10-Q 1 a12-20119_110q.htm 10-Q

Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the quarterly period ended September 30, 2012

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

For the transition period from                 to                

 

(Commission File Number) 1-15339

 

CHEMTURA CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware

 

52-2183153

(State or other jurisdiction of incorporation or

organization)

 

(I.R.S. Employer Identification Number)

 

1818 Market Street, Suite 3700, Philadelphia, Pennsylvania

199 Benson Road, Middlebury, Connecticut

 

19103

06749

(Address of principal executive offices)

 

(Zip Code)

 

(203) 573-2000

(Registrant’s telephone number,

including area code)

 

 

(Former name, former address and former fiscal year, if changed from last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  x  Yes  o  No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of the chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  x  Yes  o  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

(Do not check if smaller reporting company)

 

Smaller reporting company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  o  Yes  x  No

 

The number of shares of common stock outstanding as of the latest practicable date is as follows

 

Class

 

Number of shares outstanding at 
September 30, 2012

Common Stock - $.01 par value

 

97,731,778

 

 

 



Table of Contents

 

CHEMTURA CORPORATION AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER AND NINE MONTHS ENDED SEPTEMBER 30, 2012

 

INDEX

 

PAGE

 

 

 

PART I.

FINANCIAL INFORMATION

2

 

 

 

ITEM 1.

Financial Statements

2

 

 

 

 

Consolidated Statements of Operations (Unaudited)

2

 

 

 

 

Consolidated Statements of Comprehensive Income (Unaudited)

3

 

 

 

 

Consolidated Balance Sheets

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

5

 

 

 

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

6

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

32

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

43

 

 

 

ITEM 4.

Controls and Procedures

44

 

 

 

PART II.

OTHER INFORMATION

45

 

 

 

ITEM 1.

Legal Proceedings

45

 

 

 

ITEM 1A.

Risk Factors

45

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

 

 

 

ITEM 5.

Other Information

46

 

 

 

ITEM 6.

Exhibits

47

 

 

 

SIGNATURE

48

 



Table of Contents

 

PART I.    FINANCIAL INFORMATION

 

ITEM 1.     Financial Statements

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Statements of Operations (Unaudited)

Quarters and nine months ended September 30, 2012 and 2011

(In millions, except per share data)

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net sales

 

$

743

 

$

773

 

$

2,296

 

$

2,348

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

551

 

599

 

1,720

 

1,789

 

Selling, general and administrative

 

77

 

84

 

233

 

255

 

Depreciation and amortization

 

36

 

35

 

104

 

106

 

Research and development

 

12

 

11

 

37

 

33

 

Facility closures, severance and related costs

 

1

 

 

24

 

 

Impairment charges

 

35

 

 

36

 

3

 

Changes in estimates related to expected allowable claims

 

(1

)

 

1

 

1

 

Equity income

 

(1

)

(1

)

(2

)

(3

)

Operating income

 

33

 

45

 

143

 

164

 

Interest expense

 

(17

)

(16

)

(47

)

(48

)

Other expense, net

 

(6

)

(1

)

(3

)

(1

)

Reorganization items, net

 

(1

)

(6

)

(4

)

(19

)

Earnings before income taxes

 

9

 

22

 

89

 

96

 

Income tax expense

 

(2

)

(13

)

(9

)

(10

)

Net earnings

 

7

 

9

 

80

 

86

 

Less: Net loss (earnings) attributed to non-controlling interests

 

2

 

 

1

 

(1

)

Net earnings attributable to Chemtura

 

$

9

 

$

9

 

$

81

 

$

85

 

Basic and diluted per share information - attributable to Chemtura

 

 

 

 

 

 

 

 

 

Net earnings attributable to Chemtura

 

$

0.09

 

$

0.09

 

$

0.82

 

$

0.85

 

Weighted average shares outstanding - Basic

 

97.9

 

100.3

 

98.4

 

100.2

 

Weighted average shares outstanding - Diluted

 

98.2

 

100.5

 

98.8

 

100.4

 

 

See accompanying notes to Consolidated Financial Statements.

 

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Table of Contents

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (Loss) (Unaudited)

Quarters and nine months ended September 30, 2012 and 2011

(In millions)

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

2012

 

2011

 

Net earnings

 

$

7

 

$

9

 

$

80

 

$

86

 

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

37

 

(64

)

15

 

(20

)

Unrecognized pension and other post-retirement benefit costs

 

7

 

3

 

6

 

6

 

Comprehensive income (loss)

 

51

 

(52

)

101

 

72

 

Comprehensive income attributable to non-controlling interests

 

2

 

 

1

 

(1

)

Comprehensive income (loss) attributable to Chemtura

 

$

53

 

$

(52

)

$

102

 

$

71

 

 

See accompanying notes to Consolidated Financial Statements

 

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Table of Contents

 

CHEMTURA CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets

September 30, 2012 (Unaudited) and December 31, 2011

(In millions, except par value data)

 

 

 

September 30,
2012

 

December 31,
2011

 

 

 

(unaudited)

 

 

 

ASSETS

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

187

 

$

180

 

Restricted cash

 

 

5

 

Accounts receivable, net

 

490

 

458

 

Inventories, net

 

566

 

542

 

Other current assets

 

173

 

136

 

Total current assets

 

1,416

 

1,321

 

NON-CURRENT ASSETS

 

 

 

 

 

Property, plant and equipment, net

 

742

 

752

 

Goodwill

 

177

 

174

 

Intangible assets, net

 

369

 

392

 

Other assets

 

216

 

216

 

Total assets

 

$

2,920

 

$

2,855

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

Short-term borrowings

 

$

5

 

$

5

 

Accounts payable

 

210

 

173

 

Accrued expenses

 

195

 

194

 

Income taxes payable

 

10

 

18

 

Total current liabilities

 

420

 

390

 

NON-CURRENT LIABILITIES

 

 

 

 

 

Long-term debt

 

749

 

748

 

Pension and post-retirement health care liabilities

 

413

 

460

 

Other liabilities

 

200

 

211

 

Total liabilities

 

1,782

 

1,809

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock - $0.01 par value Authorized - 500.0 shares Issued - 100.3 shares at September 30, 2012 and 98.3 shares at December 31, 2011

 

1

 

1

 

Additional paid-in capital

 

4,356

 

4,353

 

Accumulated deficit

 

(2,868

)

(2,949

)

Accumulated other comprehensive loss

 

(325

)

(346

)

Treasury stock- at cost - 2.6 shares at September 30, 2012 and 2.0 shares at December 31, 2011

 

(33

)

(22

)

Total Chemtura stockholders’ equity

 

1,131

 

1,037

 

Non-controlling interest

 

7

 

9

 

Total stockholders’ equity

 

1,138

 

1,046

 

Total liabilities and stockholders’ equity

 

$

2,920

 

$

2,855

 

 

See accompanying notes to Consolidated Financial Statements.

 

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CHEMTURA CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

Nine months ended September 30, 2012 and 2011

(In millions)

 

 

 

Nine months ended September 30,

 

 

 

2012

 

2011

 

Increase (decrease) in cash

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net earnings

 

$

80

 

$

86

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Impairment charges

 

36

 

3

 

Depreciation and amortization

 

104

 

106

 

Stock-based compensation expense

 

14

 

22

 

Reorganization items, net

 

1

 

2

 

Changes in estimates related to expected allowable claims

 

1

 

1

 

Equity income

 

(2

)

(3

)

Changes in assets and liabilities, net of assets acquired and liabilities assumed:

 

 

 

 

 

Accounts receivable

 

(33

)

(11

)

Inventories

 

(23

)

(37

)

Accounts payable

 

36

 

(14

)

Pension and post-retirement health care liabilities

 

(71

)

(74

)

Other

 

(32

)

10

 

Net cash provided by operating activities

 

111

 

91

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Net proceeds from divestments

 

9

 

 

Payments for acquisitions

 

 

(33

)

Capital expenditures

 

(94

)

(92

)

Net cash used in investing activities

 

(85

)

(125

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from ABL Facility, net

 

 

20

 

Proceeds from A/R Financing Facility, net

 

2

 

 

(Payments on) proceeds from other short term borrowings, net

 

(3

)

5

 

Common shares acquired

 

(20

)

 

Payment for debt issuance costs

 

(1

)

 

Proceeds from exercise of stock options

 

2

 

1

 

Net cash (used in) provided by financing activities

 

(20

)

26

 

CASH AND CASH EQUIVALENTS

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

1

 

(2

)

Change in cash and cash equivalents

 

7

 

(10

)

Cash and cash equivalents at beginning of period

 

180

 

201

 

Cash and cash equivalents at end of period

 

$

187

 

$

191

 

 

See accompanying notes to Consolidated Financial Statements.

 

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Table of Contents

 

CHEMTURA CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

1)                                     NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Nature of Operations

 

Chemtura Corporation together with our consolidated subsidiaries, is dedicated to delivering innovative, application-focused specialty chemical and consumer product offerings.  Our corporate headquarters is located at 1818 Market Street, Suite 3700, Philadelphia, PA 19103.  Our principal executive offices are located at 1818 Market Street, Suite 3700, Philadelphia, PA 19103 and at 199 Benson Road, Middlebury, CT 06749.  We operate in a wide variety of end-use industries including agriculture, automotive, construction, electronics, lubricants, packaging, plastics for durable and non-durable goods, pool and spa chemicals, and transportation.

 

When we use the terms “Corporation,” “Company,” “Chemtura,” “Registrant,” “We,” “Us” and “Our,” unless otherwise indicated or the context otherwise requires, we are referring to Chemtura Corporation and our consolidated subsidiaries.

 

We are the successor to Crompton & Knowles Corporation (“Crompton & Knowles”), which was incorporated in Massachusetts in 1900 and engaged in the manufacture and sale of specialty chemicals beginning in 1954.  Crompton & Knowles traces its roots to Crompton Loom Works incorporated in the 1840s.  We expanded the specialty chemical business through acquisitions in the United States and Europe, including the 1996 acquisition of Uniroyal Chemical Company, Inc. (“Uniroyal”), the 1999 merger with Witco Corporation (“Witco”) and the 2005 acquisition of Great Lakes Chemical Corporation (“Great Lakes”).

