Chemtura Q3 profit flat year-over-year at US$9M, sales up 9% to US$773M; results reflect decreased demand from Chinese customers offset by stronger demand from other applications, savings from scaled back production
November 2, 2011
– Achieves Third Quarter 2011 Net Sales of $773 million and $0.09 Earnings Per Share
Chemtura Corporation today announced financial results for the third quarter ended September 30, 2011. We also filed our Quarterly Report on Form 10-Q with the Securities and Exchange Commission for the quarter ended September 30, 2011. For the third quarter of 2011, Chemtura reported net sales of $773 million and net earnings from continuing operations attributable to Chemtura on a GAAP basis of $9 million, or $0.09 per share. Net earnings attributable to Chemtura on a managed basis were $21 million, or $0.21 per share.
As previously announced, our Board of Directors (the "Board") has authorized us to repurchase up to $50 million of our common stock over the next twelve months. 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 applicable rules and regulations of the Securities and Exchange Commission ("SEC").
Third Quarter 2011 Financial Results
The discussion below includes financial information on both a GAAP and non-GAAP managed basis. We present managed basis financial information as management uses this information internally to evaluate and direct the performance of our operations and believes that managed basis financial information provides useful information to investors. A reconciliation of GAAP and managed basis financial information is provided in the supplemental schedules included in this release.
"As announced in our October 18, 2011 press release, we believe that the share repurchase program represents an effective use of our capital and our continued confidence in the long-term growth prospects of Chemtura," commented Craig A. Rogerson, Chairman, President and CEO of Chemtura. "It also reflects our confidence in our ability to manage our business and its cash flows through whatever changes in economic conditions we may encounter and the recognition that there may be opportunities where purchases of our common stock offer the ability to deliver superior returns to our shareholders. We have strong liquidity and no debt maturities until 2015 and, apart from seasonal working capital swings, expect to deliver positive free cash flow in 2012 and beyond."
Mr. Rogerson observed, "Third quarter net sales and operating profitability showed a year-on-year improvement, despite the uncertain macroeconomic outlook. Our adjusted EBITDA for the last twelve months increased from $361 million at June 30, 2010 to $374 million at September 30, 2011."
Mr. Rogerson continued, "Our Great Lakes Solutions business (part of our Industrial Engineered Products segment) experienced reduced demand from Chinese customers due to the influence of local economic policy and industry trends. The strength of demand from other applications partially offset this impact, but overall, reduced production resulted in lower manufacturing cost absorption. Nevertheless, the Industrial Engineered Products segment delivered record third quarter net sales and operating profit. As the third quarter progressed, many industrial customers became more cautious, slowing order volumes, but this did not impede us from demonstrating year-on-year performance improvement."
Mr. Rogerson concluded, "The third quarter concluded what had been the toughest season in recent years for our Consumer Products segment. However, we are now laying the foundation for a stronger season in 2012 with new product introductions, recapturing the requirements of the mass market customer we lost for the 2011 season and gaining additional new business in this important channel. Meanwhile, Chemtura AgroSolutions continued to see the benefit of the recovery in European demand with net sales up 13% year-on-year this quarter."
Fourth Quarter 2011 Trends
Mr. Rogerson commented, "Our goal remains to deliver year-on-year improvement in the fourth quarter. Our challenges lie primarily in two areas. Demand for our flame retardants used in electronics is providing mixed signals. Orders for products used in TV enclosures and connectors have improved compared to the third quarter while orders from printed wiring board ("PWB") applications continue to slow. However, PWB demand is still more than double that in the fourth quarter of 2008. Fourth quarter performance of our Consumer Products segment relies upon pre-season inventory purchases by our dealers. Initial feedback suggests they will buy less this year out of caution. Nevertheless, the performance of our Industrial Engineered Products and Chemtura AgroSolutions segments, as well as Organometallics within Industrial Engineered Products segment, indicates that we have the ability to deliver upon our goal again this quarter."
