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CHMT > SEC Filings for CHMT > Form 10-Q on 2-May-2013All Recent SEC Filings

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Form 10-Q for CHEMTURA CORP


2-May-2013

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, 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, electronic component 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.

FIRST QUARTER RESULTS

Overview

Consolidated net sales for the first quarter of 2013 were $606 million or $12 million lower than the first quarter of 2012 driven by overall lower sales volume. Our Industrial Performance Products segment reported a $12 million increase in sales volume from our petroleum additives and certain synthetic products which was offset, in part, by continued weakness in urethane product sales in Europe and Asia. Our Industrial Engineered Products segment experienced a reduction in demand for insulated foam application products coupled with the lower demand for electronics products resulting in a $19 million decline in sales volume in the first quarter of 2013 compared with the first quarter of 2012. Consumer Products segment sales volume declined $5 million as the result of a slow start to the 2013 season in the northern hemisphere due to a prolonged winter while our Chemtura AgroSolutions segment showed a $1 million increase in sales volume. We experienced a $2 million overall increase in selling prices across our portfolio which was offset by the unfavorable effect of foreign currency translation of $3 million.

Gross profit for the first quarter of 2013 was $126 million, a decrease of $37 million compared with the first quarter of 2012. Gross profit as a percentage of net sales decreased to 21% for the first quarter of 2013 as compared with 26% for the first quarter of 2012. Gross profit was impacted by a $21 million increase in an environmental reserve in 2013 for the costs to remediate a legacy non-operating site in France, $12 million from the lower sales volumes and product mix changes, $3 million in unfavorable manufacturing costs and variances, $2 million in higher raw material costs and a $1 million increase in other costs, only partially offset by the $2 million in higher selling prices.

Selling, general and administrative ("SG&A") expenses of $70 million were $9 million lower than the first quarter of 2012, primarily the result of lower staff count and associated benefits related to our restructuring initiatives in 2012 and 2013.

Depreciation and amortization expense of $31 million was $2 million higher than the first quarter of 2012.

Research and development expense ("R&D") of $9 million was $3 million lower than the first quarter of 2012.


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Facility closures, severance and related costs were $14 million in the first quarter of 2013. During the first quarter of 2013 the Board of Directors (the "Board") approved a restructuring plan providing for, among other things, actions to reduce stranded costs related to ongoing strategic initiatives. The $14 million expense primarily relates to the cost of severance associated with this program.

Other income, net was $3 million in the first quarter of 2013 compared to other expense, net of $3 million for the first quarter of 2012. The change is primarily the result of net foreign currency gains in 2013 compared with net foreign currency losses in 2012. In 2013, we entered into two foreign currency instruments which enabled us to offset some of the foreign currency exposure of the Euro during the first quarter of 2013.

The income tax expense in the first quarter of 2013 was $8 million compared with a benefit of $1 million in the first quarter of 2012. The tax expense reported in the first quarter of 2013 arose from fluctuations in profitability in international jurisdictions and the accrual of severance expense associated with our restructuring actions. The tax benefit reported in the first quarter of 2012 primarily related to adjustments for prior years taxes in various foreign subsidiaries. We have increased our U.S. net operating loss and associated valuation allowance for the first quarter of 2013 U.S. loss. We have offset our prior period year-to-date U.S. taxable income with net operating loss carryforwards and reduced the associated valuation allowance.

Net loss from continuing operations attributable to Chemtura for the first quarter of 2013 was $21 million, or $0.21 per share as compared with net earnings from continuing operations attributable to Chemtura of $22 million, or $0.22 per share for the first quarter of 2012.

Loss from discontinued operations, net of tax attributable to Chemtura for the first quarter of 2013 was $2 million, or $0.02 per share. Discontinued operations represents the Antioxidant business.

The following is a discussion of the results of our segments for the first quarter ended March 31, 2013.

