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| CHMT > SEC Filings for CHMT > Form 10-Q on 1-Aug-2012 | All Recent SEC Filings |
1-Aug-2012
Quarterly Report
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements included in Item 1 of this Form 10-Q.
This management's discussion and analysis of financial condition and results of operations contains forward-looking statements. See "forward-looking statements" for a discussion of certain risks, assumptions and uncertainties associated with these statements.
OUR BUSINESS
We are among the larger publicly traded specialty chemical companies in the United States. We are dedicated to delivering innovative, application-focused specialty chemical solutions and consumer products. We operate in a wide variety of end-use industries, including agriculture, automotive, building and construction, electronics, lubricants, packaging, plastics for durable and non-durable goods, pool and spa chemicals and transportation. The majority 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 agrochemical and consumer products are sold to dealers, distributors and major retailers. We are a leader in many of our key product lines and transact business in more than 100 countries.
The primary economic factors that influence the operations and sales of our Industrial Performance Products ("Industrial Performance") and Industrial Engineered Products ("Industrial Engineered") segments (collectively referred to as "Industrials") are industrial production, residential and commercial construction, electronic component production and polymer production, residential and commercial construction. In addition, our Chemtura AgroSolutions segment is influenced by worldwide weather, disease and pest infestation conditions. Our Consumer Products segment is influenced by general economic conditions impacting consumer spending and weather conditions.
Other factors affecting our financial performance include industry capacity, customer demand, raw material and energy costs, and selling prices. Selling prices are influenced by the global demand and supply for the products we produce. We pursue selling prices that reflect the value our products deliver to our customers, while seeking to pass on higher costs for raw material and energy to preserve our profit margins.
SECOND QUARTER RESULTS
Overview
Consolidated net sales for the second quarter of 2012 were $845 million or $31 million lower than in the second quarter of 2011. We realized $27 million from higher selling prices as we continued to focus on investing in new products and manufacturing capacity as well as recovering increases in raw material and distribution costs. Our Chemtura AgroSolutions and Consumer Products segments delivered modest increases in net sales compared to the second quarter of 2011 despite the weakening in the value of a number of currencies compared to the US dollar. The second quarter of 2011 was the last strong quarter for our Industrial segments prior to the weakening in global demand conditions in the second half of 2011. While there have been improvements in some industries since the second half of 2011, demand has not recovered to the levels seen in the first half of 2011 and demand from the Asia Pacific region has weakened. As a result, net sales in the second quarter of 2012 showed a net reduction in sales volume of $41 million compared to the second quarter of 2011. The impact of unfavorable foreign currency translation across all of the segments for the quarter was $17 million.
Gross profit for the second quarter of 2012 was $213 million, a decrease of $11 million compared with the second quarter of 2011. Gross profit as a percentage of net sales declined slightly to 25% for the second quarter of 2012 as compared with 26% for the second quarter of 2011. Gross profit was impacted by an $18 million reduction in volume and product mix; $9 million in higher raw material costs; $5 million in manufacturing variances; a $3 million increase in accelerated recognition of asset retirement costs and a $5 million impact from unfavorable foreign currency translation, offset by a $27 million increase in higher selling prices and $2 million in lower distribution costs. While raw material costs increased in the first quarter of 2012, the increases began to moderate in the second quarter of 2012.
Selling, general and administrative ("SG&A") expenses of $74 million were $18 million lower than the second quarter of 2011. In the second quarter of 2011, we increased our allowance for doubtful accounts reserve related primarily to the Chemtura AgroSolutions segment. The economic environment in this segment has improved and there is no need for a similar level of new reserves in this quarter resulting in a $7 million year-over-year benefit in the second quarter of 2012 versus prior year. SG&A also benefited from a $4 million reduction in non-cash stock based compensation, lower infrastructure costs in the Chemtura AgroSolutions segment from the restructuring program announced last year, as well as
tight control on discretionary expenses across our Industrial segments given the more challenging demand environment when compared to the same quarter of 2011.
Depreciation and amortization expense of $35 million was $1 million higher than the second quarter of 2011, primarily due to an increase in accelerated depreciation associated with reorganization initiatives.
Research and development expense ("R&D") of $12 million was $1 million higher than in the second quarter of 2011.