 

The information in the foregoing Consolidated Financial Statements for the quarters and nine months ended September 30, 2012 and 2011 is unaudited but reflects all adjustments which, in the opinion of management, are necessary for a fair presentation of the results of operations for the interim periods presented.  All such adjustments are of a normal recurring nature, except as otherwise disclosed in the accompanying notes to our Consolidated Financial Statements.

 

Basis of Presentation

 

The accompanying Consolidated Financial Statements include the accounts of Chemtura and our wholly-owned and majority-owned subsidiaries that we control.  Other affiliates in which we have a 20% to 50% ownership interest or a non-controlling majority interest are accounted for in accordance with the equity method.  Other investments in which we have less than 20% ownership are recorded at cost.  All significant intercompany balances and transactions have been eliminated in consolidation.

 

Our Consolidated Financial Statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”), which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from these estimates.

 

Certain prior year amounts have been reclassified to conform to the current year’s presentation. These changes did not have a material impact on previously reported results of operations, cash flows or financial position.

 

We operated as a debtor-in-possession (“DIP”) under the protection of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) from March 18, 2009 (the “Petition Date”) through November 10, 2010 (the “Effective Date”).  From the Petition Date through the Effective Date, our Consolidated Financial Statements were prepared in accordance with Accounting Standards Codification (“ASC”) Section 852-10-45, Reorganizations — Other Presentation Matters (“ASC 852-10-45”) which requires that financial statements, for periods during the pendency of our voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (the “Chapter 11”) filings, distinguish transactions and events that are directly associated with the reorganization from the ongoing operations of the business.  Accordingly, certain income, expenses, realized gains and losses and expenses for losses that are realized or incurred in the Chapter 11 cases are recorded in Reorganization items, net in our Consolidated Statements of Operations.  As of September 30, 2012, the Bankruptcy Court has entered orders granting final decrees closing all of the Debtors’ Chapter 11 cases except the Chapter 11 case of Chemtura Corporation.

 

The interim Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and notes included in our Annual Report on Form 10-K for the period ended December 31, 2011 (the “2011 Annual Report on Form 10-K”).  The consolidated results of operations for the quarter and nine months ended September 30, 2012 are not necessarily indicative of the results expected for the full year.

 

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Table of Contents

 

Accounting Policies and Other Items

 

Cash and cash equivalents include bank term deposits with original maturities of three months or less.  Included in cash and cash equivalents in our Consolidated Balance Sheets at September 30, 2012 and December 31, 2011 is less than a million and $1 million, respectively, of restricted cash that is required to be on deposit to support certain letters of credit and performance guarantees, the majority of which will be settled within one year.

 

Included in our restricted cash balance at December 31, 2011 is $5 million of cash on deposit for the settlement of disputed bankruptcy claims that existed at the Effective Date.

 

Included in accounts receivable are allowances for doubtful accounts of $15 million and $20 million as of September 30, 2012 and December 31, 2011, respectively.

 

During the nine months ended September 30, 2012 and 2011, we made interest payments of approximately $52 million.  During the nine months ended September 30, 2012 and 2011, we made payments for income taxes (net of refunds) of $29 million and $8 million, respectively.

 

Accounting Developments

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”).  ASU 2011-04 amends U.S. GAAP to conform it with fair value measurement and disclosure requirements in International Financial Reporting Standards (“IFRS”).  The amendments in ASU 2011-04 changed the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements.  The provisions of ASU 2011-04 are effective for the first reporting period (including interim periods) beginning after December 15, 2011.  The adoption of this standard did not have a material impact on our results of operations, financial condition or disclosures.

 

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”).  ASU 2011-05 requires the presentation of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements.  In December 2011, the FASB issued Accounting Standards Update No. 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (“ASU 2011-12”). ASU 2011-12 defers the effective date of the requirement in ASU 2011-05 to disclose on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income. All other requirements of ASU 2011-05 are not affected by ASU 2011-12.  The provisions of ASU 2011-05 are effective for the first reporting period (including interim periods) beginning after December 15, 2011.  The adoption of this standard did not have a material financial statement impact as it only addressed the presentation of our financial statements.

 

In September 2011, the FASB issued ASU No. 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. The provisions of ASU 2011-08 are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have a material impact on our results of operations or financial condition.

 

In September 2011, the FASB issued ASU No. 2011-09, Compensation—Retirement Benefits Multiemployer Plans (Subtopic 715-80) (“ASU 2011-09”). The guidance in ASU 2011-09 assists users of financial statements to assess the potential future cash flow implications relating to an employer’s participation in multiemployer pension plans. The disclosures will indicate the financial health of all of the significant plans in which the employer participates and assist a financial statement user to access additional information that is available outside the financial statements. The provisions of ASU 2011-09 are effective for annual periods for fiscal years ending after December 15, 2011, with early adoption permitted. The adoption of this guidance did not have a material impact on our results of operations or financial condition.

 

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Table of Contents

 

2)                                 ACQUISITIONS AND DIVESTITURES

 

Acquisitions

 

On September 26, 2012, we announced that we entered into a Business Transfer Agreement (“BTA”) with Solaris ChemTech Industries Limited (“Solaris ChemTech”), an Indian Company, and Avantha Holdings Limited, an Indian Company and the parent company of Solaris ChemTech (collectively, “Solaris”).  As provided in the BTA, we have agreed to purchase from Solaris certain assets used in the manufacture and distribution of bromine and bromine chemicals for cash consideration of $142 million and the assumption of certain liabilities.  The purchase price is subject to a post-closing net working capital adjustment.  The acquisition is subject to usual and customary closing conditions and is expected to close as soon as practicable.

 

On February 1, 2011, we announced the formation of DayStar Materials, LLC, a joint venture with UP Chemical Co. Ltd. that will manufacture and sell high purity metal organic precursors for the rapidly growing LED market in our Industrial Engineered Products segment.  DayStar Materials, LLC is a 50/50 joint venture and is being accounted for as an equity method investment.  We made cash contributions of $6 million in 2011 in accordance with the joint venture agreement.

 

On January 26, 2011, we announced the formation of ISEM S.r.l. (“ISEM”), a strategic research and development alliance with Isagro S.p.A., which will provide us access to two commercialized products and accelerate the development and commercialization of new active ingredients and molecules related to our Chemtura AgroSolutions segment.  ISEM is a 50/50 joint venture between us and Isagro S.p.A. and is being accounted for as an equity method investment.  Our investment in the joint venture was €20 million ($29 million), which was made in January 2011.  In addition, we and Isagro S.p.A. have agreed to jointly fund discovery and development efforts for ISEM, for approximately $2 million annually from each partner for five years. During 2011, we funded approximately $2 million as planned. Funding our contributions will be done in part by reducing our planned direct research and development spending.

 

Divestitures

 

On November 28, 2011, we sold our 50% interest in Tetrabrom Technologies Ltd. for net consideration of $38 million. The consideration will be paid over a three year period beginning in April 2012.  A payment of $9 million was received in April 2012. A pre-tax gain of $27 million was recorded on the sale in the fourth quarter of 2011.  In February 2012, we purchased forward contracts with a notional amount of $38 million to reduce the risk of currency exposure related to the three annual installments of this receivable which matured in April 2012.  In April 2012, we purchased two additional forward contracts totaling $25 million to reduce the risk of currency exposure related to the remaining two annual installments of the receivable (see Note 13 — Derivative Instruments and Hedging Activities for additional information).

 

3)                                 RESTRUCTURING AND ASSET IMPAIRMENT ACTIVITIES

 

Restructuring

 

On April 30, 2012, our Board of Directors (the “Board”) approved a restructuring plan providing for, among other things, the closure of our Industrial Performance Product segment’s antioxidants manufacturing facility in Pedrengo, Italy.  The Board also approved actions to improve the operating effectiveness of certain global corporate functions.  This plan is expected to achieve significant gains in efficiency and costs.  The plant closure is expected to be completed by the first quarter of 2013.  The total cost of the restructuring plan is estimated to be approximately $40 million of which approximately $6 million will consist of non-cash charges.  We recorded a pre-tax charge of $28 million in the nine months ended September 30, 2012, which included $2 million for accelerated depreciation of property, plant and equipment included in depreciation and amortization, $2 million for accelerated asset retirement obligations included in cost of goods sold (“COGS”), and $24 million for severance and other obligations related to the Pedrengo closure and corporate initiatives included in facility closures, severance and related costs with the balance of the costs being expensed as incurred through 2013.

 

In November 2011, our Board approved a restructuring plan intended to make Chemtura AgroSolutions more cost efficient by centralizing certain functions regionally and consolidating laboratory activities in North America. Costs related to this plan were immaterial for the three and nine months ended September 30, 2012.

 

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A summary of the changes in the liabilities established for restructuring programs is as follows:

 

(In millions)

 

Severance
and
 
Related
Costs

 

Other
Facility
Closure
Costs

 

Total

 

Balance at December 31, 2011

 

$

1

 

$

 

$

1

 

2012 charge

 

12

 

2

 

14

 

Cash payments

 

(3

)

(2

)

(5

)

Adjustments

 

(1

)

 

 

(1

)

Balance at September 30, 2012

 

$

9

 

$

 

$

9

 

 

In addition, we recorded a charge of approximately $10 million included in facility closures, severance and related costs for the quarter ended June 30, 2012 to reflect the write-off of a receivable for which collection is no longer probable as a result of the restructuring actions.  The amounts accrued for all of our corporate restructuring programs are $9 million at September 30, 2012 and $1 million at December 31, 2011 and were included in accrued expenses.

 

Asset Impairments

 

During the third quarter of 2012, we completed an assessment of  an initiative to monetize portfolio assets relating to certain  products in our Industrial Performance Product group.  As of September 30, 2012, we considered it more-likely-than-not that the initiative would become effective before the end of 2012.   In performing the impairment analysis, we probability weighted the possible outcomes of the initiative as of September 30, 2012. Based on this analysis, the expected undiscounted cash flows were insufficient to recover the carrying values of  assets of the component of the segment to which the initiative relates.  We estimated the fair value using various income and market approaches to calculate the impairment charge. We recorded an asset impairment charge on our Consolidated Statement of Operations, of which  $26 million related to property, plant and equipment, net and $9 million related to intangible assets, net on our Consolidated Balance Sheets.