Industrial Performance Products

Our Industrial Performance segment reported an increase in operating income for the first quarter of 2013, compared with the same quarter of 2012. Sales volume increased due to improved demand for our petroleum additives and certain synthetic lubricant products. Sales volume of urethane products in Europe and Asia continue to be effected by weak demand due to market conditions. Selling price increases offset raw material cost changes while manufacturing costs overall remained comparable to the first quarter of 2012.

Net sales totaled $241 million in the first quarter of 2013, an increase of $18 million compared with last year. The increase reflected an increase in sales volume totaling $12 million and higher selling prices of $6 million.

Operating income totaled $29 million in the first quarter of 2013, an increase of $3 million compared with last year. Operating income benefited from the higher selling prices, offset by unfavorable changes in product mix and other costs of $3 million.

Industrial Engineered Products

Our Industrial Engineered segment reported lower operating income for the first quarter of 2013, primarily the result of lower sales volumes and selling prices in certain electronic and insulation foam applications. Demand for electronic applications, tin-based organometallics and brominated flame retardants used in electronics and insulation foam applications was weak in the current quarter. Sales of organometallics products used in polyolefin polymerization catalysts increased, led by North America but was offset in part by lower European sales to Asian customers due to competitive pressures. However, some of this weakness was offset by stronger demand from oilfield and other industrial applications. We did not see a similar re-stocking benefit from flame retardants used in electronics applications that we saw in March of last year, although electronic demand was moderately stronger than the fourth quarter of 2012. This current level of demand has led to some pressure on price in the Asia Pacific region. We experienced unfavorable manufacturing absorption variances in certain product lines due to lower production volumes compared with the first quarter of 2012.

Net sales decreased by $27 million to $199 million for the first quarter of 2013 reflecting a $19 million decrease in sales volumes, $7 million in lower selling prices and $1 million from unfavorable foreign currency translation.

Operating income of $20 million in the first quarter of 2013 was $24 million lower than the first quarter of 2012. The decrease in operating income reflected the lower selling prices, a $6 million decrease in sales volume and product mix changes, $4 million in unfavorable manufacturing costs and variances, $3 million in higher raw material costs and a $4 million increase in other costs.


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Consumer Products

Our Consumer Products segment reduced its operating loss in the first quarter of 2013 compared to the loss in the first quarter of 2012, despite slightly lower sales in 2013. Sales volume was slightly lower than in the prior year primarily in North America and Europe due to a slow start to the spring pool season caused by a prolonged winter. Our margins benefited from lower raw material and manufacturing costs together with a continued reduction in SG&A and R&D (collectively "SGA&R") spending.

Net sales decreased by $6 million to $78 million for the first quarter of 2013 compared to the same quarter in 2012 reflecting a $5 million decrease in sales volume and $1 million in lower selling prices.

The operating loss decreased by $3 million to $2 million in the first quarter of 2013 compared with a loss of $5 million in the first quarter of 2012, reflecting a $2 million reduction in manufacturing costs, $2 million in lower SGA&R costs, a $2 million reduction in raw material costs and a $3 million decrease in other costs, offset by a $5 million impact from lower sales volume and unfavorable product mix and the slightly lower selling prices.

Chemtura AgroSolutions

Our Chemtura AgroSolutions segment generated higher net sales and operating income for the first quarter of 2013 compared with the same quarter in 2012. Increases in sales volume in North and Latin Americas was partly offset by lower sales volumes in Europe and China as the prolonged winter drove a slower start to the growing season. Operating income reflected the benefit of an increase in selling prices coupled with continued focus on SGA&R spending and lower bad debt expense than in the prior year.

Net sales increased by $3 million to $88 million for the first quarter of 2013 from $85 million in the same quarter of 2012. The increase reflected $4 million in higher selling prices and $1 million in higher sales volume partly offset by $2 million of unfavorable foreign currency translation.

Operating income increased $3 million to $13 million in the first quarter of 2013 compared with $10 million in the first quarter of 2012, reflecting $5 million in lower SGA&R costs and the higher selling prices, offset in part by unfavorable product mix and higher manufacturing costs.

