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Chemtura Reports Third Quarter 2012 Financial Results

“This quarter Chemtura AgroSolutions again led our performance improvement,” Mr. Rogerson noted. “With the benefit of a new sales strategy, Latin American sales grew significantly and the benefits of the introduction of new products and registrations combined with cost reduction expanded margins continued to drive profitability improvements. In our Industrial Engineered Products segment we were able to offset much of the weak conditions in the electronics market through growth from insulation foams, mercury control and healthcare applications for bromine based products. With control on pricing and costs, the segment was able to increase Adjusted EBITDA by almost 20% year-on-year and sustain percentage margins.”

Mr. Rogerson continued, “For all of our businesses, innovation of both products and applications combined with strong management of selling prices and raw material costs and fixed cost reductions permitted them to expand margins and profitability despite the uncertain macroeconomic conditions to deliver another quarter of year-on-year improvement for Chemtura.”

Outlook

Commenting on the fourth quarter of 2012 outlook, Mr. Rogerson observed, “With continuing economic uncertainty, we are unlikely to see recovery in industrial demand in the fourth quarter and there remains a risk of further weakening. We continue to look beyond the macroeconomic environment to focus on gaining revenues from sales from new products and applications while maintaining tight control on costs. Sequentially, Chemtura AgroSolutions and Consumer Products will contribute less than they did in the third quarter due to normal seasonality. Despite these challenges, we continue to target year-over-year performance improvement in the fourth quarter of 2012.”

Third Quarter 2012 Business Segment Highlights

  • Industrial Performance Products’ net sales decreased $28 million or 8% as a result of a $28 million decline in sales volume and a $3 million impact from unfavorable foreign currency translation, offset by a $3 million year-on-year increase in selling prices. Operating income on a managed basis increased $1 million in the third quarter of 2012 to $32 million, primarily reflecting the increase in selling prices and $5 million in lower raw material and other costs, offset by sales volume and changes in product mix of $7 million. On a GAAP basis, operating income was unchanged as compared to the same period last year as 2012 was impacted by accelerated depreciation of $1 million associated with the closure of our Pedrengo, Italy facility. Sales volume across the segment reflected a continued weakness in demand for many of our products in Asia and Europe with the largest year-over-year impact experienced by our petroleum additive products. Our ability to maintain operating income improvements given weak market conditions is the result of slightly higher selling prices coupled with moderating raw material and other costs.
  • Industrial Engineered Products’ net sales decreased $9 million or 4% reflecting a $9 million impact from lower sales volumes and $4 million from unfavorable foreign currency translation, offset by a benefit of $4 million from year-on-year increases in selling prices. Operating income increased $5 million from the third quarter of 2011. The increase in operating income reflected $6 million in lower raw material costs, $4 million from the benefit of selling price increases and a $1 million decrease in other costs, offset by $5 million in unfavorable manufacturing costs and variances and $1 million from lower sales volume and product mix changes. Demand for electronic goods, tin-based organometallics and traditional polyolefin catalysts has weakened over the prior year due to the current economic environment. Continuing growth in targeted end markets such as insulation foam, mercury control and healthcare coupled with price increases over prior year and control of raw material and other costs mitigated these sales volume declines and the resulting manufacturing variances. We experienced unfavorable manufacturing absorption variances for certain product lines due to lower production volumes than in the third quarter of 2011 coupled with the impacts of new production capacity placed in service in recent months.
  • Consumer Products’ net sales decreased $2 million or 2% which reflected a $3 million impact from unfavorable foreign currency translation offset by $1 million of higher sales volume. Operating income increased $4 million to $10 million, benefiting from strong production volume, reflecting the season long improvement in volumes which generated favorable manufacturing variances. Volumes improved moderately over the prior year primarily in North America, but this was more than offset by unfavorable foreign exchange translation related to our European revenues. Margins were impacted by moderate raw material inflation in an environment where pricing is set annually.
  • Chemtura AgroSolutions’ net sales increased $9 million or 9%, resulting from $10 million in higher sales volume and $2 million in higher selling prices, offset by a $3 million impact from unfavorable foreign currency translation. Operating income increased $10 million reflecting a $4 million increase from volume and favorable product mix, $2 million lower SG&A and R&D (collectively "SGA&R") costs, the higher selling prices and a $2 million decrease in other costs. Our change to a direct selling approach in Brazil has had a positive effect this quarter and we benefited from a strong growing season as well. North America finished strongly led by an increase in seed treatment products as a result of a warmer than normal weather pattern. Operating income reflected the benefit of our strong volumes and the improvements in our cost base following a restructuring that was implemented in the latter part of 2011.
  • Corporate expenses for the third quarter of 2012 decreased to $24 million compared with $28 million in 2011. Corporate expenses include amortization expense related to intangible assets of $8 million and $9 million for the third quarters of 2012 and 2011, respectively.

