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ROC > SEC Filings for ROC > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for ROCKWOOD HOLDINGS, INC.

Form 10-Q for ROCKWOOD HOLDINGS, INC.


8-May-2014

Quarterly Report


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

This discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth in Forward-Looking Statements" at the end of this Management's Discussion and Analysis ("MD&A") section and the risk factors section of our 2013 Annual Report on Form 10-K. You should read the following MD&A together with our condensed consolidated financial statements and the notes to those statements that appear elsewhere in this Quarterly Report.

Executive Summary

We are a global developer, manufacturer and marketer of technologically advanced and high value-added specialty chemicals. We serve more than 50,000 customers across a wide variety of industries and geographic areas. Prior to the completed and expected to be completed divestitures described below, we operated through five reportable segments: Lithium, Surface Treatment, Performance Additives, Titanium Dioxide Pigments and Advanced Ceramics. As a result of these completed and expected to be completed divestitures, we now operate through two reportable segments: (1) Lithium and (2) Surface Treatment.

We are focused on growth, productivity, cost reduction, margin expansion, divestment of non-core businesses, re-investment in core businesses, bolt-on acquisitions and debt reduction to drive stockholder value. In connection with this focus, among other things:

During 2013, we sold our Advanced Ceramics segment and Clay-based Additives business, and entered into a definitive agreement to sell our Titanium Dioxide Pigments, Color Pigments and Services, Timber Treatment Chemicals, Rubber/Thermoplastics Compounding and Water Chemistry businesses (the "TiO2 Pigments and Other Businesses") with a current purchase price of $1.275 billion, including the assumption of $225 million in pension obligations, and subject to other adjustments. This transaction is expected to close during the third quarter of 2014, subject to the receipt of regulatory approval by the European Commission. The transaction is currently in phase II review by the European Commission.

Our condensed consolidated financial statements have been reclassified to reflect discontinued operations for Advanced Ceramics, Clay-based Additives and the TiO2 Pigments and Other Businesses for all periods presented. See Note 2, "Discontinued Operations," for further details.

In November 2013, we entered into definitive agreement to acquire a 49% interest in Talison Lithium Pty Ltd. ("Talison") through a joint venture with Chengdu Tianqi Industry Group ("Tianqi"). In March 2014, Rockwood and Tianqi amended and restated the original agreement. This transaction is expected to close in the second quarter of 2014, following receipt of regulatory approval. See further details in Item 1. Business of our 2013 Annual Report on Form 10-K, and in the liquidity section of this management's discussion and analysis of financial condition and results of operations section.

In April 2014, we announced that our wholly-owned subsidiary, RSGI, commenced a cash tender offer (the "Asset Sale Offer") to purchase up to $400 million in the aggregate principal amount of our 2020 Notes, at a purchase price of 100% of the principal amount thereof, plus accrued and unpaid interest thereon, to but not including the date of purchase.

The following table is a summary of our financial highlights:

                                                           Three months ended
                                                               March 31,
($ in millions, except per share amounts)                2014             2013
Net sales                                            $       354.5    $       337.1

Net income from continuing operations                         21.7              6.5

Adjusted EBITDA from continuing operations                    80.8             77.4

Adjusted EBITDA from continuing operations margin             22.8 %           23.0 %

Diluted earnings per share from continuing
operations attributable to Rockwood
Holdings, Inc. stockholders                                   0.29             0.08

Results - First Quarter Review

Total net sales were up in the first quarter of 2014 compared to the same period in the prior year primarily due to higher surface treatment volumes, particularly from higher automotive OEM and automotive components, coil and cold forming, general industrial and aerospace applications, as well as the impact of the acquisition of the remaining 50% interest in a previously unconsolidated joint venture in India


in 2013, as well as higher selling prices. Net sales were also higher from increased volumes of lithium carbonate and hydroxide. This was partially offset by decreased sales of potash, mainly volumes, as well as lower volumes from organometallic products, driven mostly by butyllithium.

Adjusted EBITDA from continuing operations increased in the first quarter of 2014 compared to the same period in the prior year primarily due to the higher net sales noted above, partially offset by higher selling, general and administrative costs.