 

4)                                     INVENTORIES

 

Components of inventories are as follows:

 

 

 

September 30,

 

December 31,

 

(In millions)

 

2012

 

2011

 

Finished goods

 

$

377

 

$

348

 

Work in process

 

44

 

43

 

Raw materials and supplies

 

145

 

151

 

 

 

$

566

 

$

542

 

 

Included in the above net inventory balances are inventory obsolescence reserves of approximately $18 million at September 30, 2012 and December 31, 2011.

 

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5)                                     PROPERTY, PLANT AND EQUIPMENT

 

 

 

September 30,

 

December 31,

 

(In millions)

 

2012

 

2011

 

Land and improvements

 

$

81

 

$

85

 

Buildings and improvements

 

242

 

240

 

Machinery and equipment

 

1,278

 

1,238

 

Information systems equipment

 

189

 

175

 

Furniture, fixtures and other

 

33

 

31

 

Construction in progress

 

88

 

121

 

 

 

1,911

 

1,890

 

Less: accumulated depreciation

 

1,169

 

1,138

 

 

 

$

742

 

$

752

 

 

Depreciation expense was $27 million and $25 million for the quarters ended September 30, 2012 and 2011, respectively, and $77 million for the nine months ended September 30, 2012 and 2011.  Depreciation expense included accelerated depreciation of certain fixed assets associated with our restructuring programs of $1 million for the quarter ended September 30, 2012 and $2 million and $1 million for the nine months ended September 30, 2012 and 2011, respectively.

 

We recorded a $26 million charge to impair certain property, plant and equipment of the Industrial Performance Products segment as of September 30, 2012.  In accordance with ASC 360-10-35-20, we have reduced the carrying value of the impaired assets to their estimated fair value (see Note 3 - Restructuring and Asset Impairment Activities).

 

6)                                     GOODWILL AND INTANGIBLE ASSETS

 

Our goodwill balance was $177 million at September 30, 2012 and $174 million at December 31, 2011. The goodwill is allocated to the Industrial Performance Products segment.  The goodwill balance at September 30, 2012 and December 31, 2011 reflected accumulated impairments of $90 million.

 

We have elected to perform our annual goodwill impairment procedures for all of our reporting units in accordance with ASC Subtopic 350-20, Intangibles — Goodwill and Other - Goodwill (“ASC 350-20”) as of July 31, or sooner, if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  We estimate the fair value of our reporting units utilizing income and market approaches through the application of discounted cash flow and market comparable methods (Level 3 inputs as described in Note 14— Financial Instruments and Fair Value Measurements).  The assessment is required to be performed in two steps: step one to test for a potential impairment of goodwill and, if potential impairments are identified, step two to measure the impairment loss through a full fair valuing of the assets and liabilities of the reporting unit utilizing the acquisition method of accounting. We concluded that no goodwill impairment existed in any of our reporting units based on the annual review as of July 31, 2012.

 

We continually monitor and evaluate business and competitive conditions that affect our operations and reflects the impact of these factors in our financial projections.  If permanent or sustained changes in business or competitive conditions occur, they can lead to revised projections that could potentially give rise to impairment charges.

 

Our intangible assets (excluding goodwill) are comprised of the following:

 

 

 

September 30, 2012

 

December 31, 2011

 

(In millions)

 

Gross
Cost

 

Accumulated
Amortization

 

Net
Intangibles

 

Gross
Cost

 

Accumulated
Amortization

 

Net
Intangibles

 

Patents

 

$

125

 

$

(73

)

$

52

 

$

128

 

$

(70

)

$

58

 

Trademarks

 

254

 

(74

)

180

 

262

 

(71

)

191

 

Customer relationships

 

140

 

(50

)

90

 

146

 

(50

)

96

 

Production rights

 

46

 

(31

)

15

 

46

 

(28

)

18

 

Other

 

77

 

(45

)

32

 

70

 

(41

)

29

 

Total

 

$

642

 

$

(273

)

$

369

 

$

652

 

$

(260

)

$

392

 

 

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The decrease in gross intangible assets since December 31, 2011 is primarily due to impairment and related adjustments of $24 million offset by additions of $11 million and foreign currency translation of $3 million.

 

Amortization expense related to intangible assets amounted to $9 million for the quarters ended September 30, 2012 and 2011, and $27 million and $29 million for the nine months ended September 30, 2012 and 2011, respectively.

 

We recorded a $9 million charge to impair certain intangible assets of the Industrial Performance Products segment as of September 30, 2012.  In accordance with ASC 360-10-35-20, we have reduced the carrying value of the impaired assets to their estimated fair value (see Note 3 - Restructuring and Asset Impairment Activities).

 

7)                                     DEBT

 

Our debt is comprised of the following:

 

 

 

September 30,

 

December 31,

 

(In millions)

 

2012

 

2011

 

7.875% Senior Notes due 2018

 

$

452

 

$

452

 

Term Loan due 2016

 

293

 

293

 

A/R Financing Facility

 

2

 

 

Other borrowings

 

7

 

8

 

Total Debt

 

754

 

753

 

Less: A/R Financing Facility

 

(2

)

 

Less: Other short-term borrowings

 

(3

)

(5

)

Long-term debt

 

$

749

 

$

748

 

 

Financing Facilities

 

On August 27, 2010, we completed a private placement offering under Rule 144A of $455 million aggregate principal amount of 7.875% senior notes due 2018 (the “Senior Notes”) at an issue price of 99.269% in reliance on an exemption pursuant to Section 4(2) of the Securities Act of 1933.  We also entered into a senior secured term facility credit agreement due 2016 (the “Term Loan”) with Bank of America, N.A., as administrative agent, and other lenders party thereto for an aggregate principal amount of $295 million with an original issue discount of 1%.  The Term Loan permits us to increase the size of the facility by up to $125 million.  On September 7, 2012, we announced that we would commence a process to raise up to an additional $125 million aggregate principal amount on the Term Loan for the purpose of funding potential investment opportunities and for general corporate purposes.  On November 10, 2010, we entered into a five-year senior secured revolving credit facility available through 2015 (the “ABL Facility”) for an amount up to $275 million, subject to availability under a borrowing base (with a $125 million letter of credit sub-facility).  The ABL Facility permits us to increase the size of the facility by up to $125 million subject to obtaining lender commitments to provide such increase.  At September 30, 2012, we had no borrowings under the ABL Facility and $14 million of outstanding letters of credit (primarily related to insurance obligations, environmental obligations and banking credit facilities) which utilizes available capacity under the facility.  At December 31, 2011, we had no borrowings under the ABL Facility, but we had $15 million of outstanding letters of credit.  At September 30, 2012 and December 31, 2011, we had approximately $228 million and $201 million, respectively of undrawn availability under the ABL Facility.

 

These facilities contain covenants that limit, among other things, our ability to enter into certain transactions, such as creating liens, incurring additional indebtedness or repaying certain indebtedness, making investments, paying dividends, and entering into acquisitions, dispositions and joint ventures.  The Term Loan requires that we meet certain quarterly financial maintenance covenants including a maximum Secured Leverage Ratio (as defined in the agreement) of 2.5:1.0 and a minimum Consolidated Interest Coverage Ratio (as defined in the agreement) of 3.0:1.0.  The ABL Facility contains a springing financial covenant requiring a minimum trailing 12-month fixed charge coverage ratio (as defined in the agreement) of 1.1 to 1.0 at all times during any period from the date when the amount available for borrowings under the ABL Facility falls below the greater of (i) $34 million and (ii) 12.5% of the aggregate commitments until such date such available amount has been equal to or greater than the greater of (i) $34 million and (ii) 12.5% of the aggregate commitments for 45 consecutive days.  As of September 30, 2012, we were in compliance with the covenant requirements of these financing facilities.

 

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Accounts Receivable Financing Facility

 

On October 26, 2011, certain of our European subsidiaries (the “Sellers”) entered into a trade receivables financing facility (the “A/R Financing Facility”) with GE FactoFrance SAS as purchaser (the “Purchaser”).  Pursuant to the A/R Financing Facility, and subject to certain conditions stated therein, the Purchaser has agreed to purchase from the Sellers, on a revolving basis, certain trade receivables up to a maximum amount outstanding at any time of €68 million (approximately $88 million).  The A/R Financing Facility is uncommitted and has an indefinite term.  Since availability under the A/R Financing Facility is expected to vary depending on the value of the Seller’s eligible trade receivables, the Sellers’ availability under the A/R Financing Facility may increase or decrease from time to time.  The monthly financing fee on the drawn portion of the A/R Financing Facility is the applicable Base Rate plus 1.50%.  In addition, the A/R Financing Facility is subject to a minimum commission on the annual volume of transferred receivables.  At September 30, 2012, $2 million of international accounts receivables were outstanding under this facility.  Cost associated with this facility of $1 million and $3 million for the quarter and nine months ended September 30, 2012, respectively, is included in interest expense in our Consolidated Statement of Operations.  We had no outstanding advances under the A/R Financing Facility for the period ending December 31, 2011.

 

8)                                     INCOME TAXES

 

We reported an income tax expense of $2 million and $13 million for the quarters ended September 30, 2012 and 2011, respectively.  For the nine months ended September 30, 2012 and 2011, we reported income tax expense of $9 million and  $10 million, respectively.  The tax expense reported for the quarter and nine months ended September 30, 2012 reflects fluctuations in jurisdictional profitability, the tax benefit of an impairment charge against certain long-lived assets in our Industrial Performance Products segment, as well as the tax benefit of the second quarter restructuring charge.  The tax expense reported for the nine months ended September 30, 2011 included a decrease in deferred foreign income taxes of approximately $17 million that had been recorded in an international jurisdiction in prior years and an increase in foreign income taxes of approximately $5 million relating to a foreign tax matter dating back to the 1990s.  The tax benefit was recorded after receiving approval from the international jurisdiction to change our filing position.  We have offset our current and prior period quarter and year-to-date U.S. income with net operating loss carryforwards and reduced the associated valuation allowance. We will continue to adjust our tax provision through the establishment or reduction of non-cash valuation allowances until we determine that it is more-likely than not that the net deferred tax assets associated with our U.S. operations will be utilized.