Third Quarter 2011 Business Segment Highlights
-- Industrial Performance Products' net sales increased $21 million or 7% driven principally by higher selling prices of $24 million and $3 million of favorable foreign exchange translation, offset by lower sales volume of $4 million (the net effect of lower net sales by our antioxidants business, partially offset by growth in our petroleum additives business) and a decrease of $2 million due the divestitures of the natural sodium sulfonates and oxidized petrolatum product lines in 2010. Operating profit increased $4 million reflecting the $24 million increase in selling prices and a $2 million benefit from favorable foreign exchange translation and lower REACh registration costs, partially offset by a $22 million increase in raw material costs.
-- Industrial Engineered Products' net sales increased $32 million or 17% driven by higher selling prices of $39 million and a $3 million benefit of favorable foreign currency translation, partially offset by a $10 million reduction in sales volume. Price increases have been implemented in response to substantially higher raw material costs and a significant ongoing investment to ensure a sustainable and reliable supply of bromine and its derivatives. Operating profit on a managed basis increased $12 million from the third quarter of 2010 primarily due to the $39 million increase in selling prices, partially offset by a $16 million increase in manufacturing costs and by an $11 million increase in raw material costs. The increase in manufacturing costs compared to the third quarter of 2010 was due to lower production volumes of certain brominated flame retardants together with high maintenance costs, weather related outages and cost associated with the addition of capacity for our Emerald(R) 1000 and Emerald(R) 3000 products at our South Arkansas facility. On a GAAP basis, operating profit increased $17 million as compared to the same period last year as 2010 was impacted by accelerated depreciation of property, plant and equipment.
-- Consumer Products' net sales decreased $2 million or 2% due to lower sales volume and lower selling prices, partially offset by the benefit of favorable foreign currency translation. U.S. sales volume continued to reflect lower demand in the mass market channel where inventories continued to be managed by our customers at lower levels during the third quarter. Additionally, the European selling season was shortened by unfavorable weather conditions in the region. Operating profit decreased $8 million primarily due to a $7 million increase in manufacturing costs (primarily due to lower production and production mix changes resulting in lower fixed cost absorption), unfavorable product mix and lower selling prices. These factors were partially offset by decreased selling, general and administrative and research and development (collectively "SGA&R") costs.
-- Chemtura AgroSolutions' net sales increased $12 million or 13% primarily due to increased sales volume. Sales improved in all regions, except Asia Pacific. Operating profit on a managed basis increased $2 million due to higher sales volume and lower SGA&R expense. On a GAAP basis, operating profit increased $5 million as 2010 was impacted by a $3 million unfavorable legal settlement.
-- On a GAAP basis, corporate expenses for the third quarter of 2011 were $28 million compared to $30 million in 2010. Corporate expenses included amortization expense related to intangibles of $9 million and $10 million for the third quarters of 2011 and 2010, respectively.
Third Quarter 2011 Results - GAAP
-- Net sales for the third quarter of 2011 were $773 million or $63 million higher than 2010. The increase in net sales was attributable to higher selling prices of $62 million and a $12 million benefit from favorable foreign currency translation, partially offset by decreased sales volume of $9 million and a reduction in net sales of $2 million due to the divestiture of the natural sodium sulfonates and oxidized petrolatum product lines in the third quarter of 2010. The higher selling prices were achieved by the Industrial Performance Products and Industrial Engineered Products segments during the third quarter of 2011.
-- Gross profit for the third quarter of 2011 was $174 million, an increase of $14 million compared with the third quarter of 2010. Gross profit as a percentage of net sales remained constant at 23% for the third quarters of 2011 and 2010. The increase in gross profit was primarily due to $62 million in higher selling prices, a $4 million benefit from favorable currency translation, $3 million in 2010 for non-recurring environmental costs and a $6 million decrease in other costs. These improvements were partially offset by $34 million in higher raw material costs, $22 million of unfavorable manufacturing costs (in our Industrial Engineered Products and Consumer Products segments), a $3 million increase in distribution costs, and $2 million of lower sales volume and unfavorable product mix.