Facility closures, severance and related costs of $23 million in the second quarter of 2012 related to the closure of our Industrial Performance Products segment's antioxidants manufacturing facility in Pedrengo, Italy and other initiatives to improve the operating effectiveness of certain global corporate functions.
Other income, net was $7 million in the second quarter of 2012 compared to other expense, net of $1 million for the second quarter of 2011. The change is primarily the result of net foreign currency unrealized and realized gains recorded in the second quarter of 2012 and higher interest income.
Reorganization items, net of $1 million in the second quarter of 2012 was $5 million lower than the second quarter of 2011. The expense in both periods is comprised of professional fees directly associated with the Chapter 11 reorganization and the impact of negotiated claims settlement for which Bankruptcy Court approval has been requested or obtained.
The income tax expense in the second quarter of 2012 was $8 million compared with an income tax benefit of $6 million in the second quarter of 2011. The tax expense reported in the second quarter of 2012 reflects fluctuations in jurisdictional profitability as well as the tax benefit of the second quarter restructuring charge. The tax benefit reported in the second quarter of 2011 included a decrease in deferred foreign income taxes of approximately $17 million that had been recorded in an international jurisdiction in prior years. The tax benefit was recorded after receiving approval from the international jurisdiction to change our filing position. We have offset our current quarter U.S. income with net operating loss carryforwards and reduced the associated valuation allowance.
Net earnings attributable to Chemtura for the second quarter of 2012 were $50 million, or $0.50 per share, as compared with net earnings attributable to Chemtura of $69 million, or $0.69 per share for the second quarter of 2011.
The following is a discussion of the results of our segments for the second quarter ended June 30, 2012.
Industrial Performance Products
Our Industrial Performance segment reported lower net sales and operating income in the second quarter of 2012 compared with last year. Sales volume across the segment was lower than last year as industrial demand has not yet recovered from the decline in the second half of 2011 and there was some further weakness in Asia during this quarter. Our Urethanes product lines also saw weakening in Europe. All product lines within the segment continued to deliver year-on-year price increases to cover raw material cost increases. Raw material costs moderated as the second quarter of 2012 progressed.
Net sales totaled $339 million in the second quarter of 2012, a decrease of $31 million compared with last year. The lower results reflect the negative impact of reduced sales volume totaling $35 million, partially offset by higher selling prices of $9 million. We also experienced the impact of $5 million in unfavorable foreign currency translation.
Operating income totaled $33 million in the second quarter of 2012 as compared with $39 million in the same quarter of 2011. Lower operating income resulted from lower sales volumes and changes in product mix of $12 million, increased raw material costs of $4 million, $3 million related to accelerated depreciation and asset retirement obligations associated with the closure of our Pedrengo facility, and $2 million in unfavorable foreign currency translation, partly offset by the increase in selling prices, a $4 million benefit of favorable manufacturing and distribution costs, and lower SG&A and R&D (collectively "SGA&R") expense of $2 million.
Industrial Engineered Products
Our Industrial Engineered segment reported lower net sales and operating income over the same quarter of 2011. Net sales to insulation foam, mercury removal, agriculture, healthcare and certain industrial applications markets grew reflecting the benefits of the investment in new product and application development, diversifying this segment's revenue base. Demand from electronics applications were lower than in the second quarter of 2011. The recovery that had been building during the first quarter of 2012 as the electronics industry inventory correction abated, stalled during the second quarter as the demand for electronic goods was impacted by macroeconomic conditions. Demand for tin based organometallics products also
weakened. Against these challenges, all product lines within the segment continued to deliver year-on-year price increases to cover raw material cost increases. With lower production volumes than in the second quarter of 2011, as well as the impacts from bringing on-line new production capacity, there were unfavorable manufacturing absorption variances for certain product lines within the segment this quarter.
Net sales decreased by $8 million to $236 million for the second quarter of 2012 reflecting $19 million in lower sales volume and $4 million from unfavorable foreign currency translation, partially offset by the benefit of $15 million from year-on-year increases in selling prices.
Operating income of $38 million in the second quarter of 2012 was $4 million lower than the second quarter of 2011. The lower operating income reflected $9 million in unfavorable manufacturing absorption variances, $5 million from lower sales volume and product mix changes, $2 million in higher raw material costs and a $2 million increase in other charges, offset by the favorable benefit of selling price increases. In 2011, this segment reported a $1 million benefit of a reduction of an asset retirement obligation benefit which was not repeated in 2012.