 

We have net liabilities related to unrecognized tax benefits of $47 million and $46 million at September 30, 2012 and December 31, 2011, respectively. The increase is primarily due to currency fluctuation.

 

We recognize interest and penalties related to unrecognized tax benefits as income tax expense.  Accrued interest and penalties are included within the related liability captions in our Consolidated Balance Sheet.

 

We believe it is reasonably possible that our unrecognized tax benefits may decrease by approximately $8 million within the next year.  This reduction may occur due to the expiration of the statute of limitations or conclusion of examinations by tax authorities.  We further expect that the amount of unrecognized tax benefits will continue to change as a result of ongoing operations, the outcomes of audits and the expiration of the statue of limitations. This change is not expected to have a significant impact on our financial condition.

 

9)                                     ACCUMULATED OTHER COMPREHENSIVE LOSS

 

The components of accumulated other comprehensive loss (“AOCL”), net of tax at September 30, 2012 and December 31, 2011, are as follows:

 

 

 

September 30,

 

December 31,

 

(In millions)

 

2012

 

2011

 

Foreign currency translation adjustments

 

$

68

 

$

53

 

Unrecognized pension and other post-retirement benefit costs

 

(393

)

(399

)

Accumulated other comprehensive loss

 

$

(325

)

$

(346

)

 

10)                              EARNINGS PER COMMON SHARE

 

The computation of basic earnings per common share is based on the weighted average number of common shares outstanding.  The computation of diluted earnings per common share is based on the weighted average number of common and common share equivalents outstanding.

 

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The following is a reconciliation of the shares used in the computation of earnings per share:

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

Weighted average shares outstanding - Basic

 

97.9

 

100.3

 

98.4

 

100.2

 

Dilutive effect of common share equivalents

 

0.3

 

0.2

 

0.4

 

0.2

 

Weighted average shares outstanding - Diluted

 

98.2

 

100.5

 

98.8

 

100.4

 

 

At September 30, 2011, 1 million shares with performance criteria were excluded from the calculation of diluted earnings per share because the specified performance criteria for the vesting of these shares had not yet been met.  The shares could be dilutive in the future if the specified performance criteria are met.

 

On October 18, 2011, we announced that our Board had authorized us to repurchase up to $50 million of our common stock over the next twelve months. 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 through November 2013. 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 the applicable rules and regulations of the Securities and Exchange Commission (“SEC”).  During the quarter ended September 30, 2012, we purchased 0.7 million shares for $10 million and during the nine months ended September 30, 2012, we purchased 1.4 million shares for $20 million.  As of September 30, 2012, we had total purchases of 3.4 million shares for $41 million under this program.

 

11)                              STOCK INCENTIVE PLANS

 

In 2010, we adopted the Chemtura Corporation 2010 Long-Term Incentive Plan (the “2010 LTIP”), which was approved by the Bankruptcy Court and became effective upon our emergence from Chapter 11.  The 2010 LTIP provides for grants of nonqualified stock options (“NQOs”), incentive stock options (“ISOs”), stock appreciation rights, dividend equivalent rights, stock units, bonus stock, performance awards, share awards, restricted stock, time-based restricted stock units “RSUs” and performance-based RSUs.  The 2010 LTIP provides for the issuance of a maximum of 11 million shares.  NQOs and ISOs may be granted under the 2010 LTIP at prices equal to the fair market value of the underlying common shares on the date of the grant.  All outstanding stock options will expire not more than ten years from the date of the grant.  As of September 30, 2012, grants authorized under the 2010 LTIP included the 2009 Emergence Incentive plan (the “2009 EIP”), the 2010 Emergence Incentive Plan (the “2010 EIP”), the 2011 long-term incentive awards (the “2011 Awards”), the 2012 long-term incentive awards (the “2012 Awards”) and the 2010 Emergence Award Plan (the “2010 EAP”), as well as grants made to the Board under the Director Compensation Program.  All grants of NQOs have an exercise price equal to the fair market value of the underlying common stock at the date of grant.

 

Stock-based compensation expense was $4 million and $6 million for the quarters ended September 30, 2012 and 2011, respectively, and $14 million and $22 million for the nine months ended September 30, 2012 and 2011, respectively.  Stock-based compensation expense was primarily reported in SG&A.

 

Stock Option Plans

 

In March 2012, the compensation committee of our Board (the “Compensation Committee”) approved the grant of 0.8 million NQOs under the 2012 Awards.  These options vest ratably over a three-year period.

 

In March 2011, under the 2010 EIP, we granted 0.8 million NQOs.  One third vested immediately, one third vested on March 31, 2012 and one third vests on March 31, 2013.

 

In March 2011, the Compensation Committee approved the grant of 1.4 million NQOs under the 2011 Awards.  These options vest ratably over a three-year period.

 

We use the Black-Scholes option-pricing model to determine the fair value of NQOs.  We have elected to recognize compensation cost for awards of NQOs equally over the requisite service period for each separately vesting tranche, as if multiple awards were granted.  Using this method, the weighted average fair value of stock options granted during the nine months ended September 30, 2012 and 2011 was $8.14 and $8.39, respectively.

 

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Total remaining unrecognized compensation expense associated with unvested NQOs at September 30, 2012 was $9 million, which will be recognized over the weighted average period of approximately 2 years.

 

Restricted Stock Units and Performance Shares

 

In March 2012, the Compensation Committee approved the grant of 0.6 million time-based RSUs under the 2012 Awards.  These RSUs vest ratably over a three-year period.

 

In March 2012, the Compensation Committee approved the grant of 0.3 million performance shares under the 2012 Awards.  The share grant is subject to a performance multiplier of up to 2 times the targeted award.  The performance measurement period is the three calendar year period ending December 31, 2014, the performance share metric used will be our relative total shareholder return against the companies comprising the Russell 3000 Index, and the performance shares will be settled on March 1, 2015.  We used the Monte-Carlo simulation model to determine the fair value of the performance shares.  Using this method, the average per share fair value of these awards was $25.38.

 

In March 2011, under the 2010 EIP, we granted 0.4 million time-based RSUs with a fair market value of the quoted closing price of our stock on that date.  One third vested immediately, one third vested on March 31, 2012 and one third vests on March 31, 2013.

 

In March 2011, the Compensation Committee approved the grant of 0.4 million time-based RSUs under the 2011 Awards.  These RSUs vest ratably over a three-year period.

 

In March 2011, we established the initial allocations under the 2010 EAP, which was previously approved by the Bankruptcy Court and provided designated participants with the opportunity to share in a pool of up to 1 million fully vested shares of common stock.  The portion of the 2010 EAP pool to be distributed was determined by Chemtura’s consolidated earnings before interest, taxes, depreciation and amortization expense (“EBITDA”) during the 2011 fiscal year.  In March 2012, the compensation committee approved the allocation of specified percentage interests in the 2010 EAP pool among designated participants, including our named executive officers.  Under the formula approved by the Bankruptcy Court, our 2011 consolidated EBITDA resulted in a payout of 57% of the total 2010 EAP pool of 1 million shares, or 0.6 million, which were distributed to the participants in March 2012.

 

In February 2011, we granted 0.1 million time-based RSUs to non-employee directors with a fair market value of the quoted closing price of our stock on that date.  These RSUs vest ratably over a two-year period.

 

Total remaining unrecognized compensation expense associated with unvested time-based RSUs and performance shares at September 30, 2012 was $14 million, which will be recognized over the weighted average period of approximately 2 years.

 

Employee Stock Purchase Plan

 

In May 2012, our shareholders approved the Chemtura Corporation 2012 Employee Stock Purchase Plan (the “ESPP”).  This plan permits eligible employees to annually elect to have up to 10% of their compensation withheld and applied to the purchase of shares of Chemtura’s common stock.  Purchases are made at the end of quarterly offering periods and are based on the lower of the fair market value of the shares on the first and last trading days during the offering period.  The first offering period was for the calendar quarter ending September 30, 2012.  A total of one million shares are authorized to be issued under the ESPP, including up to 0.1 million shares per offering period and 0.3 million shares per plan year.  As of September 30, 2012, approximately one million shares are available for future issuance under this plan.

 

12)                              PENSION AND OTHER POST-RETIREMENT BENEFIT PLANS

 

Components of our defined benefit plans net periodic benefit (credit) cost for the quarters and nine months ended September 30, 2012 and 2011 are as follows:

 

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Defined Benefit Plans 

 

 

 

Qualified 

 

International and

 

Post-Retirement

 

 

 

U.S. Plans

 

Non-Qualified Plans

 

Health Care Plans

 

 

 

Quarters ended September 30,

 

Quarters ended September 30,

 

Quarters ended September 30,

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

1

 

$

1

 

$

 

$

 

$

 

$

 

Interest cost

 

10

 

11

 

5

 

5

 

2

 

1

 

Expected return on plan assets

 

(14

)

(14

)

(5

)

(4

)

 

 

Amortization of prior service cost

 

 

3

 

 

1

 

(1

)

 

Amortization of actuarial losses

 

4

 

 

1

 

 

 

(1

)

Net periodic benefit cost

 

$

1

 

$

1

 

$

1

 

$

2

 

$

1

 

$

 

 

 

 

Defined Benefit Plans

 

 

 

Qualified

 

International and

 

Post-Retirement

 

 

 

U.S. Plans

 

Non-Qualified Plans

 

Health Care Plans

 

 

 

Nine months ended September
30,

 

Nine months ended September
30,

 

Nine months ended September 
30,

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

2012

 

2011

 

Service cost

 

$

1

 

$

1

 

$

2

 

$

2

 

$

 

$

1

 

Interest cost

 

32

 

34

 

15

 

16

 

4

 

3

 

Expected return on plan assets

 

(41

)

(42

)

(16

)

(13

)

 

 

Amortization of prior service cost

 

 

9

 

 

2

 

(4

)

1

 

Amortization of actuarial losses

 

11

 

 

2

 

 

2

 

(4

)

Net periodic benefit cost

 

$

3

 

$

2

 

$

3

 

$

7

 

$

2

 

$

1

 

 

For the nine months ended September 30, 2012, we contributed $40 million to our U.S. qualified pension plans, $2 million to our U.S. non-qualified pension plans and $31 million to our international pension plans, which included $24 million to our UK Pension Plan discussed below.  Contributions to post-retirement health care plans for the nine months ended September 30, 2012 were $9 million.

