Second Quarter 2012 Business Segment Highlights
- Industrial Performance Products’ net sales decreased $31 million or 8% as a result of a $35 million decline in sales volume and a $5 million impact from unfavorable foreign currency translation partially offset by a $9 million year-on-year increases in selling prices. Unit sales volume across the segment was lower than last year as industrial demand has not yet recovered from the decline in the second half of 2011 and there was some further weakness in Asia during this quarter. Our urethanes product lines also saw weakening in Europe. All product lines within the segment continued to deliver year-on-year price increases to cover raw material costs increases. Raw material costs moderated as the second quarter of 2012 progressed. Operating income on a managed basis decreased $3 million in the second quarter of 2012 to $36 million, primarily reflecting a $12 million impact from lower sales volume and changes in product mix, a $4 million increase in raw material costs and a $2 million unfavorable effect of foreign currency translation, partially offset by the $9 million increase in selling prices, a $4 million benefit of favorable manufacturing and distribution costs, and $2 million in lower selling, general and administrative and research and development (collectively “SGA&R”) expense. On a GAAP basis, operating income decreased $6 million as compared to the same period last year as 2012 was impacted by accelerated depreciation and asset retirement obligations of $3 million associated with the closure of our Pedrengo, Italy facility.
- Industrial Engineered Products’ net sales decreased $8 million or 3% reflecting a $19 million impact of lower sales volumes and $4 million from unfavorable foreign currency translation, offset by a benefit of $15 million from year-on-year increases in selling prices. Net sales to insulation foam, mercury removal, agriculture, healthcare and certain industrial applications markets grew reflecting the benefits of the investment in new product and application development, diversifying this segment’s revenue base. Demand from electronics applications were lower than in the second quarter of 2011. The recovery that had been building during the first quarter of 2012 as the electronics industry inventory correction abated, stalled during the second quarter as the demand for electronic goods was impacted by macroeconomic conditions. Demand for tin based organometallics products also weakened. Against these challenges, all product lines within the segment continued to show year-on-year price increases covering raw material cost increases. Operating income on a managed basis decreased $3 million from the second quarter of 2011. The lower operating income reflected $9 million in unfavorable manufacturing absorption variances, $5 million in volume and product mix changes, $2 million in higher raw material costs and a $2 million increase in other charges offset by $15 million from favorable selling price increases. With lower production volumes than in the second quarter of 2011 as well as the impacts from bringing on-line new production capacity, there were unfavorable manufacturing absorption variances for certain product lines within the segment this quarter. On a GAAP basis, operating income decreased $4 million as compared to the same period last year as 2011 was impacted by the benefit of a reduction of an asset retirement obligation.
- Consumer Products’ net sales increased $6 million or 4% which reflected $9 million of higher volume and $1 million of selling price increases offset by a $4 million impact from unfavorable foreign currency translation. Increases in sales volume are attributable to regaining a customer for our 2012 season and our new opening price point product, but volume growth was less than anticipated. In the North American region the quarter started strong, but by June store sales volumes declined below prior year. In Europe, the 2012 season has been weaker than in recent years due to both cold and wet weather conditions. Operating income decreased $2 million to $20 million, principally the result of $3 million in increased raw material costs and $1 million in unfavorable product mix offset by $2 million in lower manufacturing costs.
- Chemtura AgroSolutions’ net sales increased $2 million or 2%, resulting from $4 million in higher sales volume and $2 million in higher selling prices, offset by a $4 million impact from unfavorable foreign currency translation. Embedded within our net sales are the benefits of new products and product registrations. Operating income reflected the benefit of reductions in bad debt expense and the improvements in our cost base following a restructuring that was implemented in the latter part of 2011. Net sales were ahead of prior year in all regions except Europe where net sales were marginally lower than the second quarter of 2011 after adjusting for the impact of unfavorable foreign currency translation, primarily due to the weaker euro. This volume decrease was primarily due to the impact of the colder than normal winter in Europe on one of our key crops, oil seed rape. Operating income increased $11 million reflecting $12 million in lower SGA&R costs coupled with the $2 million in higher selling prices, partly offset by a $2 million impact from unfavorable foreign currency translation and a $1 million increase in other costs.
- Corporate expenses for the second quarter of 2012 decreased to $22 million compared with $26 million in 2011. Corporate expenses included amortization expense related to intangible assets of $7 million and $9 million for the second quarters of 2012 and 2011, respectively.
Second Quarter 2012 Results - GAAP
- Consolidated net sales for the second quarter of 2012 were $845 million or $31 million lower than 2011. We realized $27 million from higher selling prices as we continued to focus on investing in new products and manufacturing capacity as well as recovering increases in raw material and distribution costs. Our Chemtura AgroSolutions and Consumer Products segments delivered modest increases in net sales compared to the second quarter of 2011 despite the weakening in the value of a number of currencies compared to the US dollar. The second quarter of 2011 was the last strong quarter for our Industrial segments prior to the weakening in global demand conditions in the second half of 2011. While there have been improvements in some industries since the second half of 2011, demand has not recovered to the levels seen in the first half of 2011 and demand from the Asia Pacific region has weakened. As a result, net sales in the second quarter of 2012 showed a net reduction in volume of $41 million compared to the second quarter of 2011. The impact of unfavorable foreign currency translation across all of the segments for the quarter was $17 million.