Consumer Products
Our Consumer Products segment showed modest improvement in net sales for the second quarter of 2012 compared with the second quarter of 2011 primarily the result of increased sales volume. Increases in sales volume are attributable to regaining a customer for our 2012 season and the introduction of our new opening price point products. In the North American region the quarter started strong, but by June 2012 store sales volumes had declined below prior year. In Europe, the 2012 season has been weaker than in recent years due to both cold and wet weather conditions. Further, segment revenues compared to 2011 saw the impact of the weaker euro.
Net sales increased by $6 million to $158 million for the second quarter of 2012 compared with the same quarter in 2011. This increase reflected $9 million of higher sales volume and $1 million of selling price increases offset by a $4 million impact from unfavorable foreign currency translation.
Operating income decreased $2 million to $20 million in the second quarter of 2012 compared with operating income of $22 million in the second quarter of 2011, principally the result of $3 million in increased raw material costs and $1 million from unfavorable mix offset by $2 million in lower manufacturing costs.
Chemtura AgroSolutions
Our Chemtura AgroSolutions segment generated higher net sales and operating income for the second quarter of 2012 compared with the same quarter in 2011. Embedded within our net sales are the benefits of new products and product registrations. Operating income reflected the benefit of reductions in bad debt expense and the improvements in our cost base following a restructuring that was implemented in the latter part of 2011. Net sales were ahead of prior year in all regions except Europe where net sales were marginally lower than the second quarter of 2011 after adjusting for the impact of unfavorable foreign currency translation, primarily due to the weak euro. This volume decrease was primarily due to the impact of a colder than normal winter in Europe on one of our key crops, oil seed rape.
Net sales increased by $2 million to $112 million for the second quarter of 2012 from $110 million in the same quarter of 2011. The increase reflected $4 million in higher sales volume and $2 million in higher selling prices, offset by a $4 million impact from unfavorable foreign currency translation.
Operating income increased $11 million to $23 million in the second quarter of 2012 compared with $12 million in the second quarter of 2011, reflecting $12 million in lower SGA&R costs coupled with the higher selling prices, partly offset by a $2 million impact from unfavorable foreign currency translation and a $1 million increase in other costs.
General Corporate
Included in general corporate expenses are costs and expenses that are of a general nature or managed on a corporate basis. These costs, net of allocations to the business segments, primarily represent corporate stewardship and administration activities together with costs associated with legacy activities and intangible asset amortization. Functional costs are allocated between the business segments and general corporate expense.
Corporate expense was $22 million in the second quarter of 2012, which included $7 million of amortization expense related to intangible assets. In comparison, corporate expense was $26 million in the second quarter of 2011, which included $9 million of amortization expense related to intangible assets.
YEAR TO DATE RESULTS
Overview
Consolidated net sales were $1,553 million for the six months ended June 30, 2012 or $22 million lower than 2011. We realized $66 million from higher year-over-year selling prices as we continued to focus on investing in new products and manufacturing capacity as well as recovering increases in raw material and distribution costs. Our Chemtura AgroSolutions and Consumer Products segments delivered modest increases in net sales compared to the same period of 2011 despite the weakening in the value of a number of currencies compared to the US dollar. The first half of 2011 saw strong demand conditions for our Industrial segments prior to the weakening in global demand conditions in the second half of 2011. While there have been improvements in some industries since the second half of 2011, demand has not recovered to the levels seen in the first half of 2011 and demand from the Asia Pacific region has weakened. As a result, net sales for the six months ended June 30, 2012 showed a net reduction in sales volume of $65 million compared to the six months ended June 30, 2011. Year-on-year selling price increases mitigated the effects of lower sales volume but the impact of unfavorable foreign currency translation across all of the segments for the period was $23 million.
Gross profit for the six months ended June 30, 2012 was $384 million, a decrease of $1 million compared with the six months ended June 30, 2011. Gross profit as a percentage of net sales, however, increased 1% to 25% for the six months ended June 30, 2012 compared to the same period of 2011. Gross profit reflected the higher year-on-year selling prices, offset by a decrease in volume and product mix of $23 million, increases in raw materials of $13 million, unfavorable manufacturing variances and costs of $19 million, the impact of unfavorable foreign currency translation of $7 million, $3 million in accelerated recognition of asset retirement obligation related to the closure of our Pedrendgo, Italy facility and a $2 million increase in other costs.
