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CHMT > SEC Filings for CHMT > Form 10-Q on 5-Nov-2012All Recent SEC Filings

Show all filings for CHEMTURA CORP

Form 10-Q for CHEMTURA CORP


5-Nov-2012

Quarterly Report


ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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.

THIRD QUARTER RESULTS

Overview

Consolidated net sales for the third quarter of 2012 were $743 million or $30 million lower than the third quarter of 2011 driven primarily by weakening unit sales volume in our Industrials segments. While we realized $9 million from higher selling prices, we were unable to offset the effects of a $26 million decline in sales volume and a $13 million impact due to unfavorable foreign currency translation. Our Industrial segments continue to experience weaker demand, particularly in Asia and Europe. Demand for electronics was weak in our Industrial Engineered segment, but this decline was offset to a large extent by expansion in other end markets such as insulation foam and mercury control. We experienced stronger sales volume in our Chemtura AgroSolutions segment as a result of our direct sales approach in Brazil coupled with a strong Brazilian growing season as well as benefiting from the warm weather at the end of the season in North America. Sales volumes in our Consumer Products segment improved moderately over the prior year but this was more than offset by negative foreign exchange on our European revenues.

Gross profit for the third quarter of 2012 was $192 million, an increase of $18 million compared with the third quarter of 2011. Gross profit as a percentage of net sales increased to 26% for the third quarter of 2012 as compared with 23% for the third quarter of 2011. Gross profit benefited from $9 million in higher selling prices, $9 million in lower raw material costs and a $4 million decrease in other costs, offset by a $4 million reduction in volume and product mix.

Selling, general and administrative ("SG&A") expenses of $77 million were $7 million lower than the third quarter of 2011. SG&A benefited from a reduction in non-cash stock based compensation expense, lower infrastructure costs in the Chemtura AgroSolutions segment from the restructuring program announced last year, as well as tight control on discretionary expenses in our segments given the more challenging demand environment.

Depreciation and amortization expense of $36 million was $1 million higher than the third quarter of 2011, primarily due to an increase in accelerated depreciation associated with our reorganization initiatives.

Research and development expense ("R&D") of $12 million was $1 million higher than the third quarter of 2011.


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Facility closures, severance and related costs of $1 million in the third 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.

During the third quarter of 2012, we recorded an impairment charge of $35 million related to certain long-lived assets included in the Industrial Performance Products segment. The impairment charges relate to an initiative to monetize portfolio assets that we considered would more-likely-than-not become effective before the end of 2012. These factors resulted in reduced expectations for future cash flows and lower estimated fair values for the respective assets. As we have previously announced, we are working on opportunities to monetize portfolio assets as well as "bolt-on" investment opportunities in our areas of strategic focus, although there are many factors that may influence whether or not we are successful.

Other expense, net was $6 million in the third quarter of 2012 compared to other expense, net of $1 million for the third quarter of 2011. The change is primarily the result of net foreign currency losses due to the volatility of the foreign exchange rates during the quarter.

Reorganization items, net of $1 million in the third quarter of 2012 was $5 million lower than the third 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 third quarter of 2012 was $2 million compared with expense of $13 million in the third quarter of 2011. The tax expense reported in the third quarter of 2012 reflects fluctuations in jurisdictional profitability, the tax benefit of an impairment charge against certain long-lived assets in our Industrial Performance Products segment. The tax provision reported in the third quarter of 2011 included approximately $5 million relating to a foreign tax matter dating back to the 1990s. We have offset our current and prior quarter U.S. income with net operating loss carryforwards and reduced the associated valuation allowance.

Net earnings attributable to Chemtura for the third quarter of 2012 and 2011 were $9 million, or $0.09 per share.

The following is a discussion of the results of our segments for the third quarter ended September 30, 2012.

Industrial Performance Products

Our Industrial Performance segment reported the same operating income for the third quarter of 2012, despite lower sales for the same period compared with the same quarter last year. Sales volume across the segment reflected a continued weakness in demand for many of our products in Asia and Europe with the largest year-over-year impact being experienced in our petroleum additive products this quarter. Our ability to maintain operating income improvements given weak market conditions is the result of slightly higher selling prices coupled with moderating raw material and other costs.