Third Quarter 2012 Results - GAAP

  • Consolidated net sales for the third quarter of 2012 were $743 million or $30 million lower than 2011 driven primarily by weakening sales volumes in our Industrials segments. While we realized $9 million from higher selling prices, we were unable to offset the effects of a $26 million decline in volume and a $13 million impact due to unfavorable foreign currency translation. Our Industrial segments continue to experience weaker demand, particularly in Asia and Europe. Demand for electronics was weak in our Industrial Engineering Products segment but the decline was offset to a large extent by expansion in other end markets, such as foam insulations, mercury control and healthcare. We experienced stronger volumes in our Chemtura AgroSolutions segment as the result of a new direct sales approach in a strong Brazilian growing season coupled with warm weather at the end of the North American season. Volumes in our Consumer Products business improved moderately over the prior year but this was offset by the negative foreign exchange on our European revenue.
  • Gross profit for the third quarter of 2012 was $192 million, an increase of $18 million compared with the third quarter of 2011. Gross profit as a percentage of net sales increased to 26% as compared with 23% in the same quarter of 2011. Gross profit benefited from $9 million in higher selling prices, $9 million in lower raw material costs and a $4 million decrease in other costs, offset by a $4 million reduction in volume and product mix.
  • During the third quarter of 2012, we recorded an impairment charge of $35 million related to certain long-lived assets included in the Industrial Performance Products segment. The impairment charges relate to an initiative to monetize portfolio assets that we considered would more-likely-than-not become effective before the end of 2012. These factors resulted in reduced expectations for future cash flows and lower estimated fair values for the respective assets. As previously announced, we are working on opportunities to monetize portfolio assets as well as “bolt-on” investment opportunities in our areas of strategic focus, although there are many factors that may influence whether or not we are successful.
  • Operating income for the third quarter of 2012 was $33 million compared with $45 million for the third quarter of 2011. The decrease of $12 million was primarily due to the $35 million impairment charge and a $1 million increase in other costs, partly offset by an $18 million increase in gross profit and $6 million in lower SGA&R costs.
  • Included in the computation of operating income for the third quarter of 2012 was $4 million of stock-based compensation expense compared with $6 million in the third quarter of 2011. Stock-based compensation expense is expected to total approximately $18 million for 2012.
  • Interest expense was $17 million during the third quarter of 2012 which was slightly higher then 2011.
  • Other expense, net was $6 million in the third quarter of 2012 compared with other expense, net of $1 million for the third quarter of 2011. The change is primarily the result of net foreign currency exchange losses due to the volatility in exchange rates during the quarter.
  • Reorganization items, net was $1 million in the third quarter of 2012 which was $5 million lower than the third 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 third quarter of 2012 was $2 million compared with expense of $13 million in the third quarter of 2011. The tax expense reported in the third quarter of 2012 reflects fluctuations in jurisdictional profitability and the tax benefit of an impairment charge against certain long-lived assets in our Industrial Performance Products segment. The tax expense 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 attributable to Chemtura for the third quarter of 2012 and 2011 was $9 million, or $0.09 per share.

Third Quarter 2012 Results - Managed Basis

  • On a managed basis, third quarter 2012 gross profit was $192 million, as compared with $174 million in the same period last year. Gross profit as a percentage of net sales increased to 26% as compared with 23% in the same quarter of 2011. The increase in gross profit was primarily due to higher selling prices and lower raw material and other costs, partially offset by a decrease in sales volume.
  • On a managed basis, third quarter 2012 operating income was $69 million as compared with $46 million in the same period last year. The increase in operating income primarily reflected the increase in gross profit and the decrease in SGA&R costs.
  • Adjusted EBITDA in the third quarter of 2012 was $108 million as compared with $87 million in the third 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 higher gross profit and lower SGA&R costs. Adjusted EBITDA for the last twelve months increased from $385 million at December 31, 2011 to $413 million at September 30, 2012, which is a record high for this portfolio of businesses since the formation of Chemtura in 2005.
  • Net earnings before income taxes on a managed basis in the third quarters of 2012 and 2011 were $46 million and $29 million, respectively and exclude pre-tax GAAP charges of $37 million and $7 million, respectively. These charges are primarily related to 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 continued to 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. We continue to monitor our estimated managed basis tax rate and may modify it based on changes in the composition of our taxable income and in tax rates around the world.

Cash Flows Details - GAAP

  • Net cash provided by operating activities for the third quarter of 2012 was $129 million as compared with $161 million for the third quarter of 2011. Net cash provided by operating activities in the first nine months of 2012 was $111 million as compared with $91 million in the first nine months of 2011.
  • As of September 30, 2012, our accounts receivable balance was $490 million as compared with $497 million as of September 30, 2011.
  • As of September 30, 2012, our inventory balance was $566 million as compared with $562 million at September 30, 2011.
  • Capital expenditures for the third quarter of 2012 were $36 million compared with $37 million in the third quarter of 2011.
  • Cash income taxes paid (net of refunds) in the third quarter of 2012 were $7 million compared with $2 million in the third quarter of 2011.
  • During the third quarter of 2012, we repurchased 0.7 million shares of our common stock for $10 million under our previously announced share repurchase program. From October 7, 2011 through September 30, 2012, we repurchased 3.4 million shares of common stock for a total purchase price of $41 million. As of September 30, 2012, the remaining authorization under the program was approximately $59 million.
  • Our total debt was $754 million as of September 30, 2012 compared to $775 million as of September 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 $187 million as of September 30, 2012 compared with $191 million as of September 30, 2011.
  • Total debt less cash and cash equivalents of $567 million as of September 30, 2012 decreased $17 million compared to total debt less cash and cash equivalents of $584 million as of September 30, 2011.

Third Quarter Earnings Q&A Teleconference

Copies of this release, as well as informational slides, will be available on the Investor Relations section of our Web site at www.chemtura.com. We will host a teleconference to review these results at 9:00 a.m. (EST) on Tuesday, November 6, 2012. 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) 633-3602 and for all other participants is (404) 665-9523. The conference ID code is 37352631.

Replay of the call will be available for thirty days, starting at 10 a.m. (EST) on Wednesday, November 7, 2012. To access the replay, call toll-free (855) 859-2056, (800) 585-8367, or (404) 537-3406, and enter access code 37352631. An audio webcast of the call can be accessed via the link below during the time of the call:

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