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| CEM > SEC Filings for CEM > Form 10-Q on 7-Nov-2008 | All Recent SEC Filings |
7-Nov-2008
Quarterly Report
DESCRIPTION OF BUSINESS
The Company is among the largest publicly traded specialty chemical companies in the United States and is dedicated to delivering innovative, market-focused specialty chemical solutions and consumer products. The Company is headquartered in Middlebury, Connecticut, and operates in a wide variety of end-use markets, including automotive, transportation, construction, packaging, agriculture, lubricants, plastics for durable and non-durable goods, industrial rubber and home pool and spa chemicals. Most of our chemical products are sold to industrial manufacturing customers for use as additives, ingredients, or intermediates that add value to their end products. Our consumer products are sold to dealers, distributors and major retailers. We are a market leader in many of our key product lines. We manufacture and sell more than 3,500 products and formulations in more than 100 countries.
The primary economic factors that influence the Company's operations and sales are industrial production, residential and commercial construction, auto production and resin production. In addition, the Company's Crop Protection segment is influenced by worldwide weather, crop disease and pest infestation conditions. The Company's Consumer Products segment is also influenced by general economic conditions impacting consumer spending and weather conditions.
Other major factors affecting the Company's financial performance include industry capacity, customer demand, raw material and energy costs and selling prices. Selling prices are influenced by global demand and supply factors. The Company's strategy is to pursue selling prices that reflect the value of our products and to pass on higher costs for raw material and energy so as to preserve our profit margins. Our target is to achieve a minimum of 15% average operating profit margin across our business portfolio.
SIGNIFICANT TRANSACTIONS AND EVENTS
The Company continues to assess its business portfolio. During the first nine months of 2008, the following significant transactions occurred:
† On January 31, 2008, the Company completed the sale of its fluorine chemical business located at the Company's El Dorado, Arkansas facility for an immaterial net loss. The assets sold consisted of patents and intangible assets of $12 million, inventory of $8 million, fixed assets of $8 million and other current liabilities of $1 million. The fluorine chemical business had revenues of approximately $49 million in 2007. The fluorine chemical business is reported as a discontinued operation in the accompanying consolidated financial statements.
† On February 29, 2008, the Company acquired the remaining stock of Baxenden Chemicals Limited Plc. The Company previously held 53.5% of Baxenden's stock.
† On February 29, 2008, the Company completed the sale of its oleochemicals business and recorded a loss on the sale of $26 million. The assets sold included inventory of $26 million, accounts receivable of $24 million, goodwill of $12 million, net fixed assets of $7 million, and intangible assets of $1 million. The oleochemicals business had revenues of approximately $175 million in 2007. Proceeds from the transaction were used to reduce debt.
† On March 12, 2008, the Company purchased the remaining shares of GLCC Laurel, LLC.
† On April 30, 2008, the Company entered into an agreement with Baerlocher for the manufacture of certain heat stabilizers used in PVC processing applications.
† During the quarter ended June 30, 2008, the Company incurred an estimated goodwill impairment charge of $320 million in the Consumer Products segment. The Company finalized its review of the estimated charge in the third quarter of 2008 and no change to the estimated charge was required.
† On October 31, 2008, the Company announced that it would suspend payment of dividends to conserve cash and expand liquidity in a period of economic uncertainty.
QUARTER RESULTS
Consolidated net sales of $924 million for the third quarter ended September 30, 2008 were $5 million lower than the third quarter of 2007. The decrease reflects a $63 million reduction due to the divestitures of the oleochemicals and organic peroxides business, selling down inventory of the rubber chemicals not divested as part of the sale of the Celogen® product lines, and the divestiture of the Diamond and Terraclor product lines and a $16 million reduction due to lower volume and mix. The Company benefited from the increase in selling prices of $59 million and $15 million of positive foreign exchange translation. The increase in selling prices occurred within the Polymer Additives, Performance Specialties and Consumer Products segments and was in response to an increase in the cost of raw materials. These increases in selling price that the Company has sought to apply during the year have not yet offset the full impact of the increases in raw material costs during 2008.
