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CHMT > SEC Filings for CHMT > Form 10-Q on 30-Jul-2013All Recent SEC Filings

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Form 10-Q for CHEMTURA CORP


30-Jul-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 and transportation markets. 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.

On April 30, 2013, we completed the sale of our Antioxidant and UV Stabilizer business (the "Antioxidant Sale"), including dedicated manufacturing plants in the U.S., France, and Germany, to affiliates of SK Capital Partners. As a result of this transaction entered into in 2012, we determined that discontinued operations treatment applied. The assets and liabilities included in the Antioxidant Sale have been presented as assets and liabilities of discontinued operations and earnings and direct costs associated with the Antioxidant business have been presented as a loss from discontinued operations, net of tax for the current and comparative periods (for further discussion, see Note 2 - Acquisitions and Divestitures in our Notes to Consolidated Financial Statements).

SECOND QUARTER RESULTS

Overview

Consolidated net sales for the second quarter of 2013 were $735 million or $6 million lower than the second quarter of 2012 driven by a $4 million overall decrease in selling prices and the unfavorable effect of foreign currency translation of $2 million. Improvements in sales volume for our Industrial Performance and Chemtura AgroSolutions segments were offset by reductions in sales volume from our Industrial Engineered and Consumer Products segments. Our Chemtura AgroSolutions segment reported a $21 million increase in sales volume. North America led the growth, seeing strong demand for our miticide products, followed by Latin America. Our Industrial Performance segment reported a $15 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 for mining and electronic applications. Consumer Products sales volume declined $12 million representing a slow start to the 2013 pool season in the northern hemisphere due to prolonged cold and wet conditions. Our Industrial Engineered Products segment continues to experience a reduction in demand for products related to insulated foam and electronic applications, resulting in a $24 million decline in sales volume in the second quarter of 2013 compared with the second quarter of 2012.

Gross profit for the second quarter of 2013 was $187 million, a decrease of $12 million compared with the second quarter of 2012. Gross profit as a percentage of net sales decreased to 25% for the second quarter of 2013 as compared with 27% for the second quarter of 2012. Gross profit was impacted by $5 million from lower sales volume and unfavorable product mix changes, $4 million in lower selling prices, $2 million in unfavorable manufacturing costs and variances and a $1 million increase in other costs.


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Selling, general and administrative ("SG&A") expenses of $67 million were $5 million lower than the second 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 $1 million higher than the second quarter of 2012.

Research and development expense ("R&D") of $11 million was unchanged from the second quarter of 2012.

Facility closures, severance and related costs were $11 million in the second quarter of 2013 compared with $7 million in the second quarter of 2012. 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 expense in 2013 primarily related to the cost of severance associated with this program. The expense in 2012 primarily related to initiatives to improve operating effectiveness of certain global corporate functions.

Other income, net was $12 million in the second quarter of 2013 compared with other income, net of $5 million for the second quarter of 2012. During the second quarter of 2013, we recognized a gain of $15 million related to the release of cumulative translation adjustments associated with the rationalization of certain European subsidiaries that are no longer required. This gain was offset by net foreign currency losses in 2013 compared with net foreign currency gains in 2012. In 2013, we entered into two foreign currency hedge instruments which enabled us to offset some of the foreign currency exposure of the Euro during the second quarter of 2013.

The income tax expense in the second quarter of 2013 was $15 million compared with expense of $13 million in the second quarter of 2012. The tax expense reported in the second quarter of 2013 arose from fluctuations in profitability in international jurisdictions. The tax expense reported for the second quarter of 2012 reflected fluctuations in jurisdictional profitability as well as the tax benefit of the second quarter of 2012 restructuring charge. We have offset our current quarter U.S. income with net operating loss carryforwards and reduced the associated valuation allowance. We also offset our second quarter of 2012, U.S. taxable income with net operating loss carryforwards and reduced the associated valuation allowance.

Net earnings from continuing operations attributable to Chemtura for the second quarter of 2013 were $47 million, or $0.47 per diluted share, as compared with net earnings from continuing operations attributable to Chemtura of $53 million, or $0.53 per diluted share, for the second quarter of 2012.

Earnings from discontinued operations, net of tax attributable to Chemtura for the second quarter of 2013, was $6 million, or $0.06 per diluted share, as compared with a loss of $3 million, or $0.03 per diluted share, for the second quarter of 2012. Discontinued operations represents the Antioxidant business.