Net sales totaled $314 million in the third quarter of 2012, a decrease of $28 million compared with last year. The lower results reflect the negative impact of reduced sales volume totaling $28 million, partially offset by higher selling prices of $3 million. We also experienced the impact of $3 million in unfavorable foreign currency translation.

Operating income totaled $31 million in the third quarter of 2012 and 2011. Operating income was impacted by the increase in selling prices and $5 million in lower raw material and other costs, offset by lower sales volumes and changes in product mix of $7 million and $1 million related to accelerated depreciation associated with the closure of our Pedrengo facility.

As previously disclosed, the U.S. regulatory approvals of our new liquid antioxidant product, WestonŽ 705, are progressing slower than we anticipated. While the U.S. food and drug administration (the "FDA") previously approved use of the product for aqueous and acidic uses, in the second quarter of 2012, the FDA advised us that we need to submit additional test data in order for it to determine if the product can be approved for fatty food uses. In the fourth quarter of 2012, we expect to request approval of market volume limits on fatty food uses of WestonŽ 705 and to commence additional testing for unlimited fatty food use. We anticipate submitting test results to FDA in the fourth quarter of 2013.

Industrial Engineered Products

Our Industrial Engineered segment reported higher operating income for the third quarter of 2012, despite lower sales in the same period of 2011. Demand for electronic goods, tin-based organometallics and traditional polyolefin catalysts has weakened over the prior year due to the current economic environment. Continuing growth in other targeted end markets such as insulation foam, mercury control and healthcare coupled with overall price increases over prior year and control of raw material and other costs mitigated these sales volume declines and the resulting unfavorable manufacturing variances. We experienced unfavorable manufacturing absorption variances in certain product lines due to lower production volumes compared with the third quarter of 2011 coupled with the impacts of new production capacity placed in service in recent months.

Net sales decreased by $9 million to $213 million for the third quarter of 2012 reflecting $9 million in lower sales volume and $4 million from unfavorable foreign currency translation, partially offset by $4 million from year-on-year increases in selling prices.

Operating income of $30 million in the third quarter of 2012 was $5 million higher than the third quarter of 2011. The increase in operating income reflected $6 million in lower raw material costs, $4 million of selling price increases and a $1 million


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decrease in other costs, offset by $5 million in unfavorable manufacturing costs and variances and $1 million from lower sales volume and product mix changes.

Consumer Products

Our Consumer Products segment showed an improvement in operating income for the third quarter of 2012 compared with the third quarter of 2011, despite slightly lower sales for the same periods. Sales volume improved moderately over the prior year primarily in the U.S., but were more than offset by negative foreign exchange on our European revenues. Operating income benefited from strong production volume, reflecting the season long improvement in sales volume, which generated favorable manufacturing variances. Our margins were impacted by moderate raw material inflation in an environment where pricing is constant within a season.

Net sales decreased by $2 million to $102 million for the third quarter of 2012 compared to the same quarter in 2011. This decrease reflected a $3 million impact from unfavorable foreign currency translation, offset by $1 million of higher sales volume.

Operating income increased $4 million to $10 million in the third quarter of 2012 compared with operating income of $6 million in the third quarter of 2011, primarily due to favorable manufacturing variances resulting from increased production volumes in the prior quarter.

Chemtura AgroSolutions

Our Chemtura AgroSolutions segment generated higher net sales and operating income for the third quarter of 2012 compared with the same quarter in 2011. Our change to a direct selling approach in Brazil had a positive effect in the quarter and we benefited from a strong growing season. North America finished strongly, led by an increase in sales of our seed treatment products aided by warmer than normal weather patterns. Europe continued to experience some year-on-year sales volume declines related to unseasonable weather this year. Our improvements continue to be underpinned by our focus on new product and product registration introductions. Operating income reflected the benefit of our strong sales volume and the improvements in our cost base following a restructuring that was implemented in the latter part of 2011.

Net sales increased by $9 million to $114 million for the third quarter of 2012 from $105 million in the same quarter of 2011. The increase reflected $10 million in higher sales volume and $2 million in higher selling prices, offset by a $3 million impact from unfavorable foreign currency translation.

Operating income increased $10 million to $21 million in the third quarter of 2012 compared with $11 million in the third quarter of 2011, reflecting a $4 million increase in sales volume and favorable product mix, $2 million lower SG&A and R&D (collectively "SGA&R") costs, and a $2 million decrease 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 $24 million in the third quarter of 2012, which included $8 million of amortization expense related to intangible assets. In comparison, corporate expense was $28 million in the third quarter of 2011, which included $9 million of amortization expense related to intangible assets.