Gross profit for the third quarter was $193 million, a decrease of $9 million compared to the same quarter last year. Gross profit as a percentage of sales decreased to 21% in the quarter from 22% in the prior year. The decrease in gross profit was primarily driven by $67 million in higher raw material and energy costs, a $5 million reduction due to divestitures, and $2 million from increased manufacturing costs. These unfavorable factors were partially offset by $59 million from higher selling prices, $4 million from favorable foreign exchange translation and reductions in distribution costs of $2 million.
Selling, general and administrative expenses ("SG&A") were $80 million, a $7 million reduction from the same quarter in 2007. The decrease in SG&A spending reflects the favorable benefit of the Company's restructuring program, offset by increased pension charges of $3 million related, in part, to pension settlements and curtailments.
Depreciation and amortization expense of $54 million was $5 million lower than the third quarter of 2007, partially due to accelerated depreciation taken in 2007 related to the Company's closure of certain antioxidant manufacturing facilities in Europe, and in 2008, the upgrade of the Company's SAP system.
Research and development expense of $12 million was $3 million lower than the third quarter of 2007 as a result of cost reduction initiatives.
Facility closure, severance and related costs during the third quarter of 2008 were immaterial compared with $9 million for the third quarter of 2007, which was primarily the result of the Company's restructuring program announced in the second quarter of 2007.
The Company incurred antitrust costs of $1 million compared with $2 million for the third quarter of 2007. Antitrust costs primarily represented legal costs associated with the antitrust investigations and civil lawsuits.
The impairment of long-lived assets was $1 million in the third quarter and $9 million for the same quarter in 2007. The charges were primarily related to the Company's Catenoy, France facility in the third quarter of 2008 and the Company's Ravenna, Italy facility in the third quarter of 2007.
Interest expense of $20 million decreased by $1 million compared with the same period in 2007. This decrease was primarily due to the early retirement of a portion of the 7% notes due 2009.
Other income, net was $4 million in the third quarter of 2008 compared with expense of $7 million for the same quarter in 2007. The improvement from 2007 was primarily due to an increase in foreign exchange gains of $5 million, lower minority interest expense of $2 million, an increase in interest income of $2 million, lower accounts receivable securitization costs of $1 million, and other miscellaneous cost decreases of $1 million.
The Company's income tax expense from continuing operations increased $23 million in the third quarter of 2008 as compared with the same quarter in 2007. The tax expense in the third quarter was $17 million, compared with a tax benefit of $6 million in the third quarter of 2007. The increase in tax expense is primarily driven by the mix of earnings amongst domestic versus foreign subsidiaries. The Company provided a full valuation allowance against the tax benefit associated with the Company's U.S. net operating loss.
Earnings from discontinued operations of $3 million (net of $2 million of tax) for the third quarter of 2007 reflect the operations of the fluorine and optical monomers businesses that were subsequently sold.
Loss on sale of discontinued operations of $2 million (net of $1 million of tax) for the third quarter of 2007 related to the sale of the EPDM business.
Net earnings for the third quarter of 2008 were $11 million as compared with earnings of $2 million for the third quarter of 2007.
Segment Results
Polymer Additives
Net sales in the Polymer Additives segment of $414 million for the third quarter of 2008 decreased $33 million over the same quarter in 2007. Operating profit of $14 million increased $7 million compared with $7 million for the third quarter of 2007.
The decrease in net sales reflects a combined $45 million reduction related to the divestiture of the oleochemicals business at the Memphis, TN facility in February 2008 and the organic peroxides product line at the Marshall, TX facility in July 2007. Reductions in volume, related primarily to the plastic antioxidants product line, had an additional negative impact of $21 million, but this was offset by a $25 million increase due to improvements in price and $8 million of favorable foreign currency translation.
Operating profit for the third quarter of 2008 was favorably impacted by a $25 million increase in selling prices, an $8 million reduction in accelerated depreciation of certain assets, a $2 million benefit from favorable currency translation and product mix improvements of $1 million. There were cost reductions of $5 million in SG&A, $4 million in distribution, $1 million in manufacturing, and $4 million in other areas. These increases in operating profit were partially offset by $37 million of energy and raw material cost increases, mainly related to tin, soybean oil and petrochemical by-products, a $3 million reduction due to divestitures and $3 million of additional expense due to closing the Taft, Louisiana facility for four days as a result of hurricanes that hit the Gulf coast in early September.
Performance Specialties
Net sales in the Performance Specialties segment of $271 million increased $34 million over the same quarter in 2007. Operating profit of $31 million for the third quarter of 2008 increased $3 million compared with $28 million for the third quarter of 2007.