General Corporate

Included in general corporate expenses are costs 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 $46 million in the first quarter of 2013, which included $7 million of amortization expense related to intangible assets. In comparison, corporate expense was $33 million in the first quarter of 2012, which included $8 million of amortization expense related to intangible assets. The increase was primarily due to an $21 million increase in 2013 in an environmental reserve for the costs to remediate a legacy non-operating site in France. Following a detailed engineering study, we received estimates of the costs of what will be a multi-year program to remediate the site to the standards required by the regulatory authorities. Depending upon when the next phase of remediation commences, we may incur up to $5 million of cash expense against this reserve in 2013. The increase was partially offset by lower costs associated with employee incentive programs and benefits.

Certain functional and other expenses that are managed company-wide are allocated to our segments. The portion of such costs allocated to the Antioxidant business do not transfer directly under the Antioxidant Sale and are anticipated to be eliminated in 2013. As such, in historic periods these costs are shown as part of continuing operations in the corporate segment and not included under loss from discontinued operations, net of tax. These costs approximate $4 million for the quarters ended March 31, 2013 and 2012.


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LIQUIDITY AND CAPITAL RESOURCES

Emergence from Chapter 11

On March 18, 2009 (the "Petition Date") Chemtura and 26 of our U.S. affiliates (collectively the "U.S. Debtors" or the "Debtors" when used in relation to matters before August 8, 2010) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code ("Chapter 11") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").

On August 8, 2010, our Canadian subsidiary, Chemtura Canada Co/Cie ("Chemtura Canada"), filed a voluntary petition for relief under Chapter 11. The U.S. Debtors along with Chemtura Canada after it filed for Chapter 11 (collectively the "Debtors") requested the Bankruptcy Court to enter an order jointly administering Chemtura Canada's Chapter 11 case with the previously filed Chapter 11 cases and appoint Chemtura Canada as the "foreign representative" for the purposes of the Canadian Case. Such orders were granted on August 9, 2010. On August 11, 2010, the Canadian Court entered an order recognizing the Chapter 11 cases as "foreign proceedings" under the CCAA.

On November 3, 2010, the Bankruptcy Court entered an order confirming the Debtors' plan of reorganization (the "Plan"). On November 10, 2010 (the "Effective Date"), the Debtors substantially consummated their reorganization through a series of transactions contemplated by the Plan and the Plan became effective. As of March 31, 2013, the Bankruptcy Court has entered orders granting final decrees closing all of the Debtors' Chapter 11 cases except the Chapter 11 case of Chemtura Corporation.

For further discussion of the Chapter 11 cases, see Note 16 - Emergence from Chapter 11 in our Notes to Consolidated Financial Statements.

Financing Facilities

On August 27, 2010, we completed a private placement offering under Rule 144A of $455 million aggregate principal amount of 7.875% senior notes due 2018 (the "Senior Notes") at an issue price of 99.269% in reliance on an exemption pursuant to Section 4(2) of the Securities Act of 1933. We also entered into a senior secured term facility credit agreement due 2016 (the "Term Loan") with Bank of America, N.A., as administrative agent, and other lenders party thereto for an aggregate principal amount of $295 million with an original issue discount of 1%. The Term Loan permits us to increase the size of the facility by up to $125 million. On October 31, 2012, we exercised the accordion feature of our Term Loan and borrowed the additional principle of $125 million for the purpose of funding potential investment opportunities and for general corporate purposes. On November 10, 2010, we entered into a five-year senior secured revolving credit facility available through 2015 (the "ABL Facility") for an amount up to $275 million, subject to availability under a borrowing base (with a $125 million letter of credit sub-facility). The ABL Facility permits us to increase the size of the facility by up to $125 million subject to obtaining lender commitments to provide such increase. At March 31, 2013, we had no borrowings under the ABL Facility and $15 million of outstanding letters of credit (primarily related to insurance obligations, environmental obligations and banking credit facilities) which utilizes available capacity under the facility. At March 31, 2013, we had approximately $260 million of undrawn availability under the ABL Facility.