Net income and diluted earnings per share from continuing operations were higher in the first quarter of 2014 compared to the same period in the prior year primarily due to the higher net sales noted above, lower foreign exchange losses on financing activities and decreased interest expense, partially offset by higher selling, general and administrative costs. Diluted earnings per share from continuing operations also benefited from fewer common shares outstanding due to share repurchases.

Factors Which Affect Our Results of Operations

Our Markets

Because the businesses in our segments generally serve many unrelated end-use markets, we discuss the principal market conditions on a segment basis rather than a consolidated basis for our continuing operations. The principal market conditions in our segments and regions in which we operate that impacted our results of operations during the periods presented and in future periods include the following:

Lithium

Demand for our lithium carbonate products is generally driven by demand in industrial applications, the aluminum business, the battery industry, glass ceramics and cement. Sales of lithium products specifically used in life science applications depend on the trends in drug development and growth in pharmaceuticals and agrochemicals markets, as well as generic competition. In the first quarter of 2014, net sales were down primarily from lower potash sales, mainly volumes, as well as lower volumes of organometallic products, driven mostly by butyllithium, partially offset by higher volumes of lithium carbonate and hydroxide.

We expect continued growth in demand for the remainder of 2014 for lithium carbonate and lithium hydroxide, along with the expected impact of the Talison transaction for the second half of the year, to more than offset lower volumes of potash and organometallic products, particularly butyllithium.

Surface Treatment

Demand for Surface Treatment products generally follows the activity levels of metal processing manufacturers, including the automotive, steel and aerospace industries, as well as products sold to general industry markets, including household appliances, manufacturing, can producers, heating, ventilation and aluminum finishing. Net sales were up in the first quarter of 2014 primarily from higher volumes of automotive OEM and automotive components, coil and cold forming, general industrial and aerospace applications, as well as the impact of the acquisition of the remaining 50% interest in the previously unconsolidated joint venture in India in July 2013, as well as higher selling prices. We expect growth for the remainder of 2014 primarily from increased volumes across most markets, particularly in general industry and automotive, combined with the impact from acquisitions, as well as higher selling prices.

Global Exposure

We operate a geographically diverse business, with 53% of our net sales in 2013 generated from shipments to customers in Europe, 21% to North America (predominantly, the United States), 16% to Asia and 10% to the rest of the world. For a geographic description of the origin of our net sales and location of our long-lived assets, see Item 8. Financial Statements and Supplementary Data - Note 3, "Segment Information" in our 2013 Form 10-K.

We have sold to customers in more than 60 countries and currently serve our diverse and extensive customer base with 33 facilities in 17 countries for our continuing operations. Consequently, we are exposed to global economic and political changes, particularly currency fluctuations that could impact our profitability and demand for our products.

Our sales and production costs are mainly denominated in U.S. dollars or Euros. Our consolidated results of operations and financial condition have been historically impacted by the fluctuation of the Euro against our reporting currency, the U.S. dollar. For the three months ended March 31, 2014, the average exchange rate of the Euro against the U.S. dollar was higher compared to the same period in 2013. Historically, however, our operating margins have not been significantly impacted by currency fluctuations because, in general, sales and costs of products sold are generated or incurred in the same currency, subject to certain exceptions.

The foreign currency effect is the translation impact of the change in the average rate of exchange of another currency to the U.S. dollar for the applicable period as compared to the preceding period. The impact relates primarily to the conversion of the Euro to the U.S.


dollar. Unless otherwise noted, all balance sheet items as of March 31, 2014 which are denominated in Euros are converted at the March 31, 2014 exchange rate of 1.00 = $1.3769. For the three months ended March 31, 2014 and 2013, the average rate of exchange of the Euro to the U.S. dollar is $1.3706 and $1.3199, respectively.

Raw Materials

Raw materials constituted approximately 58% of our 2013 cost of products sold and we have a broad raw material base, with the cost of no single raw material representing more than 7% of our cost of products sold in 2013. Nonetheless, the significant price fluctuations our raw materials have experienced in the past during periods of high demand have had an adverse impact on our results of operations. In the first three months of 2014, slightly higher raw material costs, primarily in our Surface Treatment segment, had an unfavorable impact on our consolidated results of operations. We cannot accurately predict the impact of any future price increases for raw materials or any raw material shortages on our business as a whole or in specific geographic regions. In addition, we may not be able to pass on raw material price increases to our customers.