Loss on sale of discontinued operations, net of tax attributable to Chemtura for the second quarter of 2013, was $146 million, or $1.46 per diluted share.

The following is a discussion of the results of our segments for the second quarter ended June 30, 2013.

Industrial Performance Products

Our Industrial Performance Products segment reported an increase in operating income for the second 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 our urethane products continued to be effected by weak demand in mining and electronic applications across all regions. Selling price increases, primarily in our petroleum additive products, offset raw material cost changes while manufacturing costs overall remained comparable to the second quarter of 2012.

Net sales totaled $254 million in the second quarter of 2013, an increase of $19 million compared with the same period last year. The increase reflected $15 million in higher sales volume and $4 million in higher selling prices.

Operating income of $31 million in the second quarter of 2013, was an increase of $3 million compared with last year. Operating income benefited from the higher selling prices and $3 million in higher sales volume and product mix changes, offset by higher raw material costs of $3 million and other costs of $1 million.

Industrial Engineered Products

Our Industrial Engineered Products segment reported lower operating income for the second quarter of 2013, primarily the result of lower sales volumes and lower selling prices associated with brominated flame retardants used to support insulation foam and electronic applications compared to the second quarter of 2012. Some of this weakness was offset by stronger demand from oilfield and other industrial applications coupled with an increase in the sales volume of organometallics products such as those based on tin and those used in polyolefin polymerization catalysts. While selling prices during the quarter for


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bromine based products in Asia, insulation foam products in Europe and certain organometallic products were lower than in the second quarter of 2012, pricing in the quarter stabilized at the levels seen towards the end of the first quarter of 2013. We experienced some increase in raw material costs which we were unable to recover due to demand conditions. Our manufacturing cost base was stable despite shutdowns at one of our major organometallics plants to facilitate capacity expansion.

Net sales decreased by $35 million to $201 million for the second quarter of 2013 reflecting a $24 million decrease in sales volumes, $10 million in lower selling prices and $1 million from unfavorable foreign currency translation.

Operating income of $13 million in the second quarter of 2013 was $25 million lower than the second quarter of 2012. The decrease in operating income reflected the lower selling prices, an $11 million decrease in sales volume and unfavorable product mix and $3 million in unfavorable manufacturing costs and variances.

Consumer Products

Our Consumer Products segment increased operating income to $21 million in the second quarter of 2013 compared with $20 million in the second quarter of 2012, despite lower sales in 2013. Sales volume was impacted by a slow start to this year's pool season and unseasonable cold and wet weather in North America and Europe as the quarter progressed. Margins benefited from lower raw material and manufacturing costs and some reduction in SG&A and R&D (collectively "SGA&R") costs.

Net sales decreased by $13 million to $145 million for the second quarter of 2013 compared to the same quarter in 2012 due to a $12 million decrease in sales volume and $1 million in lower selling prices.

Operating income reflected $3 million in lower manufacturing costs, a $2 million reduction in raw material costs and a $2 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 second quarter of 2013 compared with the same quarter in 2012. Despite a slow start to the quarter due to the prolonged winter in the Northern hemisphere, the segment delivered a record quarter. North America led the growth, seeing strong demand for our miticide products, followed by Latin America. China also saw strong growth while Europe was at comparable levels to the second quarter of 2012 due to unseasonably wet conditions. Operating income reflected the benefit of an increase in selling prices and higher sales volumes offset by higher manufacturing costs and slightly higher SGA&R costs.

Net sales increased by $23 million to $135 million for the second quarter of 2013 from $112 million in the same quarter of 2012. The increase reflected $21 million in higher sales volume and $3 million in higher selling prices partly offset by $1 million in unfavorable foreign currency translation.

Operating income increased $9 million to $32 million in the second quarter of 2013 compared with $23 million in the second quarter of 2012, reflecting $8 million from favorable sales volume and product mix changes, the higher selling prices and a $2 million decrease in other costs, offset in part by $2 million in higher SGA&R costs and $2 million in 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 $20 million in the second quarter of 2013, which included $6 million of amortization expense related to intangible assets. In comparison, corporate expense was $24 million in the second quarter of 2012, which included $5 million of amortization expense related to intangible assets. Included in corporate expense in 2013 is a $2 million gain related to an adjustment for a legacy pension plan offset by the cost associated with evaluating several strategic initiatives.