 

On November 18, 2009, the Bankruptcy Court entered an order (the “2009 OPEB Order”) approving, in part, our motion (the “2009 OPEB Motion”) requesting authorization to modify certain post-retirement welfare benefits (the “OPEB Benefits”) under our post-retirement welfare benefit plans (the “OPEB Plans”), including the OPEB Benefits of certain Uniroyal salaried retirees (the “Uniroyal Salaried Retirees”).  On April 5, 2010, the Bankruptcy Court entered an order denying the Uniroyal Salaried Retirees’ motion to reconsider the 2009 OPEB Order based, among other things, on the Uniroyal Salaried Retirees’ failure to file a timely objection to the 2009 OPEB Motion. On April 8, 2010, the Uniroyal Salaried Retirees appealed the Bankruptcy Court’s April 5, 2010 order and on April 14, 2010, sought a stay pending their appeal (the “Stay”) of the 2009 OPEB Order as to our right to modify the OPEB Benefits. On April 21, 2010, the Bankruptcy Court ordered us not to modify the Uniroyal Salaried Retirees’ OPEB Benefits pending a hearing and decision as to the Stay.  After consulting with the official committees of unsecured creditors and equity security holders, we requested that the Bankruptcy Court have a hearing to decide, as a matter of law, whether we have the right to modify the OPEB Benefits of the Uniroyal Salaried Retirees as requested in the 2009 OPEB Motion.  In November 2011, we reached an agreement in principle with a steering committee of the Uniroyal Salaried Retirees resolving all disputes concerning the 2009 OPEB Motion. On February 21, 2012, we filed a motion with the Bankruptcy Court seeking approval of a settlement stipulation with the steering committee of the Uniroyal Salaried Retirees based upon the prior agreement in principle and authorizing us to implement changes to the OPEB Benefits of all Uniroyal Salaried Retirees based upon the settlement stipulation and as a partial grant of the relief requested in the 2009 OPEB Motion.  The Bankruptcy Court approved the motion at a hearing held on March 29, 2012.  The changes were communicated to the participants in May 2012.  The impact of the change was an $8 million increase to the projected benefit obligation, which we recorded in the second quarter of 2012 as an increase to the pension and post-retirement healthcare liabilities, with an offset to accumulated other comprehensive loss on our Consolidated Balance Sheet at September 30, 2012.

 

On May 9, 2011, one of our UK subsidiaries entered into definitive agreements with the trustees of the Great Lakes U.K. Limited Pension Plan (“the UK Pension Plan”) over the terms of a “recovery plan” which provided for a series of additional cash contributions to be made to reduce the underfunding over time.  The agreements provided, among other things, for our UK subsidiary to make cash contributions of £60 million (approximately $96 million) in just over a three year period, with

the initial contribution of £30 million ($49 million) made in the second quarter of 2011 and the second contribution of £15 million ($24 million) made in the second quarter of 2012.  The agreements also provided for the granting of both a security interest and a guarantee to support certain of the liabilities under the UK Pension Plan.

 

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Table of Contents

 

There is also an evaluation being undertaken as to whether additional benefit obligations exist in connection with the equalization of certain benefits under the UK Pension Plan that occurred in the early 1990s. Based on the results of the evaluation to date, $8 million of expense was recorded in the fourth quarter of 2011, which may be subject to adjustment as further information is gathered as part of the evaluation. Upon completion of the evaluation and the finalization of the liability with respect to additional benefit obligations, additional cash contributions to the UK Pension Plan may be required starting in 2013.  There were no changes to the evaluation during the third quarter of 2012.

 

13)                              DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Our activities expose our earnings, cash flows and financial condition to a variety of market risks, including the effects of changes in foreign currency exchange rates, interest rates and energy prices.  We maintain a risk management strategy that may utilize derivative instruments to mitigate risk against foreign currency movements.  We do not enter into derivative instruments for trading or speculative purposes.

 

We have exposure to changes in foreign currency exchange rates resulting from transactions entered into by us and our foreign subsidiaries in currencies other than their functional currency (primarily trade payables and receivables).  We are also exposed to currency risk on intercompany transactions (including intercompany loans).  We manage these currency risks on a consolidated basis, which allows us to net our exposure.

 

On November 28, 2011, we sold our 50% interest in Tetrabrom Technologies Ltd. for net consideration of $38 million. The consideration will be paid in equal annual installments over a three year period. A pre-tax gain of $27 million was recorded on the sale in the fourth quarter of 2011.  In February 2012, we purchased two forward contracts with a notional amount totaling $38 million to reduce the risk of currency exposure related to the three annual installments of this receivable.  These contracts came due on the same day we received the first annual installment. We used fair value accounting methods for these contracts.  We recorded a realized loss associated with the settlement of these contracts of less than $1 million in the nine months ended September 30, 2012 in other expense, net in our Consolidated Statement of Operations.

 

In April 2012, we purchased two additional forward contracts with a notional amount totaling $25 million to reduce the risk of currency exposure related to the remaining two annual installments of the receivable.  We use fair value accounting methods for these contracts and have recorded a loss of less than $1 million reflecting the changes in the fair market value of these contracts in other expense, net in our Consolidated Statement of Operations for the quarter and nine months ended September 30, 2012.  The resulting net liability of the changes in fair market value of these contracts of less than $1 million has been accounted for in other current assets and other assets in our Consolidated Balance Sheet.

 

In June 2012, we purchased and settled a forward contract with a notional amount totaling $8 million to reduce the risk of currency exposure related to the payment of an intercompany payable denominated in Mexican Pesos.  We used fair value accounting methods for these contracts and have recorded a gain of less than $1 million reflecting the changes in the fair market value of these contracts in other expense, net in our Consolidated Statement of Operations for the nine months ended September 30, 2012.

 

14)                              FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

 

Financial Instruments

 

The carrying amounts for cash and cash equivalents, accounts receivable, other current assets, accounts payable and other current liabilities, approximate their fair value because of the short-term maturities of these instruments.  The fair value of debt is based primarily on quoted market values.

 

The following table presents the carrying amounts and estimated fair values of material financial instruments used by us in the normal course of business:

 

 

 

As of September 30, 2012

 

As of December 31, 2011

 

 

 

Carrying

 

Fair

 

Carrying

 

Fair

 

(In millions)

 

Amount

 

Value

 

Amount

 

Value

 

Total debt

 

$

754

 

$

805

 

$

753

 

$

777

 

 

Fair Value Measurements

 

We apply the provisions of ASC 820 with respect to our financial assets and liabilities that are measured at fair value within the financial statements on a recurring basis.  ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to

 

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those valuation techniques are observable or unobservable.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.  The fair value hierarchy specified by ASC 820 is as follows:

 

·                  Level 1 — Quoted prices in active markets for identical assets and liabilities.

 

·                  Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market date.

 

·                  Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.

 

Level 1 fair value measurements in 2012 and 2011 included securities purchased in connection with the deferral of compensation, our match and investment earnings related to the supplemental savings plan. These securities are considered our general assets until distributed to the participant and are included in other assets in our Consolidated Balance Sheets.  A corresponding liability is included in other liabilities at September 30, 2012 and December 31, 2011 in our Consolidated Balance Sheets.  Quoted market prices were used to determine fair values of these Level 1 investments which are held in a trust with a third-party brokerage firm.  The fair value of the asset and corresponding liability was $1 million at September 30, 2012 and December 31, 2011.  Level 2 fair value measurements are used to value our foreign currency forward contracts (see Note 13 — Derivative Instruments and Hedging Activities.)  For the nine months ended September 30, 2012, there were no transfers into or out of Levels 1 and 2.

 

Level 3 fair value measurements are utilized in our impairment reviews of Goodwill (see Note 6 — Goodwill and Intangible Assets).  Level 1, 2 and 3 fair value measurements are utilized for defined benefit plan assets in determining the funded status of our pension and post-retirement benefit plan liabilities on an annual basis (at December 31).

 

15)          ASSET RETIREMENT OBLIGATIONS

 

We apply the provisions of ASC Topic 410, Asset Retirements and Environmental Obligations (“ASC 410”), which requires us to make estimates regarding future events in order to record a liability for asset retirement obligations in the period in which a legal obligation is created.  Such liabilities are recorded at fair value, with an offsetting increase to the carrying value of the related long-lived assets.  The fair value is estimated by discounting projected cash flows over the estimated life of the assets using our credit adjusted risk-free rate applicable at the time the obligation is initially recorded.  In future periods, the liability is accreted to its present value and the capitalized cost is depreciated over the useful life of the related asset.  We also adjust the liability for changes resulting from revisions to the timing of future cash flows or the amount of the original estimate.  Upon retirement of the long-lived asset, we either settle the obligation for its recorded amount or incur a gain or loss.

 

Our asset retirement obligations include estimates for all asset retirement obligations identified for our worldwide facilities.  Our asset retirement obligations are primarily the result of legal obligations for the removal of leasehold improvements and restoration of premises to their original condition upon termination of leases at approximately 20 facilities; legal obligations to close approximately 90 brine supply, brine disposal, waste disposal, and hazardous waste injection wells and the related pipelines at the end of their useful lives; and decommissioning and decontamination obligations that are legally required to be fulfilled upon closure of approximately 30 of our manufacturing facilities.

 

The following is a summary of the change in the carrying amount of the asset retirement obligations for the quarters and nine months ended September 30, 2012 and 2011 and the net book value of assets related to the asset retirement obligations at September 30, 2012 and 2011:

 

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Quarters ended September 30,

 

Nine months ended September 30,

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

Asset retirement obligation balance at beginning of period

 

$

22

 

$

21

 

$

21

 

$

23

 

Accretion expense (income) — cost of goods sold (a)

 

1

 

1

 

3

 

(1

)

Payments

 

 

(1

)

(1

)

(2

)

Reclassifications

 

 

 

 

1

 

Asset retirement obligation balance at end of period

 

$

23

 

$

21

 

$

23

 

$

21

 

Net book value of asset retirement obligation assets at end of period

 

$

1

 

$

1

 

$

1

 

$

1

 

 


(a)          The accretion expense for the nine months ended September 30, 2012 reflects the acceleration of obligations related to the Pedrengo, Italy facility due to the shutdown approved on April 30, 2012.  The accretion reversal for the nine months ended September 30, 2011 was primarily due to the extension of the retirement dates for various pipelines and wells related to the El Dorado, Arkansas facility.

