S. generally accepted accounting principles (GAAP) financial measures and discussion of items affecting results.
"The product, end-market and geographic diversity of Solutia's portfolio, in combination with solid operational execution, has once again delivered year-over-year increased earnings in the third quarter, despite higher raw material costs and challenging economic conditions," said Jeffry N. Quinn, chairman, president and chief executive officer of Solutia Inc. "We continue to adapt to the dynamics of today's slower global economic environment, seizing opportunities in emerging markets, closely controlling discretionary spending and positioning Solutia for sustainable earnings growth."
Third Quarter 2011: Consolidated Results from Continuing Operations
Solutia Inc. (NYSE: SOA) today reported net sales for the third quarter 2011 of $519 million, up $8 million or 2 percent from the same period in 2010. Adjusting for divested businesses, sales were up $24 million or 5 percent, primarily due to favorable currency exchange rate fluctuations. Reported income from continuing operations attributable to Solutia was $75 million for the third quarter 2011, up $29 million from the same period in 2010. Both periods were impacted by certain events affecting comparability (detailed below), which resulted in a net after-tax gain of $20 million in 2011, and a net after-tax charge of $4 million in 2010. Excluding these items, Adjusted Earnings increased $5 million. Adjusted EBITDA in the third quarter of 2011 totaled $121 million, down $9 million from the same period in 2010. Adjusted EPS totaled $.45, up $.03 or 7 percent from the same period in 2010 despite the lower adjusted EBITDA primarily due to lower interest expense and a lower tax rate.
In order to aid understanding of Solutia's business performance, the results of its business segments are presented on an adjusted basis and reconciled to the comparable GAAP measures in the below tables.
Advanced Interlayers Segment
Advanced Interlayers' third quarter 2011 net sales totaled $227 million, an increase of $15 million or 7 percent from the same period in 2010. Adjusted EBITDA decreased $1 million to $47 million for the third quarter of 2011 compared to the prior year period. This earnings decrease was primarily due to higher raw material costs, partially offset by improved selling prices, improved product mix and lower annual incentive compensation expense.
"The third quarter reflects the strength of the Saflex® interlayers business as growth in architectural and automotive sales, boosted by premium product offerings, more than offset the impact of a continued weak demand profile in the solar encapsulant market," said D. Michael Donnelly, executive vice president and chief operating officer. "We have announced the intention to explore new pricing structures for Saflex in 2012, which are designed to lessen the impact that volatility in raw material costs brings to our business and to our customers."
Performance Films Segment
Performance Films' third quarter 2011 net sales totaled $74 million, an increase of $1 million or 1 percent from the same period in 2010. Adjusted EBITDA decreased $1 million to $12 million for the third quarter of 2011 compared to the prior year period. This earnings decrease was primarily due to higher raw materials costs and increased selling costs, partially offset by improved selling prices.
"Steady results for Performance Films in the third quarter included strong performance of our premium window film brands, which continued to exceed growth expectations, offset by lower sales into the electronics market," said Donnelly. "The recently announced agreement to acquire Southwall Technologies Inc. positions us well to capitalize on the high-growth opportunities for advanced films solutions, including securing access to a key base material for V-KOOL® premium aftermarket window films."
Technical Specialties Segment
Technical Specialties' third quarter 2011 net sales totaled $218 million, a decrease of $6 million or 3 percent from the same period in 2010. Adjusting for divested other rubber chemicals businesses, sales were up $8 million or 3 percent. Adjusted EBITDA decreased $7 million to $75 million for the third quarter of 2011 compared to the prior year period. This decrease in earnings was primarily due to higher raw material costs and the loss of earnings from the other rubber chemicals businesses divested since the third quarter of 2010.
"Notwithstanding a slower demand profile, raw material cost inflation persisted across the Technical Specialties segment in the third quarter of 2011. While selected selling price increases mitigated cost pressures in the Specialty Fluids and Crystex® insoluble sulfur product lines, the price increases achieved in our Santoflex® product lines were not sufficient due to current over-supply conditions in the antidegradant rubber chemical market," said Donnelly. "Also in the third quarter, we completed an expansion of our Texas operations to help meet the increased demand for Therminol® heat transfer fluid across a diverse set of end markets, including the high-growth concentrating solar power market."