YEAR TO DATE RESULTS

Overview

Consolidated net sales were $2.3 billion for the nine months ended September 30, 2012 or $52 million lower than 2011. The increase of $75 million in selling prices was fully offset by $89 million in sales volume declines and $38 million from the unfavorable effects of foreign currency translation. Our Industrial segments accounted for $69 million of the selling price increase as we increased selling prices in the first nine months of 2012 in our brominated flame and petroleum additive products to offset the effects of rising raw material costs. Sales volume increases in our Consumer Products and Chemtura AgroSolutions products compared with the same period last year, were unable to fully offset the effect of sales volume declines in our Industrials segments. Sales volume gains in our Chemtura AgroSolutions segment reflect new products and product registrations coupled with strong selling seasons in North American and Brazil. Our Consumer Products segment benefited from regaining a mass market customer for the 2012 season, partly offset by a harsh weather season in Europe. The first half of


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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 and we have introduced new product offerings and applications since the second half of 2011, overall demand has not recovered and demand in Asia Pacific and Europe has weakened. The impact of unfavorable foreign currency translation was experienced by all of our segments due to the volatility of foreign exchange rates in the first nine months of 2012.

Gross profit for the nine months ended September 30, 2012 was $576 million, an increase of $17 million compared with the nine months ended September 30, 2011. Gross profit as a percentage of net sales increased slightly to 25% for the nine months ended September 30, 2012 compared to 24% in same period of 2011. Gross profit reflected the higher year-on-year selling prices and a $4 million decrease in other costs, offset by a decrease in sales volume of $24 million, unfavorable manufacturing variances and costs of $22 million, the impact of unfavorable foreign currency translation of $8 million, increases in raw materials of $5 million and $3 million in higher accelerated recognition of asset retirement obligation primarily related to the closure of our Pedrendgo, Italy facility. Unfavorable manufacturing variances were driven by lower production volumes, interruptions in plant operations to install new capacity and other unplanned plant outages.

SG&A expense of $233 million was $22 million lower than the nine months ended September 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 market environment in this segment has improved and there is no need for a similar level of new reserves in 2012 resulting in a $6 million year-over-year benefit in the first nine months of 2012. SG&A also benefited from a $6 million reduction in non-cash stock based compensation expense and a $10 million reduction in other costs. The first nine months 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 all of our segments given the more challenging demand environment when compared to the same period of 2011.

R&D expense of $37 million was $4 million higher than the nine months ended September 30, 2011.

Facility closures, severance and related costs of $24 million in the nine months ended September 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.

During the third quarter of 2012, we recorded an impairment charge of $35 million related to certain long-lived assets included in the Industrial Performance Products segment. The impairment charges relate to an initiative to monetize portfolio assets that we considered would more-likely-than-not become effective before the end of 2012. These factors resulted in reduced expectations for future cash flows and lower estimated fair values for the respective assets. As we have previously announced, we are working on opportunities to monetize portfolio assets as well as "bolt-on" investment opportunities in our areas of strategic focus, although there are many factors that may influence whether or not we are successful.

Changes in estimates related to expected allowable claims were $1 million for the nine months ended September 30, 2012 and 2011, as we reduced the number of claims remaining in our Disputed Claim Reserve.

Interest expense of $47 million during the nine months ended September 30, 2012 was $1 million lower than the nine months ended September 30, 2011.

Other expense, net of $3 million in the nine months ended September 30, 2012 was $2 million higher than the nine months ended September 30, 2011. The change is primarily the result of higher net foreign currency losses, offset by higher interest income.

Reorganization items, net of $4 million in the nine months ended September 30, 2012 was $15 million lower than the nine months ended September 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 nine months ended September 30, 2012 was $9 million compared with expense of $10 million in the nine months ended September 30, 2011. The tax expense reported for the nine month period ended September 30, 2012 reflects fluctuations in jurisdictional profitability, the tax benefit of an impairment charge against certain long-lived assets in our Industrial Performance Products segment, as well as the tax benefit of the second quarter restructuring charge. The tax expense reported in the nine month period ended September 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 and an increase in foreign income taxes of approximately $5 million relating to a foreign tax matter dating back to the 1990s. The tax benefit was recorded after receiving approval from the international jurisdiction to change our filing position. We have offset our current and prior year-to-date U.S. income with net operating loss carryforwards and reduced the associated valuation allowance.