Energy Costs

In 2013, energy purchases represented approximately 3% of our costs of products sold. Energy costs were down slightly in the first three months of 2014 primarily from favorable fuel and water pricing in Chile in our Lithium segment.

Income Taxes

We recorded an income tax provision of $12.8 million on income from continuing operations before taxes of $34.5 million in the three months ended March 31, 2014. The income tax provision was negatively impacted by a tax provision recorded on foreign exchange gains in connection with the repayment of an intercompany loan that was formerly deemed to be of a long-term investment nature.

Other Charges and Credits

During the periods presented, we incurred certain other charges that included restructuring and other severance costs, acquisition and disposal costs, systems/organization establishment expenses and foreign exchange losses. See "Items excluded from Adjusted EBITDA" section in Note 3, "Segment Information," for a discussion of other charges and credits recorded in the three months ended March 31, 2014.

Note Regarding Non-GAAP Financial Measures

A non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position or cash flows but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measure. From time to time in this management's discussion and analysis, we disclose non-GAAP financial measures, such as Adjusted EBITDA, with supporting reconciliations to GAAP financial measures. See Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our 2013 Annual Report on Form 10-K for a definition of Adjusted EBITDA, management's uses of Adjusted EBITDA and its limitations.

Results of Operations

Immaterial Corrections

During 2013, we determined, after a formal investigation, that management at a single location in Italy within the Color Pigments and Services business of our former Performance Additives segment (reported in discontinued operations - see Note 2, "Discontinued Operations," for further details) had falsified accounting records supporting certain asset, liability and income statement balances, beginning in 2007. We have evaluated the identified amounts and concluded that they were not material individually or in the aggregate to any of our previously issued annual and interim financial statements, including the presentation of the Color Pigments and Services business as discontinued operations. Although we have determined the amounts individually and in the aggregate are not material to prior periods, in accordance with authoritative accounting literature on considering the effects of misstatements in prior years when quantifying misstatements in the current year, the financial statements included herein have been adjusted to correct for the impact of these items.

As a result, we have revised our previously reported operating results to reflect certain immaterial adjustments, primarily related to cost of products sold. These adjustments reduced previously reported operating income by $1.6 million and net income by $1.1 million ($0.01 per share on a diluted basis) for the three months ended March 31, 2013. See Note 18, "Immaterial Corrections," for further details.

Actual Results of Operations

The following table presents the major components of our operations on an actual basis and Adjusted EBITDA (the reconciliation to net income is set forth in-Reconciliation of Net Income Attributable to Rockwood Holdings, Inc. Shareholders to Adjusted EBITDA for the three months ended March 31, 2014 and 2013 within this MD&A section), including as a percentage of net sales, for the periods presented. See Note 3, "Segment Information," for segment information and a reconciliation from income (loss) from continuing operations before taxes to Adjusted EBITDA on a segment basis.


                                                              Three months ended
                                                                  March 31,
($ in millions)                                              2014            2013
Statement of operations data:
Net sales:
Lithium                                                  $      115.8    $      118.5
Surface Treatment                                               203.7           184.5
Other                                                            35.0            34.1
Total net sales                                                 354.5           337.1

Gross profit                                                    161.9           153.1
                                                                 45.7 %          45.4 %
Selling, general and administrative expenses                    108.6           101.1
                                                                 30.6 %          30.0 %
Restructuring and other severance costs                           4.1             6.3
Operating income (loss):
Lithium                                                          25.8            31.7
                                                                 22.3 %          26.8 %
Surface Treatment                                                37.0            28.2
                                                                 18.2 %          15.3 %
Other                                                           (13.6 )         (14.2 )
Total operating income                                           49.2            45.7
Other expenses, net:
Interest expense, net                                           (14.2 )         (23.4 )
Foreign exchange loss on financing activities, net               (0.6 )         (15.1 )
Other, net                                                        0.1             0.1
Other expenses, net                                             (14.7 )         (38.4 )
Income before taxes                                              34.5             7.3
Income tax provision                                             12.8             0.8
Income from continuing operations                                21.7             6.5
(Loss) income from discontinued operations, net of
tax                                                             (43.4 )           9.3
Gain on sale of discontinued operations, net of tax               2.0               -
(Loss) income from continuing operations                        (19.7 )          15.8
Net (income) loss attributable to noncontrolling
interest                                                         (1.1 )           2.0
Net (loss) income attributable to Rockwood
Holdings, Inc. stockholders                              $      (20.8 )  $       17.8
Adjusted EBITDA:
Lithium                                                  $       41.1    $       46.9
                                                                 35.5 %          39.6 %
Surface Treatment                                                46.4            39.5
                                                                 22.8 %          21.4 %
Other                                                            (6.7 )          (9.0 )
Total Adjusted EBITDA from continuing operations         $       80.8    $       77.4