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 earnings (loss) from discontinued operations, net of tax. These costs approximate $2 million and $4 million for the second quarters of 2013 and 2012, respectively.


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YEAR TO DATE RESULTS

Overview

Consolidated net sales were $1,341 million for the six months ended June 30, 2013 or $18 million lower than 2012 driven by a $12 million reduction in volume, $2 million overall decrease in selling prices and the unfavorable effect of foreign currency translation of $4 million. Our Industrial Performance Products segment reported a $28 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 particularly driven by weakness in mining and electronic applications in all regions. Chemtura AgroSolutions segment reported a $22 million increase in sales volume driven by strong sales in North and Latin Americas offset by lower volumes in Europe due to unseasonable weather conditions. Sales volumes in our Consumer Products segment declined $17 million as the result of a slow start to the 2013 northern hemisphere season due to prolonged cold and wet conditions which extended into our second quarter. Our Industrial Engineered Products segment experienced weak demand for insulated foam and electronic application products resulting in a $45 million decline in sales volume.

Gross profit for the six months ended June 30, 2013 was $313 million, a decrease of $49 million compared with the six months ended June 30, 2012. Gross profit as a percentage of net sales, decreased to 23% for the six months ended June 30, 2013 compared with 27% for the same period 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, $16 million from lower sales volume and unfavorable product mix, $6 million in unfavorable manufacturing costs and variances, $3 million from the unfavorable effect of foreign currency translation, $2 million in lower selling prices and a $1 million increase in other costs.

SG&A expense of $137 million was $14 million lower than the six months ended June 30, 2012, primarily the result of lower staff count and associated benefits related to our restructuring initiatives in 2012 and 2013. Included in the six months ended June 30, 2013 is a gain of $2 million related to an adjustment for a legacy pension plan.

Depreciation and amortization expense of $62 million was $3 million higher than the six months ended June 30, 2012.

R&D expense of $20 million was $3 million lower than the six months ended June 30, 2012.

Facility closures, severance and related costs of $25 million in the six months ended June 30, 2013 compared with $7 million for the six months ended June 30, 2012. The expense relates to our cost saving initiatives announced in 2013 and 2012.

Changes in estimates related to expected allowable claims were $2 million for the six months ended June 30, 2012, as we reduced the number of claims remaining in our Disputed Claim Reserve.

Interest expense of $31 million during the six months ended June 30, 2013 was $1 million higher than the six months ended June 30, 2012.

Other income, net was $15 million for the six months ended June 30, 2013 compared with $2 million for the six months ended June 30, 2012. During 2013, we recognized a gain of $15 million related to the release of cumulative translation adjustments associated with the rationalization of certain European subsidiaries that are no longer required.

Reorganization items, net of $1 million in the six months ended June 30, 2013 was $2 million lower than the six months ended June 30, 2012. The expense in both periods primarily comprised professional fees directly associated with the Chapter 11 reorganization.

The income tax expense in the six months ended June 30, 2013 was $23 million compared with expense of $12 million in the six months ended June 30, 2012. The tax expense reported for the six month period ended June 30, 2013 reflected fluctuations in jurisdictional profitability. The tax expense reported for the six months ended June 30, 2012 reflected fluctuations in jurisdictional profitability as well as the tax benefit of the second quarter restructuring charge. 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, 2013 were $26 million, or $0.26 per diluted share, as compared with $75 million, or $0.76 per diluted share, for the six months ended June 30, 2012.

Earnings from discontinued operations, net of tax attributable to Chemtura for the six months ended June 30, 2013, was $4 million, or $0.04 per diluted share, as compared with a loss of $3 million, or $0.03 per diluted share, for the six months ended June 30, 2012. Discontinued operations represents the Antioxidant business.


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Loss on sale of discontinued operations, net of tax attributable to Chemtura for the six months ended June 30, 2013, was $146 million, or $1.47 per diluted share.

The following is a discussion of the results of our segments for the six months ended June 30, 2013.

Industrial Performance Products

Our Industrial Performance Products segment reported higher net sales and operating income in the six months ended June 30, 2013 compared with the same six months of 2012. We are showing some recovery in sales of petroleum additive products across all regions as well as the benefit of a modest increase in selling prices. These gains were partially offset by weakness in mining and electronic applications for our urethane products which is effecting all of our regions. Operating income benefited from the higher selling prices over the increase in raw material costs and some favorability in manufacturing costs offset by slightly higher SGA&R costs.