-- Operating profit for the third quarter of 2011 was $45 million compared with an operating profit of $69 million for the third quarter of 2010. The decrease of $24 million was primarily due to a $40 million benefit in 2010 for changes in estimates related to expected allowable claims, a $2 million gain on sale of a business in 2010, a $2 million benefit for restructuring activities in 2010 and $3 million of other cost increases, which was offset by a $14 million increase in gross profit, $5 million of accelerated depreciation of property, plant and equipment in 2010, $3 million related to a 2010 legal settlement and a $1 million decrease related to losses on disposal of assets.
-- Included in the computation of operating profit was $6 million of stock compensation expense (including expense related to grants under the emergence incentive plans approved by the Bankruptcy Court) compared with $1 million in the third quarter of 2010.
-- Interest expense of $16 million during the third quarter of 2011 was $19 million lower than the third quarter of 2010. In 2010, we made a determination that it was probable that obligations for interest on unsecured claims would ultimately be paid based on the estimated claim recoveries reflected in our plan of reorganization filed during the second quarter of 2010 (the "Plan"). Thus, the decrease from 2010 to 2011 was due to the post-petition interest recorded during the third quarter of 2010 of $21 million, partially offset by increased interest expense in 2011 associated with the Senior Notes and Term Loan secured in August 2010 compared with interest expense on the borrowings in 2010 under the Amended DIP Credit Facility.
-- Other expense, net was $1 million in the third quarter of 2011 compared to other income, net of $8 million for the third quarter of 2010. The change is primarily the result of net foreign currency gains in 2010.
-- Reorganization items, net of $6 million in the third quarter of 2011 was $27 million lower than the third quarter of 2010. The expense in both periods primarily comprised professional fees directly associated with the Chapter 11 reorganization and the impact of negotiated claims settlement for which Bankruptcy Court approval has been obtained or requested. The decrease reflects our emergence from Chapter 11 in November 2010.
-- The income tax provision from continuing operations in the third quarter of 2011 was $13 million compared with an income tax benefit from continuing operations of $2 million in the third quarter of 2010. The tax provision in the third quarter of 2011 included tax expense of approximately $5 million related to a foreign tax matter dating back to the 1990s.
-- Net earnings from continuing operations attributable to Chemtura for the third quarter of 2011 was $9 million, or $0.09 per share, compared with net earnings from continuing operations attributable to Chemtura of $12 million, or $0.05 per share, for the third quarter of 2010.
-- The loss from sale of discontinued operations for the third quarter of 2010 was $3 million (net of a $1 million tax benefit), or $0.01 per share. Discontinued operations related to the polyvinyl chloride ("PVC") additives business, which was sold in April 2010.
Third Quarter 2011 Results - Managed Basis
-- On a managed basis, third quarter 2011 gross profit was $174 million, as compared with $163 million in the same period last year. Gross profit as a percentage of net sales remained constant at 23%. The increase in gross profit was due to higher selling prices and the benefit of favorable foreign currency translation, partially offset by higher raw material, manufacturing and distribution costs, decreased sales volume and unfavorable product mix.
-- On a managed basis, third quarter 2011 operating profit was $46 million as compared with $38 million in the same period last year. The increase in operating profit primarily reflected the increase in gross profit, partially offset by higher SGA&R.
-- Adjusted EBITDA in the third quarter of 2011 was $87 million as compared with $74 million in the third quarter of 2010. (See the tables attached to this earnings release for a reconciliation of the computation of Adjusted EBITDA.) The increase in adjusted EBITDA was principally driven by higher gross profit. Adjusted EBITDA for the last twelve months increased from $320 million at December 31, 2010 to $374 million at September 30, 2011.