Unallocated and Other
Unallocated and other expenses in the quarter reduced Adjusted EBITDA by $13 million, flat compared to the third quarter of 2010.
Nine Months 2011: Consolidated Results from Continuing Operations
Net sales for the nine months ending September 30, 2011 were $1,571 million, an increase of 8 percent as compared to the same period in 2010. Adjusting for acquisitions and divested businesses, sales were up $120 million or 9 percent, due to higher selling prices, increased volumes, and favorable currency exchange rate fluctuations. Reported income from continuing operations attributable to Solutia was $208 million in 2011 compared to $44 million from the same period in 2010. These results were impacted by certain events affecting comparability (detailed below), which resulted in a net after-tax gain of $24 million in 2011 and a net after-tax loss of $101 million in 2010. After consideration of these items in both periods, income increased by $39 million, from $145 million in 2010 to $184 million in 2011. Adjusted EBITDA totaled $397 million year-to-date 2011 versus $388 million from the same period in 2010. Adjusted EPS totaled $1.52 year-to-date, up $.31 from the same period in 2010. This increase was primarily due to higher sales volumes realized by all reporting segments, the inclusion of Vistasolar and Novomatrix results for the full year in 2011, higher average selling prices, improved manufacturing performance and lower annual incentive compensation expense. These improvements were partially offset by higher raw material prices, increased selling and R&D costs and the loss of earnings from the divestiture of the other rubber chemicals and plastic products businesses.
Leverage and Liquidity
The Company ended the third quarter with net debt of $1,167 million and liquidity of $449 million. Cash provided by continuing operations less capital expenditures for the quarter was $17 million compared to $91 million for the same period in 2010. The year-over-year decrease in cash flow in the quarter was primarily attributed to targeted inventory increases in advance of scheduled facility turnarounds in the fourth quarter of 2011 and first quarter of 2012, and higher strategic growth capital expenditures. During the quarter, the Company also sold its 2 percent retained interest in Ascend Performance Materials Holdings, Inc. for $31 million.
In the third quarter, the Company repurchased $25 million of its 2017/2020 notes bringing total debt reduction year to date to $127 million. "Solutia's strong liquidity position and cash generation capability positions us well to take advantage of attractive strategic growth opportunities while continuing to improve the balance sheet and progressing toward our goal of reducing gross leverage to approximately 2x over the near term," said James M. Sullivan, executive vice president and chief financial officer.
The Company expects net sales in the fourth quarter of 2011 to be consistent with the third quarter as slightly higher volumes are expected to be substantially offset by the translation impact from a stronger U.S. dollar. On a year-over-year basis, continued higher raw material prices are expected to be more than offset by sales volume and sales price increases. The Company expects full-year 2011 net sales to be in the range of $2.05 billion and $2.1 billion with Adjusted EPS of approximately $2.00, and cash from operations less capital spending in the range of $120 million to $130 million.
Third Quarter Conference Call
The Company will hold a conference call at 10:00 a.m. Central Daylight Time (11:00 a.m. Eastern Daylight Time) on Thursday, October 27, 2011, during which Solutia executives will elaborate upon the company's third quarter 2011 financial results.
A live webcast of the conference call and presentation slides will be available by clicking here or through Solutia's investor webpage . For those participating via teleconference, the phone number for the call is 1-877-261-8992 (U.S.) or 1-847-619-6548 (international), and the passcode is 30939673#. Participants are encouraged to dial in 10 minutes early. A replay of the event will be available through www.solutia.com for two weeks or by calling 1-888-843-7419 (U.S.) or 1-630-652-3042 (international) and entering the passcode 30939673#.
Important Information Regarding Outlook
There is no guarantee that Solutia will achieve its projected financial expectation for 2011, which is based on management estimates, currently available information and assumptions that management believes to be reasonable. Such forward-looking statements are inherently subject to significant economic, competitive and other uncertainties and contingencies, many of which are beyond the control of management. See "Forward-Looking Statements" below.