These facilities contain covenants that limit, among other things, our ability to enter into certain transactions, such as creating liens, incurring additional indebtedness or repaying certain indebtedness, making investments, paying dividends, and entering into acquisitions, dispositions and joint ventures. The Term Loan requires that we meet certain quarterly financial maintenance covenants including a maximum Secured Leverage Ratio (as defined in the agreement) of 2.5:1.0 and a minimum Consolidated Interest Coverage Ratio (as defined in the agreement) of 3.0:1.0. The ABL Facility contains a springing financial covenant requiring a minimum trailing 12-month fixed charge coverage ratio of 1.1 to 1.0 at all times during any period from the date when the amount available for borrowings under the ABL Facility falls below the greater of
(i) $34 million and (ii) 12.5% of the aggregate commitments until such date such available amount has been equal to or greater than the greater of (i) $34 million and (ii) 12.5% of the aggregate commitments for 45 consecutive days. As of March 31, 2013, we were in compliance with the covenant requirements of these financing facilities.

On March 29, 2013, we entered into a promissory note in the principal sum of $7 million with a term of six years bearing interest at a rate of 5.29% per annum to finance the cost of certain information technology software licenses. The principal of note is to be repaid in equal monthly installments over its term.

In December 2012, we entered into a CNY 250 million (approximately $40 million) 5 year secured credit facility available through December 2017 (the "China Bank Facility") with Agricultural Bank of China, Nantong Branch ("ABC Bank"). The China Bank Facility will be used for funding construction of our manufacturing facility in Nantong, China. The China Bank Facility is secured by land, property and machinery of our subsidiary Chemtura Advanced Materials (Nantong) Co., Ltd. At March 31, 2013, we had borrowings of $5 million under the China Bank Facility. Repayments of principal will be made in semi-annual installments from December 2014 through December 2017.

For further discussion of the financing facilities, see Note 7 - Debt in our Notes to Consolidated Financial Statements.


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Share Repurchase Program

On October 18, 2011, we announced that our Board of Directors (the "Board") had authorized us to repurchase up to $50 million of our common stock over the next twelve months. On July 31, 2012, our Board authorized an increase in our share repurchase program from $50 million to up to $100 million and extended the program through November 2013. The shares are expected to be repurchased from time to time through open market purchases. The program, which does not obligate us to repurchase any particular amount of common stock, may be modified or suspended at any time at the Board's discretion. The manner, price, number and timing of such repurchases, if any, will be subject to a variety of factors, including market conditions and the applicable rules and regulations of the Securities and Exchange Commission ("SEC"). There were no purchases during the quarter ended March 31, 2013. As of March 31, 2013, we had total re-purchases of 3.4 million shares at a cost of $41 million under this program.

Divestitures

Antioxidant Divestiture

On November 9, 2012, we entered into an asset purchase agreement with SK Blue Holdings, Ltd. ("SK"), an affiliate of SK Capital Partners III, L.P. to sell substantially all the assets of our antioxidant and UV stabilizers (the "Antioxidant") business for $200 million, $190 million to be paid in cash at closing plus a $10 million seller note. The assets to be sold include, among others, trade receivables, inventory, our equity interest in two joint ventures, certain dedicated plants in the U.S., France and Germany, and certain dedicated assets in shared facilities and the purchaser agreed to assume certain liabilities (the "Antioxidant Sale"). We will retain assets that are shared with our other business components that exist in certain locations globally and utilize those assets under supply agreements with SK or its affliate.

On January 25, 2013, we entered into an Amended and Restated Asset Purchase and Contribution Agreement with SK and Addivant USA Holdings Corp. ("Addivant") whereby SK and Addivant agreed, in addition to purchasing substantially all the assets of our Antioxidant business, to assume certain additional pension and environmental liabilities totaling approximately $93 million. The agreement provides for the actuarial valuation of net pension liabilities to be assumed to be updated shortly before the closing of the transaction. To the extent the updated values are a reduction of the net pension liability, the difference will be applied to increase, by an equal amount, the value of the seller note to be issued at closing. The transaction closed on April 30, 2013. We anticipate recording a non-cash loss during the second quarter primarily related to the release of currency translation adjustments and accumulated other comprehensive loss ("AOCL") related to the transfer of the pension obligations, among other items.