Net sales increased due to higher selling price of $28 million, organic sales volume growth of $3 million and $3 million of favorable foreign currency translation. Increases in operating profit were due to $28 million in higher selling price, $1 million in organic volume growth and $1 million of favorable foreign currency translation. These were partially offset by increases in raw material prices of $24 million and a $3 million increase in distribution costs.
Consumer Products
Net sales for the Consumer Product segment decreased $18 million to $121 million in the third quarter compared with the same quarter in 2007. Operating profit decreased $4 million in the third quarter to $16 million, compared with $20 million in 2007.
The $18 million decrease in net sales was driven by a volume decline of $27 million due to the combination of lower consumer demand towards the end of the U.S. pool season and excess dealer inventory within the European market. This was partially offset by price increases of $7 million and favorable foreign currency translation of $2 million. Operating profit decreased by $4 million reflecting the volume and mix impact of $14 million, $2 million of unfavorable raw material costs and $3 million of increased manufacturing costs. These were partially offset by $7 million of price increases, a $5 million reduction in SG&A, a $2 million reduction in distribution costs and $1 million in other cost reductions.
Crop Protection
Net sales for the Crop Protection segment were $103 million for the third quarter, which represents an increase of $20 million from the third quarter of 2007. Operating profit increased $7 million to $18 million for the third quarter compared with the same quarter of 2007.
The increase in net sales reflects increases of $26 million due to volume and product mix and $3 million of foreign currency translations, which were offset by $2 million in lower selling prices and $7 million from the divestiture of the Diamond and Terraclor product lines. Operating profit increased by $7 million primarily due to $11 million in volume increases and product mix and $3 million of favorable manufacturing variances, which were partly offset by $2 million from product divestitures, $2 million in reduced pricing, $2 million in higher raw material, energy and distribution costs, and $1 million due to a higher provision for doubtful accounts.
Other Businesses
Net sales for the Company's non-core businesses, reported in the Other segment, were $15 million for the third quarter of 2008, representing a decrease of $8 million compared with net sales of $23 million for the third quarter of 2007. Operating profit was unchanged versus prior year at $1 million.
The decline in net sales was the result of selling down the remaining inventory of the rubber chemicals not divested as part of the Celogen® foaming agent product line in June of 2007, with an impact of $12 million, partially offset by a $3 million increase from volume and mix of the remaining product lines and $1 million from price increases. Operating income was unchanged for the third quarter with price increases of $1 million and other gross profit improvements of $1 million, offset by a $2 million increase in raw material and energy costs over prior year.
General Corporate
General corporate expenses include costs and expenses that are of a general nature or managed on a corporate basis. These costs primarily represent corporate administration services, costs related to corporate headquarters, management compensation plan expenses related to executives and corporate managers and worldwide amortization expenses. Functional costs are allocated between the business segments and general corporate expense.
Corporate expense was $25 million for the third quarter, which included $10 million of amortization expense related to intangibles, compared with $24 million for the third quarter of 2007, which included $11 million of amortization expense.
Corporate expense for the third quarter included $3 million in increased pension charges related, in part, to pension settlement and curtailments, offset by a $2 million benefit from the recovery of insurance proceeds related to a facility fire in 2004 and the decrease in amortization expense of $1 million.
YEAR-TO-DATE RESULTS
Consolidated net sales of $2,856 million for the nine month period ended September 30, 2008 were consistent with the prior year. Net sales benefited from $105 million in increased selling prices, $70 million in favorable foreign currency translation, and $20 million as a result of the second quarter 2007 acquisition of Kaufman offset by a $158 million reduction from business divestitures (oleochemicals business, organic peroxides business and the Celogen®, Diamond, and Terraclor product lines) and a $37 million reduction due to lower volume and product mix.
Gross profit decreased by $34 million to $625 million for the nine month period ended September 30, 2008 as compared with the same nine month period in 2007. Gross profit as a percentage of sales declined to 22% from 23% for the first nine months of 2008 and 2007, respectively. The decrease in gross profit principally reflects a $141 million impact from increases in raw material and energy costs, $4 million in unfavorable manufacturing variances, $4 million in higher distribution costs and $1 million in lost operating profit from divestitures. These unfavorable costs were partially offset by $105 million in higher selling prices and $11 million from favorable foreign currency translation.