- Gross profit for the second quarter of 2012 was $213 million, a decrease of $11 million compared with the second quarter of 2011. Gross profit as a percentage of net sales decreased slightly to 25% as compared with 26% in the same quarter of 2011. Gross profit was impacted by an $18 million reduction in volume and product mix; $9 million in higher raw material costs; $5 million in manufacturing variances; a $3 million increase in accelerated recognition of asset retirement obligations; and a $5 million impact from unfavorable foreign currency translation, offset by a $27 million increase in higher selling prices and $2 million in lower distribution costs. While raw material costs increased in the first quarter of 2012, the increases began to moderate in the second quarter of 2012.
- Operating income for the second quarter of 2012 was $69 million compared with $87 million for the second quarter of 2011. The decrease of $18 million was primarily due to facility closures, severance and related costs of $23 million related to the previously disclosed closure of our manufacturing facility in Pedrengo, Italy and other initiatives; an $11 million decrease in gross profit and a $1 million increase in other costs, which was offset by $17 million in lower SGA&R costs.
- Included in the computation of operating income for the second quarter of 2012 was $3 million of stock-based compensation expense compared with $8 million in the second quarter of 2011. Stock-based compensation expense is expected to total approximately $18 million for 2012.
- Interest expense was $16 million during the second quarter of 2012 and 2011.
- Other income, net was $7 million in the second quarter of 2012 compared with other expense, net of $1 million for the second quarter of 2011. The change is primarily the result of net foreign currency gains in 2012 and higher interest income.
- Reorganization items, net was $1 million in the second quarter of 2012 which was $5 million lower than the second quarter of 2011. The expense in both periods is comprised of professional fees directly associated with the Chapter 11 reorganization and the impact of negotiated settlements of claims for which Bankruptcy Court approval has been requested or obtained.
- The income tax expense in the second quarter of 2012 was $8 million compared with a benefit of $6 million in the second quarter of 2011. The tax expense reported in the second quarter of 2012 reflects fluctuations in jurisdictional profitability as well as the tax benefit of the second quarter restructuring charge. The tax benefit in the second quarter of 2011 included a decrease in deferred foreign income taxes that had been recorded in an international jurisdiction in prior years.
- Net earnings attributable to Chemtura for the second quarter of 2012 was $50 million, or $0.50 per share, compared with net earnings attributable to Chemtura of $69 million, or $0.69 per share, for the second quarter of 2011.
Second Quarter 2012 Results - Managed Basis
- On a managed basis, second quarter 2012 gross profit was $215 million, as compared with $223 million in the same period last year. Gross profit as a percentage of net sales remained constant at 25% for the second quarter of 2012 and 2011. The decrease in gross profit was primarily due to decreased sales volume, higher manufacturing and raw material costs, and unfavorable absorption variances, partially offset by higher selling prices.
- On a managed basis, second quarter 2012 operating income was $95 million as compared with $88 million in the same period last year. The increase in operating income primarily reflected the decrease in SGA&R costs, partially offset by the decrease in gross profit.
- Adjusted EBITDA in the second quarter of 2012 was $132 million as compared with $130 million in the second quarter of 2011 (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 lower SGA&R costs, partially offset by lower gross profit. Adjusted EBITDA for the last twelve months increased from $385 million at December 31, 2011 to $392 million at June 30, 2012.
- Net earnings before income taxes on a managed basis in the second quarters of 2012 and 2011 were $86 million and $71 million, respectively and exclude pre-tax GAAP charges of $27 million and $7 million, respectively. These charges are primarily related to accelerated recognition of asset retirement obligations; accelerated depreciation of property, plant and equipment; facility closures, severance and related costs; impairment charges; changes in estimates related to expected allowable claims; and costs associated with our 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. We apply an estimated managed basis tax rate of 28% reflecting the expected performance of our core operations in 2011 and 2012. 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; (iii) the utilization of foreign tax credits generated in the current year; and (iv) the conclusion that we will indefinitely re-invest the majority of the earnings of our foreign subsidiaries in our international operations.
Cash Flows Details - GAAP
- Net cash provided by operating activities for the second quarter of 2012 was $71 million as compared with $42 million for the second quarter of 2011. We traditionally use cash in the first half of the year as working capital increases driven by our seasonal businesses. This working capital is then recovered in the second half of the year, usually resulting in net cash being provided by operations for the year as a whole. This year net cash used in operating activities in the first six months of 2012 was $18 million compared to $70 million in the first six months of 2011.
- As of June 30, 2012, our accounts receivable balance was $583 million as compared with $615 million as of June 30, 2011.
- As of June 30, 2012, our inventory balance was $568 million as compared with $602 million at June 30, 2011.
- Capital expenditures for the second quarter of 2012 were $29 million compared with $32 million in the second quarter of 2011.
- Cash income taxes paid (net of refunds) in the second quarter of 2012 were $10 million compared with $2 million in the second quarter of 2011.
- During the second quarter of 2012, we repurchased 0.7 million shares of our common stock for approximately $10 million under our previously announced share repurchase program. 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 to November 2013. The shares are expected to be repurchased from time to time through open market purchases. 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 of the Securities and Exchange Commission. From October 7, 2011 through July 31, 2012, we repurchased 3.4 million shares of common stock for a total purchase price of $41 million. As a result of the additional authorization approved by the Board, as of July 31, 2012, there remains approximately $59 million under the share repurchase program.
- Our total debt was $778 million as of June 30, 2012 compared to $846 million as of June 30, 2011. The decrease is primarily due to a reduction in borrowings under our revolving credit facility which supports seasonal working capital requirements. Cash and cash equivalents decreased to $125 million as of June 30, 2012 compared with $143 million as of June 30, 2011