Solaris Acquisition

On September 26, 2012, we announced that we entered into a Business Transfer Agreement ("BTA") with Solaris ChemTech Industries Limited ("Solaris ChemTech"), an Indian Company, and Avantha Holdings Limited, an Indian Company and the parent company of Solaris ChemTech (collectively, "Solaris"). As provided in the BTA, we have agreed to purchase from Solaris certain assets used in the manufacture and distribution of bromine and bromine chemicals for cash consideration of $142 million and the assumption of certain liabilities. The purchase price is subject to a post-closing net working capital adjustment. The acquisition is subject to usual and customary closing conditions and is expected to close as soon as practicable.

Restructuring Initiatives

On February 22, 2013, our Board of Directors (the "Board") approved a restructuring plan providing for, among other things, actions to reduce stranded costs related to ongoing strategic initiatives. This plan is expected to preserve pre-divestiture operating margins following our portfolio changes. The total cost of the restructuring plan is estimated to be between $35 million and $45 million, primarily for severance and related costs, accelerated depreciation of property, plant and equipment, and asset retirement obligations. Non-cash charges are estimated to be between $9 million and $11 million with a net cash cost of between $26 million and $34 million. We recorded a pre-tax charge of $14 million in the first quarter of 2013 which included $11 million for severance and related costs and $3 million related to professional fees, and expect all but approximately $4 million to $8 million to be incurred throughout 2013. The remainder of the costs being related to decommissioning are expected to be expensed as incurred over a number of years.

On April 30, 2012, our Board approved a restructuring plan providing for, among other things, the closure of our Antioxidant business manufacturing facility in Pedrengo, Italy. The Board also approved actions to improve the operating effectiveness of certain global corporate functions. This plan is intended to achieve significant gains in efficiency and costs. The total cost of


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the restructuring plan was estimated to be approximately $40 million of which approximately $6 million will consist of non-cash charges.

During 2012, we recorded pre-tax charges of $33 million which included $4 million for accelerated depreciation of property, plant and equipment included in depreciation and amortization, $2 million for accelerated asset retirement obligations included in cost of goods sold, $12 million for severance and professional fees related to corporate initiatives, $5 million for severance and other obligations related to the Pedrengo closure and $10 million reflecting the write-off of a receivable for which collection is not longer probable as a result of these restructuring actions. We recorded an additional pre-tax charge of $1 million in the quarter ended March 31, 2013, primarily for accelerated depreciation related to the Pedrengo closure. All charges related to the Pedrengo closure have been included in loss from discontinued operations, net of tax, due to the pending sale of our Antioxidants business. The Pedrengo plant ceased operations March 31, 2013 and asset retirement work has begun. We will retain this property after the sale of the Antioxidants business is complete and anticipate selling it after all retirement and remediation work is completed.

Cash Flows from Operating Activities

Net cash used in operating activities was $75 million for the quarter ended March 31, 2013 compared to net cash used in operating activities of $89 million in the same period last year. Changes in key working capital accounts are summarized below:

Favorable (unfavorable)                                  Quarter ended       Quarter ended
(In millions)                                            March 31, 2013      March 31, 2012
Accounts receivable                                     $            (69 )  $            (94 )
Inventories                                                          (58 )               (53 )
Accounts payable                                                      45                  34
Pension and post-retirement health care liabilities                   (7 )               (19 )

During the quarter ended March 31, 2013, accounts receivable increased by $69 million over December 31, 2012 primarily driven by our Consumer Products segment related to seasonal demand to stock for the upcoming pool season in North America and Europe and Industrial Performance Products as a result of increased sales of our petroleum additive products this quarter. Inventory increased by . . .

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