SG&A costs of $253 million for the nine month period ended September 30, 2008 were $39 million lower than in the same period of 2007. This decrease is primarily due to the impact of the Company's restructuring program that was announced in June 2007 and other cost reduction initiatives.
Depreciation and amortization expense for the nine month period ended September 30, 2008 of $180 million was $12 million lower than the same period ended September 30, 2007. This decrease is primarily due to a net reduction in accelerated depreciation of property, plant and equipment of $8 million. In 2007, this accelerated depreciation was related to the closure of certain antioxidant manufacturing facilities in Europe, and in 2008 it was related to the oleochemicals business which was sold in the first quarter of 2008 and the Company's SAP upgrade project.
Research and development expense of $40 million for the nine month period ended September 30, 2008 was $6 million lower than the same period ended September 30, 2007 as a result of cost reduction initiatives.
Facility closure, severance and related costs during the nine months ended September 30, 2008 were immaterial compared with $34 million for the same period of 2007, which was primarily the result of the Company's restructuring programs announced in June 2007.
The Company incurred antitrust costs of $12 million in the nine months ended September 30, 2008 compared with $32 million during the same period of 2007. Antitrust costs for 2008 were primarily related to settlement offers made to certain rubber chemical claimants and legal costs associated with antitrust investigations and civil lawsuits. Antitrust costs for the same period in 2007 primarily represented settlement offers made to certain urethane and rubber chemicals claimants, indirect case claimants, securities class action plaintiffs and legal costs associated with the antitrust investigations and civil lawsuits.
Loss on sale of business of $25 million in the nine month period ended September 30, 2008 was primarily related to the sale of the oleochemicals business. The loss on sale of business of $14 million in 2007 was primarily related to the sale of the Celogen® product line.
The impairment of long-lived assets of $321 million in the nine month period ended September 30, 2008, primarily related to reducing the carrying value of goodwill in the Company's Consumer Products segment. The impairment of long-lived assets was $16 million in 2007. Included in this charge was $9 million related to the Company's Ravenna, Italy facility, $4 million related to the sale of the Company's Marshall, Texas facility, and $3 million related to the write-off of construction in progress at certain facilities affected by the restructuring programs announced in the second quarter.
Interest expense of $59 million for the nine month period ended September 30, 2008 reflects an $8 million decrease from the same period in 2007. The decrease was due to lower average borrowings under the Company's credit facilities.
Other income, net was $16 million in the nine month period ended September 30, 2008 compared with $11 million of expense in the same period of 2007. The $27 million increase in income reflects an increase in favorable foreign currency gains of $16 million, lower minority interest expense of $3 million, lower accounts receivable securitization costs of $3 million, an increase in interest income of $2 million and other miscellaneous cost decreases of $3 million.
The Company's income tax expense from continuing operations increased $38 million in the nine months ended September 30, 2008 as compared with the same period in 2007. The tax expense in the nine months ended September 30, 2008 was $37 million compared with a tax benefit of $1 million in 2007. The increase in tax expense is primarily driven by the mix of earnings amongst domestic versus foreign subsidiaries. The Company provided a full valuation allowance against the tax benefit associated with the Company's U.S. net operating loss.
Earnings from discontinued operations of $14 million (net of $7 million of tax) for the nine month period ended September 30, 2007 reflect the operations of the EPDM, fluorine and optical monomers businesses that were subsequently sold.
Gain on sale of discontinued operations of $25 million (net of $13 million of tax) for the nine month period ended September 30, 2007 includes $23 million related to the sale of the EPDM business and $2 million related to the final contingent earn-out proceeds related to the sale of the OrganoSilicones business.
The net loss for the nine month period ended September 30, 2008 was $283 million compared with a loss of $3 million during the same period in 2007.
Segment Results
Polymer Additives
Net sales for the Polymer Additives segment decreased by $72 million to $1,294 million for the nine months ended September 30, 2008. Operating profit of $49 million for the nine months ended September 30, 2008 decreased $15 million compared with $64 million for the nine months ended September 30, 2007.
Decreases in net sales reflect a $99 million reduction resulting from the divestiture of the oleochemicals business and the organic peroxides product line and a decrease in volume of $58 million related primarily to the plastic antioxidants product line. These reductions were partially offset by a $52 million increase due to improvements in pricing and $33 million of favorable foreign currency translation.
