 million. Excluding pro forma adjustments to 2003 EBITDA for future cost savings, Pro Forma Adjusted EBITDA grew 9.0% in the quarter and 13.2% year to date.
"The second quarter confirmed the progress Nalco has made since our acquisition late last fall. Our sales engineers are clearly focused on delivering results for our customers, which creates good returns for Nalco as well," said Nalco Chairman and Chief Executive Officer Dr. William H. Joyce. "The quarter saw sales growth broadly spread across our customer base. In addition, earnings improvement was supported by continued strong progress toward lowering our organization's cost structure."
Nalco's Energy Services Division delivered the company's strongest growth in the second quarter, with a nearly double-digit organic increase led by strong oil and gas production service sales. The Pacific and Industrial & Institutional Service divisions also delivered better than 5% organic sales growth. Lingering impacts from 2003 price and contract concessions in North America kept the Paper Services Division from contributing to the company's overall sales growth, although Paper Services sales gained momentum during the quarter.
Two innovations formally introduced in the quarter delivered strong results. Early sales results were strong for the company's patent-protected 3D TRASAR(R) cooling water stress management system. In addition, an innovative COIL-FLO® HVAC coil cleaning service aimed at improving energy efficiency and air quality in hotels, light manufacturing and several other markets proved successful in trial markets and is now being expanded to the rest of North America.
During the quarter, Nalco joined with partner Katayama Chemical Inc. to create a joint venture in Japan known as Katayama Nalco that will accelerate Nalco's development in this important industrialized market. Results of this joint venture are consolidated with Nalco's results from June 1 forward. The joint venture is expected to generate annualized incremental sales of more than $50 million and to be accretive to earnings in its first full year.
"Our businesses are gaining momentum. We are obtaining and holding price increases and have more to do in this area. We expect to exceed our commitment to take $75 million in costs out this year from back-office activities while expanding our investment in sales engineers and targeted research programs," Dr. Joyce said. "We are on target to deliver our previously projected sales growth at greater than trend-line GDP and EBITDA growth at about a double-digit level while making regular debt reduction payments."
Mix impacts contributed to a year-on-year 170 basis point gross margin decline, as did increased raw material and freight costs. Price increases have followed behind these cost increases and contributed modestly to the company's 4.3% organic sales gain. Additional price increase programs are underway in many segments. Nalco filled the earnings gap with accelerated attention to cost savings programs, putting the company ahead of its cost reduction plans.
Free cash flow generated in the quarter was $21.5 million, compared to $75.2 million in 2003. A major difference was that interest payments during the quarter were $81.9 million higher than in the same time period in 2003, due to higher debt from the company's acquisition last November and scheduled concentration of interest payments in May and November. "Our strong cash position going into the quarter, combined with good free cash flow after making our semiannual interest payments, allowed us to make another discretionary debt repayment of $45 million," Dr. Joyce noted.
He reaffirmed Nalco's commitment to make ongoing quarterly discretionary debt payments at about the $45 million level. In addition to the discretionary payment, the company has repaid $100 million of its term loan debt mainly with proceeds from a trade-receivables securitization.
On a year-to-date basis, Nalco sales increased 7.5% to $1.45 billion. The year-to-date net loss of $106.6 million is a result of the first quarter non-cash $122.3 million expense for in-process research and development, a charge resulting from purchase accounting. In the first six months, the company made discretionary debt repayments of $90 million on its term loans and paid off the full $15 million borrowed earlier under its revolving credit facility. Net financial debt for the year has been reduced by $145.5 million.
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 60,000 customer locations representing a broad range of end markets. It has established a global presence with over 10,000 employees operating in 130 countries, supported by a comprehensive network of manufacturing facilities, sales offices and research centers. In 2003, Nalco achieved sales of $2.8 billion.
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