Three months ended March 31, 2014 compared to three months ended March 31, 2013

Overview

Net sales increased $17.4 million, or 5.2%, from the prior year primarily due to higher volumes of $14.9 million and higher selling prices of $3.0 million, particularly in our Surface Treatment segment. See further discussion by segment below.

Operating income increased $3.5 million, or 7.7%, from the prior year primarily due to the gross margin impact of higher sales volumes of $7.2 million, higher selling prices of $3.0 million, as well as lower restructuring and other severance costs of $2.2 million. This was partially offset by higher selling, general and administrative costs of $7.5 million, particularly in our Surface Treatment segment.


Adjusted EBITDA from continuing operations increased $3.4 million, or 4.4%, from the prior year primarily due to the reasons noted above, except for the change in restructuring and other severance costs which are excluded from Adjusted EBITDA.

Net income from continuing operations increased $15.2 million to $21.7 million in the three months ended March 31, 2014 compared with the same period in the prior year due to decreased foreign exchange losses on financing activities of $14.5 million, lower interest expense, net of $9.2 million, as well higher operating income of $3.5 million as noted above. This was partially offset by an increased tax provision of $12.0 million primarily from higher income before taxes.

Income from discontinued operations, net of tax, decreased $52.7 million to a loss of $43.4 million in the three months ended March 31, 2014 compared with the same period in the prior year primarily from the recording of an additional expected net loss of $73.4 million in connection with the sale of the TiO2 Pigments and Other Businesses and the elimination of net income of $30.6 million from the Advanced Ceramics segment and the Clay-based Additives businesses sold in the second half of 2013. This was partially offset by lower raw material costs of $27.3 million, particularly for slag and ilmenite, higher production levels resulting in higher fixed cost absorption of $12.5 million, and a charge, net of tax, of $12.1 million recorded in the first quarter of 2013 in connection with the repayment of the outstanding borrowings under the Titanium Dioxide Pigments facility agreement.

The gain on sale of discontinued operations, net of tax, of $2.0 million recorded in the three months ended March 31, 2014 relates to the sales of the Advanced Ceramics segment and the Clay-based Additives business in 2013.

Net income attributable to noncontrolling interest of $1.1 million was recorded in the three months ended March 31, 2014 compared to a net loss attributable to noncontrolling interest of $2.0 million in the three months ended March 31, 2013. The change from the prior year was primarily related to a loss recorded in the first quarter of 2013 in the Titanium Dioxide Pigments venture and the acquisition of our Titanium Dioxide Pigments venture partners' 39% interest in February 2013.

Net income attributable to Rockwood Holdings, Inc. shareholders decreased $38.6 million to a loss of $20.8 million in the three months ended March 31, 2014 compared with the same period in the prior year due to the reasons noted above.

Net sales

Lithium. Net sales decreased $2.7 million, or 2.3%, from the prior year primarily from lower selling prices of $2.4 million and lower volumes of $1.5 million. Lower sales of potash, mainly volumes, and lower volumes of organometallic products, mostly driven by butyllithium, were partially offset by higher volumes of lithium carbonate and hydroxide. The impact of currency changes of $1.2 million had a favorable impact on net sales.

Surface Treatment. Net sales increased $19.2 million, or 10.4%, from the prior year primarily from higher volumes of $15.6 million ($7.6 million from the impact of acquisitions, primarily the acquisition of the remaining 50% interest in a previously unconsolidated joint venture in India in 2013), particularly driven by higher automotive OEM and automotive applications, coil and cold forming, general industrial and aerospace applications, as well as higher selling prices of $6.4 million. The impact of currency changes of $2.8 million had an unfavorable impact on net sales.