Operating profit was negatively impacted by $83 million of energy and raw material cost increases, $6 million of increased manufacturing costs, $2 million from divestitures and $2 million of other costs increases. These decreases in operating profit were partially offset by $52 million of increased selling prices, a $14 million reduction in accelerated depreciation of certain assets, $5 million from lower distribution costs, $4 million related to mix of higher margin products and $3 million of favorable currency translation.
Performance Specialties
Net sales in the Performance Specialties segment of $787 million for the nine months ended September 30, 2008 increased by $107 million compared with the same period in 2007. Operating profit increased $6 million to $88 million compared with $82 million in 2007.
The net sales increase of $107 million was due to $44 million in higher selling prices, $30 million from volume growth, $20 million from the first quarter 2007 acquisition of Kaufman and $13 million from the favorable effect of foreign currency translation.
Operating profit benefited from $44 million in higher selling prices, a $6 million decrease in SG&A costs, $5 million of volume growth, a $4 million increase due to the Kaufman acquisition and $2 million in other cost reductions. However, these favorable factors were offset by $44 million in rising raw material costs, $9 million in higher distribution costs and $2 million of increased manufacturing costs.
Consumer Products
The Consumer Products segment reported net sales of $422 million for the nine months ended September 30, 2008 compared with $456 million for the same period of 2007. Reported operating profit of $49 million for the nine months ended September 30, 2008 reflected a decrease of $7 million from the $56 million reported for the same period in 2007.
The net sales decrease of $34 million was driven by a $53 million decrease in sales volume, partially offset by improvements in selling prices of $9 million and a $10 million benefit related to favorable foreign currency translation. The loss of volume during the nine months ended September 30, 2008 is attributable to lower volume in the distributor, BioGuard and international channels, partially offset by higher sales in the mass market channel.
The reduction in operating income was primarily driven by $26 million in lower volume and $8 million of increased raw materials costs. These decreases were partly offset by a $9 million increase in selling price, a $6 million reduction in cooperative marketing costs, an additional $5 million reduction in other SG&A costs, a $3 million reduction in distribution costs, $1 million in favorable foreign currency translation and $3 million in other cost decreases.
Crop Protection
Net sales for the Crop Protection segment were $306 million for the nine months ended September 30, 2008, an increase of $45 million from 2007. Operating profit of $63 million increased by $23 million over the same period in 2007.
The increase in net sales reflects an increase of $41 million from organic sales volume growth primarily due to increased demand for products across Europe and a $14 million benefit from foreign currency translation, partially offset by $3 million in reduced selling prices and $7 million from product divestitures. The increase in operating profit was primarily driven by $16 million in higher volume and favorable product mix, $4 million in improved manufacturing costs, a $3 million reduction in provision for doubtful accounts related to certain customers in Brazil, $2 million due to favorable foreign currency translation and a net reduction of $1 million from cost savings programs. This was partly offset by a reduction of $3 million from higher distribution costs.
Other Businesses
Net sales for the Company's non-core businesses, reported in the Other segment, were $47 million for the nine months ended September 30, 2008 compared with $93 million for the same period in 2007. Operating profit of these businesses was $2 million for the nine months of 2008 compared with an operating loss of $3 million in the nine months of 2007.
The $46 million decline in net sales was primarily from the sale of the Celogen® foaming agent product line in June of 2007 followed by the inventory sell down of the remaining rubber chemicals with an impact of $52 million, partially offset by a $4 million increase from volume and mix from the remaining product lines and $2 million from price increases. The operating income increase of $5 million was due to the $4 million increase from volume and mix, a reduction in accelerated asset retirement obligations of $4 million and the $2 million improvement in price, offset by raw material and energy increases of $4 million and other costs of $1 million.
General Corporate
General corporate expenses include costs and expenses that are of a general nature or managed on a corporate basis. These costs primarily represent corporate administration services, costs related to corporate headquarters, management compensation plan expenses related to executives and corporate managers and all amortization expenses. Functional costs are allocated between the business segments and general corporate expense.
Corporate expense was $72 million for the nine month period ended September 30, 2008, which included $32 million of amortization expense related to intangibles, compared with $71 million for the same period of 2007, which included $29 . . .
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