 

Depreciation expense for the quarters and nine months ended September 30, 2012 and 2011 was less than $1 million.

 

At September 30, 2012 and December 31, 2011, $7 million and $6 million, respectively of asset retirement obligations were included in accrued expenses and $16 million and $15 million, respectively, were included in other liabilities on the Consolidated Balance Sheet.

 

16)          EMERGENCE FROM CHAPTER 11

 

On March 18, 2009 (the “Petition Date”) Chemtura and 26 of our U.S. affiliates (collectively the “U.S. Debtors” or the “Debtors” when used in relation to matters before August 8, 2010) filed voluntary petitions for relief under Chapter 11 of Title 11 of the United States Code (“Chapter 11”) in the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”).

 

On August 8, 2010, our Canadian subsidiary, Chemtura Canada Co/Cie (“Chemtura Canada”), filed a voluntary petition for relief under Chapter 11.  On August 11, 2010, Chemtura Canada commenced ancillary recognition proceedings under Part IV of the Companies’ Creditors Arrangement Act (the “CCAA”) in the Ontario Superior Court of Justice, (the “Canadian Court” and such proceedings, the “Canadian Case”).  The U.S. Debtors along with Chemtura Canada after it filed for Chapter 11 (collectively the “Debtors”) requested the Bankruptcy Court to enter an order jointly administering Chemtura Canada’s Chapter 11 case with the previously filed Chapter 11 cases and appoint Chemtura Canada as the “foreign representative” for the purposes of the Canadian Case.  Such orders were granted on August 9, 2010.  On August 11, 2010, the Canadian Court entered an order recognizing the Chapter 11 cases as a “foreign proceedings” under the CCAA.

 

On November 3, 2010, the Bankruptcy Court entered an order confirming the Debtors’ plan of reorganization (the “Plan”).  On November 10, 2010 (the “Effective Date”), the Debtors substantially consummated their reorganization through a series of transactions contemplated by the Plan and the Plan became effective.

 

In March 2011, we made a supplemental distribution to holders of previously issued common stock (“Holders of Interests”) as authorized by the Bankruptcy Court.  The supplemental distribution included payments of $3 million in stock, valuing the stock at the Plan valuation.

 

On June 10, 2011, we filed a closing report in Chemtura Canada’s Chapter 11 case and a motion seeking a final decree closing that Chapter 11 case.  On June 23, 2011, the Bankruptcy Court granted our motion and entered a final decree closing the Chapter 11 case of Chemtura Canada.

 

In August 2011, we made a second supplemental distribution to Holders of Interests as authorized by the Bankruptcy Court.  The supplemental distribution included payments of $2 million in cash and $12 million in stock, valuing the stock at the Plan valuation.

 

On December 1, 2011, we filed a motion requesting entry of an order granting a final decree closing the Chapter 11 cases of 22 Debtors (the “Fully Administered Debtors”):

 

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· A&M Cleaning Products LLC

 

· Crompton Colors Incorporated

 

· Laurel Industries Holdings, Inc.

· Aqua Clear Industries, LLC

 

· Crompton Holding Corporation

 

· Monochem, Inc.

· ASEPSIS, Inc.

 

· Crompton Monochem, Inc.

 

· Naugatuck Treatment Company

· ASCK, Inc.

 

· Great Lakes Chemical Global, Inc.

 

· Recreational Water Products, Inc.

· BioLab Company Store, LLC

 

· GT Seed Treatment, Inc.

 

· Weber City Road LLC

· Biolab Franchise Company, LLC

 

· HomeCare Labs, Inc

 

· WRL of Indiana, Inc.

· BioLab Textile Additives, LLC

 

· ISCI, Inc.

 

 

· CNK Chemical Realty Corporation

 

· Kem Manufacturing Corporation

 

 

 

On December 15, 2011, the Bankruptcy Court entered an order granting a final decree closing the Fully Administered Debtors’ Chapter 11 cases.

 

On January 5, 2012, we filed a motion with the Bankruptcy Court seeking authority to make a third supplemental distribution to Holders of Interests, which was granted by the Bankruptcy Court on January 26, 2012.  The Bankruptcy Court extended the time to make the third supplemental distribution by order dated March 2, 2012 and authorized an increase to the third supplemental distribution by order dated March 8, 2012.  The third supplemental distribution was made in March 2012 and included payments of $3 million in cash and $20 million in stock, valuing the stock at the Plan valuation.

 

On February 7, 2012, we filed a motion requesting entry of an order granting a final decree closing the Chapter 11 cases for Bio-Lab, Inc. and GLCC Laurel, LLC, which was granted by the Bankruptcy Court on February 22, 2012.

 

On March 16, 2012, we filed a motion requesting entry of an order granting a final decree closing the Chapter 11 cases for Great Lakes Chemical Corporation and Uniroyal Chemical Company Limited (Delaware), which was granted by the Bankruptcy Court on March 29, 2012.

 

In July 2012, we made a final distribution to Holders of Interests under the Plan including all amounts remaining in the Disputed Claims Reserve.  The final distribution included $3 million in stock valued at the Plan valuation.

 

As of September 30, 2012, the Bankruptcy Court has entered orders granting final decrees closing all of the Debtors’ Chapter 11 cases except the Chapter 11 case of Chemtura Corporation.

 

On October 2, 2012, the Bankruptcy Court granted the motion of Momentive Performance Materials, Inc. (“Momentive”) for an order granting our prior motion under the Plan to assume our executory contract with Momentive and directing payment of a purportedly agreed cure claim.  After a contested hearing, the Bankruptcy Court granted the motion by order dated October 17, 2012.  The payment of the cure claim will resolve all claims of default under the agreement through October 2, 2012.

 

There remains one pending dispute before the Bankruptcy Court concerning enforcement of the discharge injunction under the Plan.  The dispute is scheduled to be heard by the Bankruptcy Court on November 13, 2012.

 

At September 30, 2012 there were no remaining undisbursed amounts in the Disputed Claims Reserve.

 

The Reorganization Items, net recorded in our Consolidated Statements of Operations related to our Chapter 11 cases comprise the following:

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

Professional fees

 

$

1

 

$

2

 

$

3

 

$

14

 

Severance and closure costs (a)

 

 

1

 

 

1

 

Claim settlements, net (b)

 

 

3

 

1

 

4

 

Total reorganization items, net

 

$

1

 

$

6

 

$

4

 

$

19

 

 


(a)          Represents charges for cost savings initiatives for which Bankruptcy Court approval has been obtained or requested.

 

(b)         Represents the difference between the settlement amount of certain pre-petition obligations (obligations settled in common stock are based on the fair value of our stock at the issuance date) and the corresponding carrying value of the recorded liabilities.

 

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17)        LEGAL PROCEEDINGS AND CONTINGENCIES

 

We are involved in claims, litigation, administrative proceedings and investigations of various types in a number of jurisdictions.  A number of such matters involve, or may involve, claims for a material amount of damages and relate to or allege, among other things, environmental liabilities, including clean-up costs associated with hazardous waste disposal sites, natural resource damages, property damage and personal injury.

 

As a result of the Chapter 11 cases, substantially all prepetition litigation and claims against us and our subsidiaries that were Debtors in the Chapter 11 cases have been discharged and permanently enjoined from further prosecution and are described below under the subheading “Prepetition Litigation and Claims Discharged Under the Plan.”

 

Claims and legal actions asserted against non-Debtors or relating to events occurring after the Effective Date, certain regulatory and administrative proceedings and certain contractual and other claims assumed with the authorization of the Bankruptcy Court, were not discharged in the Chapter 11 cases and are described below under the subheading “Litigation and Claims Not Discharged Under the Plan.”

 

Prepetition Litigation and Claims Discharged Under the Plan

 

Chapter 11 Plan and Establishment of Claims Reserves

 

On March 18, 2009, the Debtors filed voluntary petitions in the Bankruptcy Court seeking relief under Chapter 11.  The Debtors’ Chapter 11 cases were assigned to the Honorable Robert E. Gerber and are being jointly administered as Case No. 09-11233.  The Debtors continued to operate their business as debtors in possession under the jurisdiction of the Bankruptcy Court until their emergence from Chapter 11 on November 10, 2010.

 

Pursuant to the Plan, and by orders of the Bankruptcy Court dated September 24, 2010, October 19, 2010 and October 29, 2010, the Debtors established the Diacetyl Reserve, the Environmental Reserve and the Disputed Claims Reserve, each as defined in the Plan, on account of claims that were not yet allowed in the Chapter 11 cases as of the Effective Date, including proofs of claim asserted against the Debtors that were subject to objection as of the Effective Date (the “Disputed Claims”).  The Diacetyl Reserve was approved by the Bankruptcy Court in the amount of $7 million, comprised of separate segregated reserves, and has since been reduced as settlement agreements have been approved by the Bankruptcy Court.  The Environmental Reserve was approved by the Bankruptcy Court in the amount of $38 million, a portion of which was further segregated into certain separate reserves established to account for settlements that were pending Bankruptcy Court approval, and has since been reduced as settlement agreements have been approved by the Bankruptcy Court.  The Disputed Claims Reserve was approved by the Bankruptcy Court in the amount of $42 million, plus additional segregated individual reserves for certain creditors’ claims in the aggregate amount of approximately $30 million, all of which have been reduced as settlement agreements have been approved by the Bankruptcy Court.

 

On June 24, 2011, we resolved the final disputed Environmental Claim.  As a result, under the Plan, the amounts remaining in the Environmental Reserve were transferred to the Disputed Claims Reserve.  Any remaining Disputed Claims, to the extent they were ultimately allowed by the Bankruptcy Court, were satisfied (to the extent allowed and not covered by insurance) from the Disputed Claims Reserve.  Holders of the Disputed Claims are permanently enjoined under the Plan from pursuing their claims against us.  On May 4, 2012, the Bankruptcy Court entered an order disallowing the last Disputed Claim subject to the Disputed Claims Reserve.  In July 2012, we made a final distribution to Holders of Interests in accordance with the Plan that included all amounts remaining in the Disputed Claims Reserve.