SG&A expense of $156 million was $15 million lower than the six months ended June 30, 2011. In the first six months of 2011, we increased our allowance for doubtful accounts reserve related primarily to the Chemtura AgroSolutions segment. The economic environment in this segment has improved and there is no need for a similar level of new reserves in this quarter resulting in a $7 million year-over-year benefit in the first half of 2012 compared to last year. SG&A also benefited from a $5 million reduction in non-cash stock based compensation expense and a $3 million reduction in other costs. The first half of 2012 continued to benefit from lower infrastructure costs in the Chemtura AgroSolutions segment from the restructuring program announced last year as well as tight control on discretionary expenses across our Industrial segments given the more challenging demand environment when compared to the first half of 2011.
R&D expense of $25 million was $3 million higher than the six months ended June 30, 2011 as we invested in sales and marketing to support growth.
Facility closures, severance and related costs of $23 million in the six months ended June 30, 2012 related to the closure of our Industrial Performance Products segment's antioxidants manufacturing facility in Pedrengo, Italy and other initiatives to improve the operating effectiveness of certain global corporate functions.
Changes in estimates related to expected allowable claims were $2 million for the six months ended June 30, 2012, compared with $1 million for the six months ended June 30, 2011, as we reduced the number of claims remaining in our Disputed Claim Reserve.
Interest expense of $30 million during the six months ended June 30, 2012 was $2 million lower than the six months ended June 30, 2011.
Other income, net was $3 million in the six months ended June 30, 2012. The change is primarily the result of net foreign currency losses recorded in the six months ended June 30, 2011 and higher interest income.
Reorganization items, net of $3 million in the six months ended June 30, 2012 was $10 million lower than the six months ended June 30, 2011. The expense in both periods comprised professional fees directly associated with the Chapter 11 reorganization and the impact of negotiated claims settlement for which Bankruptcy Court approval has been requested or obtained.
The income tax expense in the six months ended June 30, 2012 was $7 million compared with an income tax benefit of $3 million in the six months ended June 30, 2011. The tax expense reported for the six month period ended June 30, 2012 reflects fluctuations in jurisdictional profitability as well as the tax benefit of the second quarter restructuring charge. The tax benefit reported in the six month period ended June 30, 2011 included a decrease in deferred foreign income taxes of approximately $17 million that had been recorded in an international jurisdiction in prior years. The tax benefit was recorded
after receiving approval from the international jurisdiction to change our filing position. We have offset our current year-to-date U.S. income with net operating loss carryforwards and reduced the associated valuation allowance.
Net earnings attributable to Chemtura for the six months ended June 30, 2012 were $72 million, or $0.73 per share, as compared with $76 million, or $0.76 per share for the six months ended June 30, 2011.
The following is a discussion of the results of our segments for the six months ended June 30, 2012.
Industrial Performance Products
Our Industrial Performance segment reported lower net sales and operating income in the six months ended June 30, 2012 compared with last year. All of our product lines experienced weakness in some of their end markets. Sales volume across the segment was lower than last year as demand has not yet generally recovered from the decline experienced in the second half of 2011 and there was some further weakness evident in Asia during the second quarter of 2012. A significant contributor to reducing the impact on operating income from lower sales volumes was improved mix through selling higher margin products coupled with the year-over-year increases in selling prices. All product lines within the segment continued to deliver year-on-year price increases to cover raw material cost increases. Raw material costs moderated as the second quarter of 2012 progressed.
Net sales totaled $652 million in the six months ended June 30, 2012, a decrease of $54 million compared with last year. The lower results reflect the negative impact of reduced sales volume totaling $71 million coupled with the impact of unfavorable foreign currency translation of $6 million, partially offset by higher selling prices of $23 million.
Operating income totaled $57 million in the six months ended June 30, 2012, a decrease of $12 million compared with last year. Price increases only partly offset the $12 million increase in raw materials, a $22 million decrease in volume and unfavorable product mix and a $1 million increase in other costs.