Gross profit

Gross profit increased $8.8 million, or 5.7%, from the prior year due to the impact of higher sales volumes. Gross profit as a percentage of net sales were 45.7% and 45.4% for the three months ended March 31, 2014 and 2013, respectively.

Selling, general and administrative ("SG&A") expenses

SG&A expenses increased $7.5 million, or 7.4%, from the prior year primarily from increased SG&A costs in our Surface Treatment segment. SG&A expenses as a percentage of net sales were 30.6% and 30.0% for the three months ended March 31, 2014 and 2013, respectively.

Restructuring and other severance costs

See Note 14, "Restructuring And Other Severance Costs," for further details.

Operating income

Lithium. Operating income decreased $5.9 million, or 18.6%, from the prior year primarily due to the gross margin impact of lower sales volumes of $3.6 million, primarily related to lower potash sales, and lower selling prices of $2.4 million.


Surface Treatment. Operating income increased $8.8 million, or 31.2%, from the prior year primarily due to the gross margin impact of higher sales volumes of $8.9 million, higher selling prices of $6.4 million and lower restructuring and other severance costs of $1.6 million. This was partially offset by higher selling, general and administrative expenses of $5.0 million, higher raw material costs of $1.9 million and higher manufacturing costs of $1.4 million.

Other income (expenses)

Interest expense, net. Interest expense, net decreased $9.2 million, or 39.3%, compared to the same period in the prior year primarily due to the repayment of all of the outstanding borrowings under the senior secured credit facility in September 2013.

Foreign exchange loss on financing activities, net. For the three months ended March 31, 2014, foreign exchange losses of $0.6 million were primarily reported in connection with non-operating Euro-denominated transactions. For the three months ended March 31, 2013, foreign exchange losses of $15.1 million were primarily reported in connection with intercompany Euro-denominated loans put in place to fund the repayment of the outstanding borrowings under the Titanium Dioxide Pigments facility agreement.

Income tax benefit/provision

We recorded an income tax provision of $12.8 million on income from continuing operations before taxes of $34.5 million in the three months ended March 31, 2014, resulting in an effective tax rate of 37.1%. The effective tax rate of 37.1% is higher than the U.S. statutory rate of 35% primarily due to a tax provision recorded on foreign exchange gains in connection with the repayment of an intercompany loan that was formerly deemed to be of a long-term investment nature.

We recorded an income tax provision of $0.8 million on income from continuing operations before taxes of $7.3 million in the three months ended March 31, 2013, resulting in an effective tax rate of 11.0%. The effective tax rate of 11.0% is lower than the U.S. statutory rate of 35% primarily due to a beneficial foreign earnings mix.

Adjusted EBITDA

Lithium. Adjusted EBITDA decreased $5.8 million, or 12.4%, from the prior year primarily due to the gross margin impact of lower sales volumes of $3.6 million, primarily related to lower potash sales, and lower selling prices of $2.4 million.

Surface Treatment. Adjusted EBITDA increased $6.9 million, or 17.5%, from the prior year primarily due to the gross margin impact of higher sales volumes of $8.9 million and higher selling prices of $6.4 million. This was partially offset by higher selling, general and administrative expenses of $5.0 million, higher raw material costs of $1.9 million and higher manufacturing costs of $1.4 million.

Other. Adjusted loss before interest, taxes, depreciation and amortization decreased $2.3 million, or 25.6%, from the prior year, primarily due to cost reduction efforts, particularly personnel costs and professional fees, in connection with divestitures in 2013.


Reconciliation of Net Income Attributable to Rockwood Holdings, Inc. Shareholders to Adjusted EBITDA from Continuing Operations

Because we view Adjusted EBITDA on both a consolidated basis and a segment basis as an operating performance measure, we use net income as the most comparable U.S. GAAP measure on a consolidated basis. The following table, which sets forth the applicable components of Adjusted EBITDA, presents a reconciliation of net income attributable to Rockwood Holdings, Inc. shareholders to Adjusted EBITDA from continuing operations on a consolidated basis:

                                                                Three months ended
. . .
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