 

Litigation and Claims Not Discharged Under the Plan

 

Environmental Liabilities

 

We are involved in environmental matters of various types in a number of jurisdictions.  A number of such matters involve claims for material amounts of damages and relate to or allege environmental liabilities, including clean up costs associated with hazardous waste disposal sites and natural resource damages.

 

The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (“CERCLA”), and comparable state statutes impose strict liability upon various classes of persons with respect to the costs associated with the investigation and remediation of waste disposal sites.  Such persons are typically referred to as “Potentially Responsible Parties” or PRPs.  Chemtura and several of our subsidiaries have been identified by federal, state or local governmental agencies or by other PRPs, as a PRP at various locations in the United States.  Because in certain circumstances these laws have been construed to authorize the imposition of joint and several liability, the Environmental Protection Agency (“EPA”) and comparable state agencies could seek to recover all costs involving a waste disposal site from any one of the PRPs for such site, including Chemtura, despite the involvement of other PRPs.  In many cases, we are one of a large number of PRPs with

 

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respect to a site.  In a few instances, we are the sole or one of only a handful of PRPs performing investigation and remediation.  Where other financially responsible PRPs are involved, we expect that any ultimate liability resulting from such matters will be apportioned between us and such other parties.  In addition, we are involved with environmental remediation and compliance activities at some of our current and former sites in the United States and abroad.

 

Each quarter, we evaluate and review estimates for future remediation and other costs to determine appropriate environmental reserve amounts.  For each site where the cost of remediation is probable and reasonably estimable, we determine the specific measures that are believed to be required to remediate the site, the estimated total cost to carry out the remediation plan, the portion of the total remediation costs to be borne by us and the anticipated time frame over which payments toward the remediation plan will occur.  At sites where we expect to incur ongoing operation and maintenance expenditures, we accrue on an undiscounted basis for a period of generally 10 years those costs which we believe are probable and reasonably estimable.

 

On June 6, 2011, our subsidiary Great Lakes Chemical Corporation received a proposed Consent Administrative Order (“CAO”) from the Arkansas Department of Environmental Quality alleging violations of the Resource Conservation and Recovery Act in conjunction with its facility located in El Dorado, Arkansas.  The violations alleged in the CAO were settled in May 2012 for a penalty of less than $1 million which was paid in August 2012.  This settlement fully resolves the matter.

 

The total amount accrued for environmental liabilities as of September 30, 2012 and December 31, 2011 was $85 million and $88 million, respectively.  At September 30, 2012 and December 31, 2011, $16 million and $18 million, respectively, of these environmental liabilities were reflected as accrued expenses and $69 million and $70 million, respectively, were reflected as other liabilities.  We estimate that the reasonably possible ongoing environmental liabilities could range up to $100 million at September 30, 2012.  Our accruals for environmental liabilities include estimates for determinable clean-up costs.  We recorded a pre-tax charge of $5 million in 2012, and made payments of $8 million during the nine months ended September 30, 2012 for clean-up costs, which reduced our environmental liabilities.  At certain sites, we have contractual agreements with certain other parties to share remediation costs.  As of September 30, 2012, no receivables are outstanding related to these agreements.  At a number of these sites, the extent of contamination has not yet been fully investigated or the final scope of remediation is not yet determinable.  We intend to assert all meritorious legal defenses and will pursue other equitable factors that are available with respect to these matters.  However, the final cost of clean-up at these sites could exceed our present estimates, and could have, individually or in the aggregate, a material adverse effect on our financial condition, results of operations, or cash flows.  Our estimates for environmental remediation liabilities may change in the future should additional sites be identified, further remediation measures be required or undertaken, current laws and regulations be modified or additional environmental laws and regulations be enacted, and as negotiations with respect to certain sites.

 

Other

 

We are routinely subject to other civil claims, litigation and arbitration, and regulatory investigations, arising in the ordinary course of our business, as well as in respect of our divested businesses.  Some of these claims and litigations relate to product liability claims, including claims related to our current and historical products and asbestos-related claims concerning premises and historic products of our corporate affiliates and predecessors.  We believe the claims relating to the period before the filing of the Chapter 11 cases are subject to discharge pursuant to the Plan and have been satisfied, to the extent they were timely filed in the Chapter 11 cases and allowed by the Bankruptcy Court, solely from the Disputed Claims Reserve.  Further, we believe that we have strong defenses to these claims.  These claims have not had a material impact on us to date and we believe the likelihood that a future material adverse outcome will result from these claims is remote.

 

However, we cannot be certain that an adverse outcome of one or more of these claims, to the extent not discharged in the Chapter 11 cases, would not have a material adverse effect on its financial condition, results of operations or cash flows.

 

Guarantees

 

In addition to the letters of credit of $14 million and $15 million outstanding at September 30, 2012 and December 31, 2011, respectively, we have guarantees that have been provided to various financial institutions.  At September 30, 2012 and December 31, 2011, we had $12 million and $11 million of outstanding guarantees, respectively.  The letters of credit and guarantees were primarily related to liabilities for insurance obligations, environmental obligations, banking and credit facilities, vendor deposits and European value added tax (“VAT”) obligations.

 

We have applied the disclosure provisions of ASC Topic 460, Guarantees (“ASC 460”), to our agreements that contain guarantee or indemnification clauses.  We are a party to several agreements pursuant to which we may be obligated to indemnify a third party with respect to certain loan obligations of joint venture companies in which we have an equity interest.  These obligations arose to provide initial financing for a joint venture start-up, fund an acquisition and/or provide project capital.  Such obligations mature through August 2016.  In the event that any of the joint venture companies were to default on these loan obligations, we would indemnify the other party up to its proportionate share of the obligation based upon its ownership interest in the joint venture.  At September 30, 2012, the maximum potential future principal and interest payments

 

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due under these guarantees were $4 million.  At December 31, 2011, the maximum potential future principal and interest payments due under these guarantees were $8 million. In accordance with ASC 460, we have accrued $1 million in reserves, which represents the probability weighted fair value of these guarantees at September 30, 2012 and December 31, 2011.  The reserve has been included in other liabilities on our Consolidated Balance Sheet at September 30, 2012 and December 31, 2011 with an offset to the investment included in other assets.

 

In addition, we have financing agreements with banks in Brazil for certain customers under which we receive funds from the banks at invoice date, and in turn, the customer agrees to pay the banks on the due date.  We provide a full recourse guarantee to the banks in the event of customer non-payment.

 

In the ordinary course of business, we enter into contractual arrangements under which we may agree to indemnify a third party to such arrangement from any losses incurred relating to the services they perform on our behalf or for losses arising from certain events as defined within the particular contract, which may include, for example, litigation, claims or environmental matters relating to our past performance.  For any losses that we believe are probable and estimable, we have accrued for such amounts in our Consolidated Balance Sheets.

 

18)          BUSINESS SEGMENT DATA

 

We evaluate a segment’s performance based on several factors, of which the primary factor is operating income (loss).  In computing operating income (loss) by segment, the following items have not been deducted:  (1) general corporate expense; (2) amortization; (3) facility closures, severance and related costs; (4) certain accelerated depreciation; (5) changes in estimates related to expected allowable claims; and (6) impairment charges.  Pursuant to ASC Topic 280, Segment Reporting (“ASC 280”), these items have been excluded from our presentation of segment operating income (loss) because they are not reported to the chief operating decision maker for purposes of allocating resources among reporting segments or assessing segment performance.

 

Industrial Performance Products

 

Industrial Performance Products are engineered solutions for our customers’ specialty chemical needs.  Industrial Performance Products include petroleum additives that provide detergency, friction modification and corrosion protection in automotive lubricants, greases, refrigeration and turbine lubricants; castable urethane prepolymers engineered to provide superior abrasion resistance and durability in many industrial and recreational applications; polyurethane dispersions and urethane prepolymers used in various types of coatings such as clear floor finishes, high-gloss paints and textiles treatments; and antioxidants that improve the durability and longevity of plastics used in food packaging, consumer durables, automotive components and electrical components.  These products are sold directly to manufacturers and through distribution channels.

 

Industrial Engineered Products

 

Industrial Engineered Products are chemical additives designed to improve the performance of polymers in their end-use applications. Industrial Engineered Products include brominated performance products, flame retardants, fumigants and organometallics.  The products are sold across the entire value chain ranging from direct sales to monomer producers, polymer manufacturers, compounders and fabricators, fine chemical manufacturers and oilfield service companies to industry distributors.

 

Consumer Products

 

Consumer Products are performance chemicals that are sold to consumers for in-home and outdoor use.  Consumer Products include a variety of branded recreational water purification products sold through local dealers and large retailers to assist consumers in the maintenance of their pools and spas and branded cleaners and degreasers sold primarily through mass merchants to consumers for home cleaning.

 

Chemtura AgroSolutions

 

Chemtura AgroSolutions develops, supplies, registers and sells agricultural chemicals formulated for specific crops in various geographic regions for the purpose of enhancing quality and improving yields.  The business focuses on specific target markets in six major product lines: seed treatments, fungicides, miticides, insecticides, growth regulators and herbicides.  These products are sold directly to growers and to major distributors in the agricultural sector.

 

General Corporate Expense and Other Charges

 

General corporate expense includes costs and expenses that are of a general corporate nature or managed on a corporate basis.  These costs (net of allocations to the business segments) primarily represent corporate stewardship and administration activities

 

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together with costs associated with legacy activities and intangible asset amortization.  Functional costs are allocated between the business segments and general corporate expense.  Accelerated depreciation relates to certain assets affected by our restructuring programs.  Facility closures, severance and related costs are primarily for severance costs related to our cost savings initiatives.  Impairment charges related to the impairment of intangible assets and property, plant and equipment that were no longer supportable. Change in estimates related to expected allowable claims relates to adjustments to resolve disputed claims.