Industrial Engineered Products
Our Industrial Engineered segment delivered improvements in net sales and operating income over the same six month period ended June 30, 2011, mainly as a result of increases in selling prices over the last twelve months. During 2011, we increased selling prices to cover the higher cost of raw materials and other manufacturing and distribution costs as well as to support the required capacity reinvestments for sustainable and reliable supply of products to our customers. Net sales to insulation foam, mercury removal, agriculture, healthcare and certain industrial applications markets grew reflecting the benefits of the investment in new product and application development, diversifying this segment's revenue base. Demand from electronics applications was lower than in the same period of 2011. The recovery that had been building during the first quarter of 2012 as the electronics industry inventory correction abated, stalled during the second quarter as the demand for electronic goods was impacted by macroeconomic conditions. Demand for tin based organometallics products also weakened. With lower production volumes than in the first six months of 2011 as well as the impacts from bringing new production capacity on-line in 2012, the segment generated unfavorable manufacturing absorption variances in the first quarter which carried over into the six months ended June 30, 2012. Increases in distribution costs also impacted operating income.
Net sales increased by $9 million to $462 million for the six months ended June 30, 2012 reflecting the benefit of $39 million in increased selling prices partially offset by $24 million in lower sales volume and $6 million from the impact of unfavorable foreign currency translation.
Operating income increased $7 million to $82 million in the six months ended June 30, 2012 compared with $75 million in the six months ended June 30, 2011. The increase reflected the favorable selling price increases and $2 million from lower raw material costs, which were offset by $23 million in unfavorable manufacturing costs and absorption variances, $3 million in unfavorable product mix, $2 million in higher distribution costs, a $1 million effect of unfavorable foreign currency translation and a $5 million increase in other costs.
Consumer Products
Our Consumer Products segment reported higher net sales and lower operating income for the six months ended June 30, 2012 compared with the six months ended June 30, 2011. Net sales benefited from an increase in volume due to regaining a mass market customer for our 2012 season and the introduction of our new opening price point products. Some of the volume increase in North America was offset by volume declines in Europe due to colder and wetter weather conditions than
in recent years. Lower manufacturing variances and lower SGA&R were unable to offset unfavorable product mix, increasing raw material costs and the unfavorable effects of the weakening euro.
Net sales increased by $11 million to $242 million in the six months ended June 30, 2012. This increase reflected $15 million of higher sales volume and $1 million in higher selling prices partially offset by $5 million from the impact of unfavorable foreign currency translation.
Operating income decreased $4 million to $15 million in the six months ended June 30, 2012 compared with $19 million in the six months ended June 30, 2011. Lower manufacturing costs and variances of $1 million and lower SGA&R costs of $2 million were offset by a $4 million increase in raw material, $1 million in unfavorable product mix and $2 million in unfavorable foreign currency translation
Chemtura AgroSolutions
Our Chemtura AgroSolutions segment reported higher net sales and operating income for the six months ended June 30, 2012 compared with the same period in 2011. Net sales increased over the prior year period as a result of improved sales volume primarily from new product introductions. Operating income reflected the benefit of reductions in bad debt expense compared to 2011 and the improvements in our cost base following the restructuring that was implemented in the latter part of 2011. North America had the benefit of a mild winter and a warm start to spring. European sales still grew despite a colder than average winter. Net sales and operating income benefited from increases in selling prices. The weakening of a number of currencies against the US dollar offset some of the benefit of higher sales volumes and selling prices.
Net sales increased by $12 million to $197 million for the six months ended June 30, 2012 from $185 million in the same period of 2011 primarily reflecting $15 million in higher sales volume and $3 million in higher selling prices partially offset by a $6 million impact from unfavorable foreign currency translation.
Operating income increased $19 million to $33 million in the six months ended June 30, 2012 compared with $14 million in the six months ended June 30, 2011. The primary driver was a decrease in SGA&R of $11 million which reflects the benefit of the restructuring actions taken in 2011 and a reduction of bad debt expense from that recognized in 2011. Operating income also reflected the increase in selling prices, a $3 million benefit from increased volume and favorable product mix, $4 million in lower raw material, manufacturing, distribution and other costs, partly offset by a $2 million impact from unfavorable foreign currency translation.
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