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Net earnings attributable to Chemtura for the nine months ended September 30, 2012 were $81 million, or $0.82 per share, as compared with $85 million, or $0.85 per share for the nine months ended September 30, 2011.

The following is a discussion of the results of our segments for the nine months ended September 30, 2012.

Industrial Performance Products

Our Industrial Performance segment reported lower net sales and operating income in the nine months ended September 30, 2012 compared with last year. All of our product lines experienced demand 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 continuing weakness in Asia as well as Europe. 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 increases in raw material cost, which are stabilizing as we finish the third quarter of 2012.

Net sales totaled $966 million in the nine months ended September 30, 2012, a decrease of $82 million compared with last year. Lower sales reflect the negative impact of reduced sales volume totaling $97 million coupled with the impact of unfavorable foreign currency translation of $11 million, partially offset by higher selling prices of $26 million.

Operating income totaled $88 million in the nine months ended September 30, 2012, a decrease of $12 million compared with last year. Price increases only partly offset the $26 million decrease in volume adjusted for product mix and manufacturing variances, a $9 million increase in raw materials costs and $3 million related to the impact of unfavorable foreign currency translation.

As previously disclosed, the U.S. regulatory approvals of our new liquid antioxidant product, WestonŽ 705, are progressing slower than we anticipated. While the FDA previously approved use of the product for aqueous and acidic uses, in the second quarter of 2012, the FDA advised us that we need to submit additional test data in order for it to determine if the product can be approved for fatty food uses. In the fourth quarter of 2012, we expect to request approval of market volume limits on fatty food uses of WestonŽ 705 and to commence additional testing for unlimited fatty food use. We anticipate submitting test results to FDA in the fourth quarter of 2013.

Industrial Engineered Products

Our Industrial Engineered segment delivered improvements in operating income over the same nine month period in 2011 despite flat net sales. Improvement in selling prices completely offset the effect of sales volume declines and the unfavorable effects of foreign currency translation. Increases in selling prices were implemented 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. Demand for electronic goods, tin-based organometallics and traditional polyolefin catalysts has weakened over the prior year due to current economic conditions. Continued growth in targeted end markets such as insulation foam, mercury control and healthcare have mitigated the effects of other sales volume declines and reflect the benefit of our investment in new product and application development. With lower production volumes than in the first nine months of 2011 coupled with the cost impacts from bringing new production capacity on-line in 2012, the segment generated unfavorable manufacturing absorption variances in the nine months ended September 30, 2012. Raw material costs were stabilizing as we finished the third quarter of 2012.

Net sales of $675 million for the nine months ended September 30, 2012 was unchanged as compared to 2011. Net sales reflected the benefit of $43 million in increased selling prices, offset by $33 million in lower sales volume and $10 million from the impact of unfavorable foreign currency translation.

Operating income increased $12 million to $112 million in the nine months ended September 30, 2012 compared with $100 million in the nine months ended September 30, 2011. The increase reflected the favorable selling price increases and $8 million from lower raw material costs, which were offset by $28 million in unfavorable manufacturing costs and absorption variances, $4 million in lower sales volume and a $7 million increase in other costs.

Consumer Products

Our Consumer Products segment reported operating income that was unchanged over the same nine months period ended September 30, 2011 on flat net sales. Net sales benefited from an increase in volume due to regaining a mass market customer for our 2012 season and increased volume in North America, which was offset by sales 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 foreign exchange translation on our European revenues.

Net sales increased by $9 million to $344 million in the nine months ended September 30, 2012. This increase reflected $16 million of higher sales volume and $1 million in higher selling prices, partially offset by $8 million from the impact of unfavorable foreign currency translation.


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Operating income of $25 million in the nine months ended September 30, 2012 was unchanged from the nine months ended September 30, 2011. Lower manufacturing costs and variances of $4 million and lower SGA&R costs of $4 million were offset by a $5 million increase in raw material cost and a $3 million impact from unfavorable foreign currency translation.

Chemtura AgroSolutions

Our Chemtura AgroSolutions segment reported higher net sales and operating income for the nine months ended September 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, changes to a direct sales approach in Brazil and strong selling seasons in North America and . . .

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