-- Earnings from continuing operations before income taxes on a managed basis in the third quarters of 2011 and 2010 exclude pre-tax GAAP charges of $7 million and $23 million, respectively. These charges are primarily related to accelerated depreciation of property, plant and equipment; facility closures, severance and related costs; gain or loss on the sale of business or assets; changes in estimates related to expected allowable claims; legal settlements; and costs associated with the Chapter 11 reorganization.
-- Chemtura has chosen to apply an estimated tax rate to our managed basis pre-tax income to simplify for investors the comparison of underlying operating performance. Following our emergence from Chapter 11, we developed an estimated managed basis tax rate of 28% reflecting the expected performance of our core operations in 2011. The estimated managed basis tax rate reflects (i) the impact of the adjustments made in the preparation of pre-tax managed basis income; (ii) the exclusion of the benefit or charge arising from the creation or release of valuation allowances on U.S. income; and (iii) the utilization of foreign tax credits generated in the current year. We expect to apply the 28% tax rate in the preparation of our managed basis financial statements throughout 2011 and reevaluate for 2012, or sooner, if significant circumstances warrant. The 28% managed basis tax rate reflects the benefit of lower international corporate tax rates as compared with the U.S. Federal corporate tax rate as well as the conclusion that we will indefinitely re-invest the majority of the earnings of our foreign subsidiaries in our international operations.
-- Chemtura's managed basis tax rate of 35% in 2010 represented a standard tax rate for our core operations to simplify comparison of underlying operating performance during the course of the Chapter 11 proceedings.
Cash Flows Details - GAAP
-- Net cash provided by operating activities for the third quarter of 2011 was $161 million as compared with $120 million for the third quarter of 2010. Both quarters were favorably impacted by the seasonal reduction in working capital.
-- As of September 30, 2011, our accounts receivable balance was $497 million as compared with $496 million as of September 30, 2010 and $615 million as of June 30, 2011.
-- As of September 30, 2011, our inventory balance was $562 million as compared with $533 million at September 30, 2010 and $602 million as of June 30, 2011.
-- Capital expenditures for the third quarter of 2011 were $37 million compared with $24 million in the third quarter of 2010. Capital expenditures for the nine months ending September 30, 2011 were $92 million compared to $62 million for the nine months ending September 30, 2010.
-- Cash income taxes paid (net of refunds) in the third quarter of 2011 were $2 million compared with $3 million in the third quarter of 2010.
-- Our total debt was $775 million as of September 30, 2011 compared to $846 million as of June 30, 2011. The decrease is primarily due to a reduction in borrowings under our revolving credit facility. Cash and cash equivalents increased to $191 million as of September 30, 2011 compared with $143 million as of June 30, 2011. The decrease in borrowings under our revolving credit facility during the quarter is primarily due to the seasonal reduction in working capital.
-- On October 26, 2011, certain of our European subsidiaries entered into a trade receivables financing facility that permits the sale, on a revolving basis, of certain trade receivables up to a maximum amount outstanding at any time of EUR68 million.
Third Quarter Earnings Q&A Teleconference
Copies of this release, as well as informational slides, will be available on the Investor Relations section on our Web site at www.chemtura.com . We will host a teleconference to review these results at 9:00 a.m. (EDT) on Wednesday, November 2, 2011. Interested parties are asked to dial in approximately 10 minutes prior to the start time. The call-in number for U.S. based participants is (877) 494-3128 and for all other participants is (404) 665-9523. The conference ID code is 10536229. Replay of the call will be available for thirty days, starting at 10 a.m. (EDT) on Thursday, November 3, 2011. To access the replay, call toll-free (855) 859-2056, (800) 585-8367, or (404) 537-3406, and enter access code 10536229. An audio webcast of the call can be accessed via the link below during the time of the call: http://www.talkpoint.com/viewer/starthere.asp?Pres=136920
Chemtura Corporation, with 2010 sales of $2.8 billion, is a global manufacturer and marketer of specialty chemicals, agrochemicals and pool, spa and home care products. Additional information concerning us is available at www.chemtura.com.
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