 

A summary of business data for our reportable segments for the quarters and nine months ended September 30, 2012 and 2011 are as follows:

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

Net Sales

 

 

 

 

 

 

 

 

 

Industrial Performance Products

 

$

314

 

$

342

 

$

966

 

$

1,048

 

Industrial Engineered Products

 

213

 

222

 

675

 

675

 

Consumer Products

 

102

 

104

 

344

 

335

 

Chemtura AgroSolutions

 

114

 

105

 

311

 

290

 

Total net sales

 

$

743

 

$

773

 

$

2,296

 

$

2,348

 

 

 

 

Quarters ended September 30,

 

Nine months ended September 30,

 

(In millions)

 

2012

 

2011

 

2012

 

2011

 

Operating Income

 

 

 

 

 

 

 

 

 

Industrial Performance Products

 

$

31

 

$

31

 

$

88

 

$

100

 

Industrial Engineered Products

 

30

 

25

 

112

 

100

 

Consumer Products

 

10

 

6

 

25

 

25

 

Chemtura AgroSolutions

 

21

 

11

 

54

 

25

 

 

 

92

 

73

 

279

 

250

 

General corporate expense, including amortization

 

(24

)

(28

)

(75

)

(82

)

Facility closures, severance and related costs

 

(1

)

 

(24

)

 

Impairment charges

 

(35

)

 

(36

)

(3

)

Changes in estimates related to expected allowable claims

 

1

 

 

(1

)

(1

)

Total operating income

 

$

33

 

$

45

 

$

143

 

$

164

 

 

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19)          GUARANTOR CONDENSED CONSOLIDATING FINANCIAL DATA

 

Our obligations under the Senior Notes are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by each current and future domestic restricted subsidiary, other than excluded subsidiaries that guarantee any indebtedness of Chemtura or our restricted subsidiaries.  Our subsidiaries that do not guarantee the Senior Notes are referred to as the “Non-Guarantor Subsidiaries.”  The Guarantor Condensed Consolidating Financial Data presented below presents the statements of operations, statements of comprehensive income, balance sheets and statements of cash flow for: (i) Chemtura Corporation (the “Parent Company”), the Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on a consolidated basis (which is derived from Chemtura historical reported financial information); (ii) the Parent Company, alone (accounting for our Guarantor Subsidiaries and the Non-Guarantor Subsidiaries on an equity basis under which the investments are recorded by each entity owning a portion of another entity at cost, adjusted for the applicable share of the subsidiary’s cumulative results of operations, capital contributions and distributions, and other equity changes); (iii) the Guarantor Subsidiaries alone; and (iv) the Non-Guarantor Subsidiaries alone.

 

Condensed Consolidating Statement of Operations

Quarter ended September 30, 2012

(In millions)

 

 

 

Consolidated

 

Eliminations

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Net sales

 

$

743

 

$

(462

)

$

412

 

$

199

 

$

594

 

Cost of goods sold

 

551

 

(462

)

339

 

149

 

525

 

Selling, general and administrative

 

77

 

 

34

 

14

 

29

 

Depreciation and amortization

 

36

 

 

9

 

13

 

14

 

Research and development

 

12

 

 

5

 

2

 

5

 

Facility closures, severance and related costs

 

1

 

 

1

 

 

 

Impairment charges

 

35

 

 

10

 

 

25

 

Changes in estimates related to expected allowable claims

 

(1

)

 

(1

)

 

 

Equity Income

 

(1

)

 

 

 

(1

)

Operating income (loss)

 

33

 

 

15

 

21

 

(3

)

Interest expense

 

(17

)

 

(16

)

 

(1

)

Other (expense) income, net

 

(6

)

 

(10

)

1

 

3

 

Reorganization items, net

 

(1

)

 

(1

)

 

 

Equity in net earnings of subsidiaries

 

 

(21

)

21

 

 

 

Earnings (loss) before income taxes

 

9

 

(21

)

9

 

22

 

(1

)

Income tax expense

 

(2

)

 

 

 

(2

)

Net earnings (loss)

 

7

 

(21

)

9

 

22

 

(3

)

Less: Net loss attributed to non-controlling interests

 

2

 

 

 

 

2

 

Net earnings (loss) attributable to Chemtura

 

$

9

 

$

(21

)

$

9

 

$

22

 

$

(1

)

 

24



Table of Contents

 

Condensed Consolidating Statement of Operations

Nine months ended September 30, 2012

(In millions)

 

 

 

Consolidated

 

Eliminations

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Net sales

 

$

2,296

 

$

(1,422

)

$

1,279

 

$

599

 

$

1,840

 

Cost of goods sold

 

1,720

 

(1,422

)

1,031

 

493

 

1,618

 

Selling, general and administrative

 

233

 

 

94

 

39

 

100

 

Depreciation and amortization

 

104

 

 

27

 

38

 

39

 

Research and development

 

37

 

 

14

 

7

 

16

 

Facility closures, severance and related costs

 

24

 

 

5

 

1

 

18

 

Impairment charges

 

36

 

 

10

 

 

26

 

Changes in estimates related to expected allowable claims

 

1

 

 

1

 

 

 

Equity income

 

(2

)

 

 

 

(2

)

Operating income

 

143

 

 

97

 

21

 

25

 

Interest expense

 

(47

)

 

(51

)

2

 

2

 

Other (expense) income, net

 

(3

)

 

(11

)

1

 

7

 

Reorganization items, net

 

(4

)

 

(4

)

 

 

Equity in net earnings of subsidiaries

 

 

(50

)

50

 

 

 

Earnings before income taxes

 

89

 

(50

)

81

 

24

 

34

 

Income tax expense

 

(9

)

 

 

 

(9

)

Net earnings

 

80

 

(50

)

81

 

24

 

25

 

Less: Net loss attributed to non-controlling interests

 

1

 

 

 

 

1

 

Net earnings attributable to Chemtura

 

$

81

 

$

(50

)

$

81

 

$

24

 

$

26

 

 

Condensed Consolidating Statement of Comprehensive Income

Quarter ended September 30, 2012

(in millions)

 

 

 

Consolidated

 

Eliminations

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Net earnings

 

$

7

 

$

(21

)

$

9

 

$

22

 

$

(3

)

Other comprehensive income (loss), net of tax

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

37

 

 

(18

)

2

 

53

 

Unrecognized pension and other post-retirement benefit costs

 

7

 

 

6

 

 

1

 

Comprehensive income (loss)

 

51

 

(21

)

(3

)

24

 

51

 

Comprehensive loss attributable to non-controlling interests

 

2

 

 

 

 

2

 

Comprehensive income (loss) attributable to Chemtura

 

$

53

 

$

(21

)

$

(3

)

$

24

 

$

53

 

 

25



Table of Contents

 

Condensed Consolidating Statement of Comprehensive Income

Nine months ended September 30, 2012

(in millions)

 

 

 

Consolidated

 

Eliminations

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Net earnings

 

$

80

 

$

(50

)

$

81

 

$

24

 

$

25

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

15

 

 

(3

)

 

18

 

Unrecognized pension and other post-retirement benefit costs

 

6

 

 

3

 

 

3

 

Comprehensive income

 

101

 

(50

)

81

 

24

 

46

 

Comprehensive loss attributable to non-controlling interests

 

1

 

 

 

 

1

 

Comprehensive income attributable to Chemtura

 

$

102

 

$

(50

)

$

81

 

$

24

 

$

47

 

 

Condensed Consolidating Balance Sheet

As of September 30, 2012

(In millions)

 

 

 

Consolidated

 

Eliminations

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets

 

$

1,416

 

$

 

$

385

 

$

194

 

$

837

 

Intercompany receivables

 

 

(8,903

)

3,358

 

2,884

 

2,661

 

Investment in subsidiaries

 

 

(11,688

)

1,731

 

1,633

 

8,324

 

Property, plant and equipment

 

742

 

 

140

 

271

 

331

 

Goodwill

 

177

 

 

93

 

3

 

81

 

Other assets

 

585

 

 

176

 

174

 

235

 

Total assets

 

$

2,920

 

$

(20,591

)

$

5,883

 

$

5,159

 

$

12,469

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$

420

 

$

 

$

131

 

$

73

 

$

216

 

Intercompany payables

 

 

(8,903

)

3,529

 

3,106

 

2,268

 

Long-term debt

 

749

 

 

748

 

 

1

 

Other long-term liabilities

 

613

 

 

337

 

59

 

217

 

Total liabilities

 

1,782

 

(8,903

)

4,745

 

3,238

 

2,702

 

Stockholders’ equity

 

1,138

 

(11,688

)

1,138

 

1,921

 

9,767

 

Total liabilities and stockholders’ equity

 

$

2,920

 

$

(20,591

)

$

5,883

 

$

5,159

 

$

12,469

 

 

26



Table of Contents

 

Condensed Consolidating Statement of Cash Flows

Nine months ended September 30, 2012

(In millions)

 

 

 

Consolidated

 

Eliminations

 

Parent
Company

 

Guarantor
Subsidiaries

 

Non-
Guarantor
Subsidiaries

 

Increase (decrease) to cash

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net earnings

 

$

80

 

$

(50

)

$

81

 

$

24

 

$

25

 

Adjustments to reconcile net earnings to net cash provided by operations:

 

 

 

 

 

 

 

 

 

 

 

Impairment charges

 

36

 

 

10

 

 

26

 

Depreciation and amortization

 

104

 

 

27

 

38

 

39

 

Stock-based compensation expense

 

14

 

 

14

 

 

 

Reorganization items, net

 

1

 

 

1

 

 

 

Changes in estimates related to expected allowable claims

 

1

 

 

1

 

 

 

Equity income

 

(2

)

 

 

 

(2

)

Changes in assets and liabilities, net

 

(123

)

50

 

(94

)

(32

)

(47

)

Net cash provided by operations

 

111

 

 

40

 

30

 

41

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Net proceeds from divestments

 

9

 

 

 

 

9

 

Capital expenditures

 

(94

)

 

(16

)

(30

)

(48

)

Net cash used in investing activities

 

(85

)

 

(16

)

(30

)

(39

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

Proceeds from A/R Financing Facility, net

 

2

 

 

 

 

2

 

Payments on other short term borrowings, net

 

(3

)

 

 

 

(3

)

Common shares acquired

 

(20

)

 

(20

)

 

 

Payment for debt issuance costs

 

(1

)

 

 

 

(1

)

Proceeds from the exercise of stock options

 

2

 

 

2

 

 

 

Net cash used in financing activities

 

(20

)

 

(18

)

 

(2

)

CASH AND CASH EQUIVALENTS