Net sales totaled $495 million in the six months ended June 30, 2013, an increase of $37 million compared with last year. The increase reflected higher sales volume totaling $28 million and higher selling prices of $9 million.

Operating income totaled $60 million in the six months ended June 30, 2013, an increase of $6 million compared with last year. Operating income benefited from the higher selling prices and $3 million in higher sales volume net of unfavorable product mix, offset by higher raw material costs of $4 million and an increase in SG&A costs of $2 million.

Industrial Engineered Products

Our Industrial Engineered Products segment reported lower net sales and operating income in 2013 over the same six month period ended June 30, 2012. We experienced a weakness in demand in 2013 for insulation foam and electronic application products compared with very strong market growth particularly in insulation foam applications during the first half of 2012. This weakness was only partially offset by some marginal improvement in tin based product demand from 2012. Due to the weaker market in 2013, we have felt competitive pricing pressures which caused our sales and margins to decrease further. The segment's operating income was further impacted by unfavorable manufacturing costs and variances resulting from the impact of bringing on-line new production capacity in 2013.

Net sales decreased by $62 million to $400 million for the six months ended June 30, 2013 reflecting a $45 million decrease in sales volumes, $16 million in lower selling prices and $1 million from unfavorable foreign currency translation.

Operating income of $33 million in the six months ended June 30, 2013 decreased $49 million compared with last year. The decrease reflected the lower selling prices, $17 million from lower sales volume and unfavorable product mix, $7 million in unfavorable manufacturing costs and variances, $3 million in higher raw material costs, $2 million from unfavorable foreign currency translation and a $4 million increase in other costs.

Consumer Products

Our Consumer Products segment reported lower net sales for the six months ended June 30, 2013 compared with the six months ended June 30, 2012 but through cost control reported higher operating income for the same comparative periods. This segment experienced volume declines in the Northern Hemisphere as a result of a prolonged winter and cold, wet spring which has extended into the summer months. This has caused some weakness in our large retailer and dealer distribution channels in some U.S. states and European countries. Lower manufacturing and distribution costs and variances coupled with lower SGA&R and favorable sales prices over raw material costs provided favorable effects on our margins and operating income.

Net sales decreased by $19 million to $223 million in the six months ended June 30, 2013 reflecting a $17 million decrease in sales volume and $2 million in lower selling prices.

Operating income increased $4 million to $19 million in the six months ended June 30, 2013 compared with $15 million in the six months ended June 30, 2012 which reflected $5 million in lower manufacturing costs, a $5 million reduction in raw material costs, $3 million from lower SGA&R costs and a $2 million decrease in other costs, offset by a $9 million impact from lower sales volume and unfavorable product mix and the slightly lower selling prices.

Chemtura AgroSolutions

Our Chemtura AgroSolutions segment reported higher net sales and operating income for the six months ended June 30, 2013 compared with the same period in 2012. Net sales increased over the prior year period as a result of improved sales volume in


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both North and Latin America. We experienced some decline in our European markets due to unusually cold weather conditions and flooding in some regions. Operating income reflected the benefit of the increased sales volume and selling prices coupled with continued focus on SGA&R, offset in part by higher manufacturing and distribution cost.

Net sales increased by $26 million to $223 million for the six months ended June 30, 2013 from $197 million in the same period of 2012. The increase reflected $22 million in higher sales volume and $7 million in higher selling prices partly offset by $3 million of unfavorable foreign currency translation.

Operating income increased $12 million to $45 million in the six months ended June 30, 2013 compared with $33 million in the six months ended June 30, 2012, reflecting $7 million from favorable sales volume and product mix changes, the higher selling prices and $3 million in lower SGA&R costs, offset in part by $4 million in higher manufacturing costs and a $1 million increase in other costs.

General Corporate

Corporate expense was $66 million in the six months ended June 30, 2013, which included $13 million of amortization expense related to intangible assets. In comparison, corporate expense was $57 million in the six months ended June 30, 2012, which included $13 million of amortization expense related to intangible assets. The increase in 2013 was primarily due to a $21 million increase 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. Additionally, in the second quarter of 2013, we reported a gain of $2 million related to an adjustment for a legacy pension plan and 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 earnings (loss) from discontinued operations, net of tax. These costs approximate $6 million and $8 million for the six months ended June 30, 2013 and 2012, respectively.

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 . . .

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